Your SEC disclosure: what you need to know NOW
Mar 25, 2020
* Updated March 26, 2020
** Updated April 7, 2020
Originally published on March 25, this article has been updated to (i) address the evolving impact of the coronavirus-2019 pandemic (COVID-19) on your company’s SEC reporting obligations and (ii) provide disclosure considerations that you and your company should consider, if you haven’t already, as you begin to prepare your earnings releases, annual and quarterly reports and proxy statements.
The SEC’s Recently Articulated Position on Disclosure (**Updated)
On April 2, SEC Chairman Jay Clayton made clear in two public statements that, despite the turmoil and uncertainty created by COVID-19, the SEC fully expects reporting companies to provide materially accurate disclosure as soon as reasonably possible to ensure that investors are adequately protected and that trading markets function in a proper and orderly manner.
In one such statement, Chairman Clayton stated that “[o]ur investors and our markets thirst for information as a general matter. This is particularly the case in times of economic shock and uncertainty. Couple this fundamental premise with the reality that for COVID-19-related reasons issuers may not be able to file required quarter-end reports on time, and we have a challenge. Importantly, an inability to file required reports does not prevent issuers from issuing earnings releases and filing current reports on Forms 8-K. I believe the conditional, tailored relief crafted by the Division of Corporation Finance, coupled with their detailed guidance regarding COVID-19-related disclosure topics 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. We encourage issuers to provide as much information as is practicable and stand ready to engage with them.”
On April 3, Sagar Teotia, the SEC’s Chief Accountant, in his own public statement emphasized that the “regular supply” of “high-quality financial information” is essential for investors and other capital markets participants to make informed decisions. Recognizing that certain accounting areas (such as fair value and impairment considerations, Leases, Debt modifications or restructurings, Hedging, Revenue recognition, Income taxes, Going concern, Subsequent events and adoption of new accounting standards (e.g., the new credit losses standard or CECL)), require significant estimates and judgments, Teotia stated that “[w]e recognize that the accounting and financial reporting implications of COVID-19 may require companies to make significant judgments and estimates. Certain judgments and estimates can be challenging in an environment of uncertainty. As we have stated for a number of years, OCA has consistently not objected to well-reasoned judgments that entities have made, and we will continue to apply this perspective.”
Clearly, despite the difficulties created by COVID-19, timely, materially accurate public disclosure should continue to be a top priority for your company.
Recent SEC Reporting Relief and Interpretive Guidance (**Updated)
Relief and Guidance for Filing Deadlines
On March 25, the SEC extended the filing deadline for certain periodic, current and other reports, proxy statements and other schedules (though, they did not extend filings deadlines for Schedule 13D or Forms 3, 4 and 5). For reports, statements and schedules with filing deadlines between March 1 and July 1, 2020, the SEC will allow you to file late if you:
- are unable to meet a filing deadline due to circumstances related to COVID-19;
- by the original filing deadline, furnish a Form 8-K stating (i) that you are relying on the SEC’s relief, (ii) a brief description of why you cannot file on a timely basis, (iii) the estimated date of when the report, statement or schedule is expected to be filed, (4) a risk factor, if appropriate, explaining the impact of COVID-19 on your business, and (5) if the delay is due to the inability of a person to provide an opinion, report or certification, a statement by such person stating why they are unable to do so;
- file the required report, statement or schedule within 45 days of the original due date; and
- in any late filing, disclose that you are relying on the SEC’s relief and state the reasons why you could not file on a timely basis.
Expanding this relief, on March 31 and April 6, the SEC issued three new C&DIs regarding the interplay between the COVID-19 Form 8-K and Form 12b-25 (the latter is the form traditionally used to request relief for late filings) and between Part III of Form 10-K and proxy statements:
C&DI 135.12 states that, if you believe that you will be unable to file your Form 10-K or 10-Q on a timely basis due to the COVID-19 crisis and you are not sure whether you will be able to file within the Rule 12b-25 timeframes(fidteen or five days, as applicable), you should furnish the COVID-19 Form 8-K by the original due date in order to avail yourself of the 45-day relief period. You may not rely on the 45-day relief period if you have only filed a Form 12b-25 because you will not have met the specific conditions necessary to obtain the additional 45 days.
