Extension of Filing Periods for Regulatory Relief
On March 25, the Securities and Exchange Commission announced an extension to the filing periods covered by the conditional regulatory relief previously announced on March 4 for companies affected by COVID-19. The time period for which relief is provided now extends to filings due on or before July 1, rather than April 30. For calendar year-end companies, this will now include the first quarter Form 10-Q. The SEC also included a footnote in the new order clarifying that a Form 8-K or Form 6-K must be furnished for each filing that is delayed.
In its new order, the SEC “recognizes that public companies and other market participants continue to face challenges in meeting the reporting and proxy delivery requirements of the federal securities laws in a timely manner.” The SEC also noted that it will continue monitoring the current situation and may extend the time period for relief if necessary.
Guidance on Public Company Disclosures
On the same day, the SEC’s Division of Corporation Finance issued “Disclosure Guidance Topic No. 9,” which provides its current views with respect to COVID-19 and related market and business disruptions. While the Division of Corporation Finance acknowledges the difficulty in precisely evaluating and estimating the broad effects of COVID-19 and that many factors are beyond a company’s control or awareness, the current effects, future impacts, management response, and company planning for COVID-19 uncertainties can be material to investment and voting decisions. To help companies analyze their disclosure and securities law obligations, the Division of Corporation Finance provided guidance in the following three areas:
1. Assessing and Disclosing the Evolving Impact of COVID-19
The Division of Corporation Finance reminds companies to think about COVID-19-related disclosures within a principles-based system that can require disclosures for evolving risks in the absence of a specific line item requirement. Additionally, with disclosure also required for known or reasonably likely effects of the risks COVID-19 presents, a company may find itself updating disclosures in its management’s discussion and analysis, business section, risk factors, legal proceedings, disclosure controls and procedures, internal controls over financial reporting, and financial statements.
As part of a facts-and-circumstances analysis that should be specific to a company’s situation, the Division of Corporation Finance offered an illustrative list of questions to consider when a company assesses the effects of COVID-19 on its disclosures, ranging from generic, for example:
- How has COVID-19 impacted the company’s financial condition and results of operations?
- How has COVID-19 impacted the company’s capital and financial resources, including its overall liquidity position and outlook?
- Does the company expect COVID-19 to materially affect the demand for its products or services?
… to more specific, for example:
- Have COVID-19-related circumstances such as remote work arrangements adversely affected the company’s ability to maintain operations, including financial reporting systems, internal control over financial reporting, and disclosure controls and procedures?
- Has the company experienced challenges in implementing its business continuity plans or does the company foresee requiring material expenditures to do so?
Companies are encouraged to provide material, tailored disclosures that help investors analyze the impact of COVID-19 through the eyes of management, and to proactively revise and update disclosures as facts and circumstances evolve.
Companies are also reminded that providing forward-looking information to help keep investors informed about material developments can be done in a way that allows companies to avail themselves of the safe harbors in Section 27A of the Securities Act and Section 21E of the Exchange Act.
2. Need to Refrain from Trading Prior to Dissemination of Material Non-Public Information
The Division of Corporation Finance reminds companies and other related persons to consider their market activities in light of their obligations under the federal securities laws, including corporate insiders refraining from trading in a company’s securities until COVID-19 information that would be material to investors is disclosed to the public.
Additionally, companies are reminded to take the necessary steps to avoid selective disclosures when disseminating material information relating to COVID-19.
Finally, companies should consider whether previous disclosures need to be revisited, refreshed, or updated if that information becomes materially inaccurate.
3. Reporting Earnings and Financial Results
The Division of Corporation Finance recognizes that companies may be considering how to report their earnings due to the evolving impact of COVID-19, including noting that companies are not required to release earnings or other results in advance of filing the related financial statements, and that companies may experience novel or complex accounting issues that may take time to resolve. Companies are encouraged to proactively address financial reporting matters earlier than usual as the impact from COVID-19 may make it more difficult to file reports in a timely manner.
Companies are also reminded of their obligations related to non-GAAP financial measures and the SEC’s recent guidance on performance metrics disclosures. If a company adjusts a non-GAAP financial measure or performance metric for the impact of COVID-19, the company should disclose why its management finds the metric or measure useful and how it can help investors assess the impact of COVID-19 on the company’s financial position or results of operations. The guidance also offers companies some flexibility if a GAAP financial measure is not available when a company’s earnings are released due to the impact of COVID-19-related adjustments, and it allows in certain circumstances for a company to reconcile the non-GAAP financial measure to preliminary GAAP results. This would not be allowed, for example, in Form 10-K or Form 10-Q filings that require GAAP financial statements.
Additionally, the Division of Corporation Finance reiterates its position that a company should not present non-GAAP financial measures or performance metrics only to provide a more favorable view of the company; companies should instead use non-GAAP financial measures and performance metrics to share with investors how management and the company’s board of directors are analyzing the impact of COVID-19 on the company’s financial condition and operating results.
The Division of Corporation Finance ends Disclosure Guidance Topic No. 9 emphasizing the message “that health and safety are the first priority and that, as the Commission’s relief and staff guidance makes clear, they should not be compromised to meet reporting requirements.” The Division of Corporation Finance will provide, if appropriate, additional guidance and encourages companies to reach out with questions or additional areas where guidance or temporary relief may be necessary.
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