In a significant joint statement issued on April 8, 2020, titled The Importance of Disclosure – For Investors, Markets and Our Fight Against COVID-19, U.S. Securities and Exchange Commission (SEC) Chairman Jay Clayton and Division of Corporation Finance Director William Hinman urge public companies – for the upcoming 1Q 2020 earnings release season – to “provide as much information as is practicable regarding their current financial and operating status, as well as their future operational and financial planning” with respect to the COVID-19 pandemic. Specifically, Clayton and Hinman encourage companies to respond to investor interest by disclosing:
- where the company stands today, operationally and financially;
- how the company’s COVID-19 response, including its efforts to protect the health and well-being of its workforce and its customers, is progressing; and
- how its operations and financial condition may change as the nation’s efforts to fight COVID-19 progress.
By comparison, they note that “[h]istorical information may be relatively less significant.” To assure companies that their liability exposure should not increase by responding to their personal “call for forward-looking statements,” Clayton and Hinman state, twice, that “we would not expect good faith attempts to provide appropriately framed forward-looking information to be second guessed by the SEC.”
|The forward-looking disclosure that Clayton and Hinman are calling for would typically be included in either the MD&A or Risk Factor sections of the Form 10-Q and Form 10-K – and not in the earnings release, which typically is limited to summarizing the financial results for the just-completed quarter. Given Clayton’s and Hinman’s emphasis on “earnings releases” and “analyst and investors calls” – indeed, the joint statement nowhere mentions Form 10-Q1 – companies should consider including a COVID-19 section in their earnings releases which would address the disclosures listed in the three bullet points above. Otherwise, if this section is included only in the 1Q Form 10-Q and that Form 10-Q is filed on a date after the day on which the earnings release is furnished, then those public companies may need to revise their customary practice of opening trading windows shortly after the issuance of the earnings release and before the Form 10-Q is filed. Although the joint statement does not use the word “material,” it strongly suggests that forward-looking, qualitative disclosure about COVID-19 risks, trends and uncertainties is more important to investors today than historical, quantitative financial disclosure.|
A more detailed discussion of the SEC leaders’ remarks follows (emphasis supplied).
“We Request That Companies Provide as Much Information as Is Practicable Regarding Their Current Status and Plans for Addressing the Effects of COVID-19”
Clayton and Hinman note that earnings reports and related investor and analyst calls this quarter “will not be routine,” and that information about the preceding quarter “may be substantially less relevant” to investors than detailed information about what businesses are planning and expecting in the coming months. They highlight key areas for disclosure, including:
- “[A]s much information as is practicable regarding [public companies’] current operating status and their future operating plans under various COVID-19-related mitigation conditions”;
- “Detailed discussions of liquidity positions and expected financial resource needs”;
- Company actions and policies to protect worker health and well-being and customer safety; and
- Financial assistance under the CARES Act or other COVID-19-related federal and state programs if they have materially affected, or are reasonably likely to have a material future effect upon, financial condition or results of operations, including the “nature, amounts and effects of such assistance”.
“We Recognize That Producing Forward-Looking Disclosure Can Be Challenging and Believe That Taking On That Challenge Is Appropriate”
Clayton and Hinman encourage companies to avoid “generic, or boilerplate, disclosures that do little to inform investors of company-specific status, operational strategies and risks.” Instead, companies and their advisers are encouraged to “make all reasonable efforts to convey meaningful information – information that provides investors a level of insight that allows them to see the key operational and financial considerations and challenges the company faces through the eyes of management,” even though the key COVID-19-related drivers, such as the time frames for current COVID-19 social distancing guidelines, “are not uniform and are likely to undergo material change.”
As an example of how a company could do this, Clayton and Hinman said, “In this regard, we encourage companies to consider the broad frameworks of some of the strategies that have been suggested, how following those strategies may affect their operations and whether that analysis would be of material interest to investors.” The “strategies” in question would be the United States’ “combined health and economic” strategies.
“Robust, Forward-Looking Disclosures Will Benefit Investors, Companies and, More Generally, Our Fight against COVID-19. Such Disclosures Will Facilitate Communication and Coordination Among the Public and Private Sectors”
Clayton and Hinman offer three reasons why they believe companies should strive to provide, and update and supplement, as much forward-looking information about the impact of the COVID-19 pandemic as practicable. In their view:
- First, the information will benefit investors – “the more investors know about how management is assessing, planning for, and taking steps to address, the effects of COVID-19, the better investment decisions investors will make”;
- Second, market digestion of the information will benefit the company – “the more confidence investors (and the markets more generally) have that a company has a well thought out and executable strategy for addressing the effects of COVID-19, the more willing investors will be to provide credit and other financing to the company”; and
- Third, broad dissemination and exchange of firm-specific plans for addressing the effects of COVID-19 under various scenarios will substantially contribute to our nation’s collective effort to fight and recover from COVID-19 – because “broad and extensive coordination across workers, firms, investors and governmental officials will be critical to successfully emerge from this fight. The exchange of forward-looking information is essential to that coordination”.
Investor Protection, Market Integrity and Legal Risk
In closing, and consistent with recent admonitions from the Divisions of Enforcement and Corporation Finance regarding heightened insider trading risk in the context of COVID-19, Clayton and Hinman reiterate that investor protection and market integrity will continue to be front of mind, and emphasize the need to practice good corporate hygiene with respect to selective disclosure/Regulation FD issues and the proper dissemination and use of material, non-public information. They also remind companies of the protections afforded by the statutory safe harbors for forward-looking information.2
1 In this regard, the joint statement is consistent with the SEC’s “Request for Comment on Earnings Releases and Quarterly Reports” from December 2018, in which the SEC solicited comment as to whether Form 10-Q’s “disclosure requirements overlap with disclosures these companies voluntarily provide to the public in the form of an earnings release furnished on Form 8-K” and whether the SEC should “provide flexibility as to the frequency of [public companies’] periodic reporting.” Release No. 33-10588 (Dec. 18, 2018) available here.
2 Of course, these safe harbors are not available to all public companies – for example, a company that has been the subject, within the last three years, of an SEC order that requires the company to cease and desist from violating the antifraud provisions of the securities laws is disqualified from relying on the statutory safe harbors in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, unless the SEC has granted a waiver of such disqualification.
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