C&DI 135.13 clarifies that, even if you have previously filed a Form 12b-25, you cannot subsequently rely upon 45-day relief unless you have already furnished the required COVID-19 Form 8-K in a timely manner (no later than the due date of the report, statement or schedule). If you timely furnish the required Form 8-K and still cannot file on or before the extended deadline, you can still file a Form 12b-25.
C&DI 104.18 provides that, if you are unable to file your Form 10-K Part III information (which is typically reverse incorporated by reference from a registrant’s definitive proxy statement) within 120 days after the end of your related ﬁscal year, you will be able to avail yourself of the SEC’s 45-day relief as long as you satisfy all necessary conditions for such relief, including, but not limited to, furnishing a Form 8-K and filing the Part III information within 45-days of the 120-day deadline. The C&DI goes on to summarize the steps to be taken if (1) you timely filed your Form 10-K but did not rely on the SEC’s 45-day relief and (2) you properly availed yourself of the SEC’s 45-day relief with respect to your Form 10-K by furnishing a Form 8-K but you were silent on your ability to timely file your Part III information.
Relief for Mailing of Proxy Statements and Other Proxy Materials
In the SEC’s March 25 order, the SEC also noted that you may be exempt from the requirements to furnish proxy statements, annual reports, and other soliciting materials, if you satisfy all the conditions below:
- A shareholder has a mailing address located in an area where, as a result of COVID-19, the common carrier has suspended delivery service of the type or class customarily used by your company; and
- Your company has made a good faith effort to furnish the proxy statement, annual report and/or other soliciting materials to the shareholder.
Relief For Certain Registration Statements and WKSI Status
In its March 25 order, the SEC also noted that you may be exempt from the requirements to furnish proxy statements, annual reports, and other soliciting materials if you satisfy all of the conditions below:
- For purposes of eligibility to use a Registration Statement on Form S-3 (and for WKSI status, which is based in part on Form S-3 eligibility), you will be considered current and timely in your filing requirements if you were current and timely as of the first day of the relief period and you file any report or statement due during the relief period within 45 days of the filing deadline for the report or statement.
- For purposes of the Form S-8 eligibility requirements and the current public information eligibility requirements of Rule 144(c), you will be considered current in your filing requirements if you were current as of the first day of the relief period and you file any report or statement due during the relief period within 45 days of the filing deadline for the report or statement.
Relief For Transitioning to a Virtual Annual Meeting
As we previously wrote about on our blog in response to the SEC’s March 13 release, many companies are transitioning to virtual annual meetings in light of COVID-19. If you have already filed your proxy statement with the SEC, this may require a change in date, time or location of the meeting. Accordingly, if you decide to change the date, time, or location of your annual meeting due to concerns related to COVID-19 and you have already mailed and filed your definitive proxy materials with the SEC, you may notify shareholders of the change without having to mail additional soliciting materials or amend your previously filed proxy materials if you:
- issue a press release announcing the change in the date, time, or location;
- file the announcement with the SEC as definitive additional soliciting material; and
- take all reasonable steps necessary to inform other intermediaries in the proxy process and other relevant market participants (such as any proxy service provider and the appropriate national securities exchanges) of the change.
(**Updated) In addition, you must also adhere to the requirements set forth in your governing documents and in your respective state laws regarding virtual meetings and notice. Although states such as Delaware and California have issued orders either providing that (i) compliance with the SEC requirements will satisfy the Delaware state law notice requirements or (ii) California companies do not need to obtain consent from all shareholders to conduct a virtual meeting and eases notice requirements for California companies that switch from physical to virtual meetings, not all states have issued such orders. For more information and other considerations regarding virtual annual meetings, including a discussion of the impact on shareholder proposals, state law notice concerns and the response of proxy advisory firms, see our prior blog post. If you so choose to take advantage of the SEC relief and transition to a virtual annual meeting, proxy advisory firms, and shareholders alike, expect transparency and organization when transitioning to a virtual meeting. Accordingly, companies should take care to provide fulsome and detailed disclosure regarding the when, how and where a shareholder is able to attend and participate at a virtual annual meeting.
