COVID-19 disclosure: SEC Chairman urges companies to practise 'good corporate hygiene'

Message from the SEC Chairman: urged SEC-reporting companies to continue to give material information to investors including about the current and expected impacts of COVID-19 as promptly as practicable even though their ongoing reports may be delayed. The SEC is ‘keenly focused’ on ensuring that this happens and has reminded companies to continue to evaluate their securities law obligations to make materially accurate and complete disclosures. In another statement on the same day, he said ‘ Importantly, an inability to file required reports does not prevent issuers from issuing earnings releases and filing current reports on Forms 8-K’. Although focused on SEC-reporting companies, this message and the disclosure guidance discussed below are relevant to public companies everywhere as they reach for how best to meet their COVID-19-related disclosure requirements and satisfy investors.

On 2 April 2020, US Securities and Exchange Commission Chairman Jay Clayton

Chair Clayton noted that because investors and the markets ‘thirst for information’ particularly in times of economic shock and uncertainty as now, there was a challenge in that the COVID-19 trigger for the intense investor interest was also the reason why companies may be unable to file required quarter-end reports on time. In a TV interview on 7 April, Chair Clayton pointed out that ‘information is the lifeblood of our markets’ and he urged public companies to ‘practice good corporate hygiene’ by announcing sensitive information as soon as they can and before they are able to announce it, by keeping it ‘as tight as possible’. He noted ‘We really need to preserve market integrity through what we all recognize is going to be a choppy period in terms of company information.’ Such sensitive information includes, for example, companies’ plans to seek government financial support, other financing plans, possible material changes in the way a company does its business or in capital expenditures.

The SEC’s approach to the crisis puts health and safety first as well as giving a firm message that the law continues to apply. Chair Clayton commended the proactive and investor-orientated approach of the SEC’s Division of Corporation Finance to the pending earnings period. This approach includes both detailed disclosure guidance (outlined below) and targeted conditional relief on filing deadlines. The filing deadline relief provides an extra 45 days for periodic reports due up to I July 2020 for companies grappling with COVID-19-related operations challenges that prevent them from filing on time. Chair Clayton believes the approach ‘will allow issuers to provide prompt, period-end earnings information, and information regarding their past and expected future efforts to address the effects of COVID-19, regardless of whether they are able to comply with filing deadlines’. He encouraged companies to provide as much information as is practicable, noting that ‘the importance of this cannot be overstated – particularly as investors are looking for information about the material impacts of COVID-19 on US companies’. The SEC stands ready to engage with companies.

Detailed disclosure guidance:

The overall message is that companies should provide disclosures that allow investors to evaluate the current and expected impact of C-19 through the eyes of management.

Disclosure about the risks and effects of COVID-19 and the responses of the company and management to them, should be tailored to the company’s particular situation. There is a helpful non-exclusive checklist of questions covering 10 topics that companies should consider when assessing and disclosing the evolving impact of COVID-19. For example, have your sources or uses of cash been materially impacted? Have you identified a material deficiency? Do you anticipate any material impairments?

These are the 10 topics:

1. Financial condition and results of operations
2. Capital and financial resources including overall liquidity and outlook
3. Assets on the balance sheet
4. Material impairments
5. Impact on maintaining internal corporate operations
6. Implementing business continuity plans
7. Demand for products and services
8. Supply chains or distribution
9. Human capital resources and productivity
10. Travel restrictions and border closures

Finally, there is a reminder that disclosure may be ‘necessary or appropriate’ in several areas (so not merely in risk factors). For SEC-reporting companies, these areas are:

• MD&A/OFR
• Business section
• Risk factors
• Legal proceedings
• Disclosure controls and procedures
• Internal control over financial reporting
• Financial statements

For more detail on the disclosure guidance and the conditional filing deadline relief, see our briefing.

Message from the SEC’s Chief Accountant:  the SEC’s Chief Accountant, Sagar Teotia, made a statement noting that the accounting and financial reporting implications of COVID-19 may require companies to make significant judgments and estimates which can be challenging when there is great uncertainty as now. He confirmed that his Office’s longstanding and consistent position of not objecting to well-reasoned judgments made by companies would continue to apply. However he noted that at this time of unprecedented national challenge, investors and other stakeholders needed high-quality financial information more than ever so they could make informed decisions. He gave a non-exclusive list of nine accounting areas likely to involve such judgments and estimates, including:

On 3 April 2020,

1. Fair value and impairment considerations
2. Leases
3. Debt modifications or restructurings
4. Hedging
5. Revenue recognition
6. Income taxes
7. Going concern
8. Subsequent events
9. Adoption of new accounting standards (e.g. the new credit losses standard)

The SEC’s Office of the Chief Accountant is proactively engaging with all those involved in the financial reporting system and encourages stakeholders to get touch with questions arising from COVID-19.

Companies other than SEC-reporting companies may find it helpful to consider the comments from the SEC Chairman and Chief Accountant and the disclosure guidance as the COVID-19-related impacts and risks specific to their situation unfold. In particular, companies should focus not only on their risk factor disclosure but also on crafting appropriate disclosure regarding the current and expected impact of COVID-19 on the business that will allow investors to see through the eyes of management.