On March 25, 2020, the Division of Corporation Finance of the Securities and Exchange Commission (SEC) released CF Disclosure Guidance: Topic No. 9, which provides the Division’s current views on disclosure and other securities laws obligations of public companies related to the coronavirus (COVID-19). To address potential compliance issues, the SEC also issued an order superseding its original order of March 4, 2020, providing public companies with a 45-day extension to file certain disclosure reports that would otherwise have been due between March 1 and July 1, 2020, subject to certain conditions.
SEC Chairman Jay Clayton emphasized that the actions provide temporary, targeted relief for public companies affected by COVID-19 and he encouraged public companies to provide current and forward-looking information to their investors. Clayton also reminded public companies that they can avail themselves of the safe harbor in Section 21E of the Exchange Act for forward-looking statements.
The CF Disclosure Guidance: Topic No. 9 is available at sec.gov/guidance and a copy of the SEC’s order may be found at sec.gov/exorders.
Disclosure and other securities laws obligations related to COVID-19
Assessing COVID-19’s impact on a company’s operations and the related risks will be a facts and circumstances inquiry for each company. To assist registrants with that analysis, CF Disclosure Guidance: Topic No. 9 provides an illustrative, but non-exhaustive, list of questions for management teams to consider when drafting disclosure related to COVID-19’s impact on a registrant’s present and future operations:
- How has COVID-19 impacted your financial condition and results of operations? In light of changing trends and the overall economic outlook, how do you expect COVID-19 to impact your future operating results and near- and-long-term financial condition? Do you expect that COVID-19 will impact future operations differently than how it affected the current period?
- How has COVID-19 impacted your capital and financial resources, including your overall liquidity position and outlook? Has your cost of or access to capital and funding sources, such as revolving credit facilities or other sources changed, or is it reasonably likely to change? Have your sources or uses of cash otherwise been materially impacted? Is there a material uncertainty about your ongoing ability to meet the covenants of your credit agreements? If a material liquidity deficiency has been identified, what course of action has the company taken or proposed to take to remedy the deficiency? Consider the requirement to disclose known trends and uncertainties as it relates to your ability to service your debt or other financial obligations, access the debt markets, including commercial paper or other short-term financing arrangements, maturity mismatches between borrowing sources and the assets funded by those sources, changes in terms requested by counterparties, changes in the valuation of collateral, and counterparty or customer risk. Do you expect to disclose or incur any material COVID-19-related contingencies?
- How do you expect COVID-19 to affect assets on your balance sheet and your ability to timely account for those assets? For example, will there be significant changes in judgments in determining the fair-value of assets measured in accordance with U.S. GAAP or IFRS?
- Do you anticipate any material impairments (e.g., with respect to goodwill, intangible assets, long-lived assets, right of use assets, investment securities), increases in allowances for credit losses, restructuring charges, other expenses, or changes in accounting judgments that have had or are reasonably likely to have a material impact on your financial statements?
- Have COVID-19-related circumstances, such as remote work arrangements, adversely affected your ability to maintain operations (including financial reporting systems), internal control over financial reporting, and disclosure controls and procedures? If so, what changes in your controls have occurred during the current period that materially affect or are reasonably likely to materially affect your internal control over financial reporting? What challenges do you anticipate in your ability to maintain these systems and controls?
- Have you experienced challenges in implementing your business continuity plans or do you foresee requiring material expenditures to do so? Do you face any material resource constraints in implementing these plans?
- Do you expect COVID-19 to materially affect the demand for your products or services?
- Do you anticipate a material adverse impact of COVID-19 on your supply chain or the methods used to distribute your products or services? Do you expect the anticipated impact of COVID-19 to materially change the relationship between costs and revenues?
- Will your operations be materially impacted by any constraints or other impacts on your human capital resources and productivity?
- Are travel restrictions and border closures expected to have a material impact on your ability to operate and achieve your business goals?
In addition to providing guidelines for adequate COVID-19-related disclosure, CF Disclosure Guidance: Topic No. 9 reminds public companies of other securities law obligations that COVID-19 may affect. Prior to the dissemination of material, non-public information related to COVID-19, public companies should take steps to avoid selective disclosure of such information and remind corporate insiders to refrain from trading in a registrant’s securities until after such information becomes public. To the extent that a registrant presents non-GAAP financial measures or a performance metric to explain the impact of COVID-19 on operations, the Division noted that management should include an explanation to investors of the usefulness of such measures or metric to understanding the company’s financials.
Periodic reporting deadline relief extended to reports due between March 1 and July 1, 2020
The SEC also announced that it is extending the filing periods covered by its previous order providing conditional reporting relief for certain public company filing obligations. Under the SEC’s new order dated March 25, 2020, public companies affected by COVID-19 have an additional 45-day period to file periodic reports due between March 1 and July 1, 2020, subject to certain conditions. This order supersedes the SEC’s March 4, 2020 order that applied to reports due between March 1, 2020 and April 30, 2020.
Any registrant seeking the exemptive relief must file a current report on Form 8-K (or Form 6-K, as applicable) by the original filing deadline of the applicable report, summarizing why relief from the reporting deadline is necessary under its particular circumstances. If the reason the report cannot be filed on a timely basis relates to the inability of a third party to furnish any required opinion, report, or certification, the Form 8-K or Form 6-K, as applicable, must also include as an exhibit a statement signed by such person stating the specific reasons why such person is unable to furnish the required opinion, report, or certification.
Client Alert 2020-165