Relief from Manual Signature Requirement
Finally, in its March 25 release, the SEC has granted a modicum of leniency with respect to the requirement that every signatory to an electronic filing also manually sign the filing and the requirement that the company retain the manual signature for five years and produce it upon request to the SEC. Although the SEC still expects you and your company to comply with its manual signature requirements to the greatest extent possible during this period of time, the SEC also said that it will not recommend enforcement actions in situations where compliance is affected by circumstances arising from COVID-19, if:
• a signatory retains a manually signed signature page or other document authenticating, acknowledging or otherwise adopting his or her signature that appears in typed form within the electronic filing;
• the signatory provides the document, as promptly as reasonably practicable, to your company for retention;
• the document indicates the date and time when the signature was executed; and
• and your company establishes and maintains policies and procedures governing this process.
The SEC has indicated that, if a signatory is working remotely, he or she may execute a hard copy of the signature page and hold that page for delivery to your company upon his or her return to work or the signatory could provide your company with an electronic record (such as a photograph or .pdf) of the document when it is signed. This may prove useful in situations where the signatory does not have access to a printer. Technologies such as DocuSign, however, do not obviate the need to comply with the SEC’s manual signature requirement.
Relief from Requirement to Notarize Forms ID
To gain access to SEC filing system (EDGAR), you must complete a Form ID application that must be notarized. The SEC granted temporary relief through July 1, 2020 that will allow you to obtain EDGAR codes without the requisite notarization as long as you indicate on the face of the signed document that the failure to obtain notarization was due to circumstances relating to COVID-19. You must provide the SEC proof of the notarized manually signed Form ID within 90 days of the issuance of the access code; otherwise, the SEC may inactivate your EDGAR access codes.
Questions You Should Be Asking When Crafting your Disclosure (*Updated)
On March 25, the SEC issued updated guidance advising that you should focus on particular questions related to COVID-19 when preparing your upcoming earnings releases, periodic reports and proxy statement. In particular, the SEC has posed the following questions that you should address, as applicable, in your public disclosures:
- 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?
- 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?
Your Real-Time Reporting Requirements
- Absent a specific triggering event, COVID-19, in and of itself, does not require that your company file a Form 8-K.
- When an event occurs that triggers disclosure on Form 8-K and COVID-19 is the primary cause or is a material driver of such event, your company should specifically disclose the role that COVID-19 played in the occurrence of the triggering event. The table below contains a list of possible disclosure events and the relevant item number of Form 8-K that is triggered: (*Updated)
Entry into a material definitive agreement
Termination of a material agreement
Earnings releases and guidance changes
New credit facilities and draws on lines of credit
Increase or acceleration of a direct financial obligation or an off-balance sheet arrangement , or ratings downgrades
Failure to meet a stock exchange’s listing standard
Interruptions of service of directors and officers
Regulation FD Disclosure (that you wish to furnish but that will not be reverse incorporated into your live registration statements); COVID filing relief (if you wish to take advantage of the SEC’s recent order granting filing deadline relief)
Other Events (That you want to file and thereby reverse incorporate into your live registration statements)
- If your management team is interfacing with analysts, shareholders and other interested parties because of the impact of COVID-19 on your company, your management team must comply with Regulation FD and its prohibition on disclosing material nonpublic information in a non-compliant manner. As is evident from the quotes above from the SEC Chairman and Chief Accountant, the SEC is laser-focused on your full compliance with Regulation FD and the timely disclosure of materially accurate information. Accordingly, if your company anticipates that it will or may communicate material, non-public information to analysts, shareholders and other interested parties, compliant methods of disseminating such information include the filing of Forms 8-K and/or the issuance of press releases.
Your Earnings Release, Earnings Guidance and Earnings Call (**Updated)
- Your company has undoubtedly been impacted by COVID-19 to some degree; accordingly, you should begin considering now how best to address the impact, if material, of COVID-19 on your company in its upcoming earnings release. In particular, depending upon how severely your company has been impacted by COVID-19, the earnings release should discuss your company’s financial condition and liquidity, cash management practices, intention to continue dividend payments and share repurchase activities, ability to meet its short- and long-term liquidity needs, recent or planned draws on lines of credit, and other potential sources of liquidity and capital strength.
- Unless your company is currently conducting a securities offering, is conducting buybacks, or has previously undertaken to update its guidance, you generally have no duty to update the previously issued earnings guidance. If your company has previously provided earnings guidance, you should consider whether the impact of COVID-19 requires your company to reaffirm the prior guidance (likely with the qualification that it does not account for the impact of COVID-19), update the prior guidance or advise investors not to rely on the prior guidance because it has materially changed. Earnings guidance should be crafted so that it comes within the protection of the forward-looking statement safe harbor of the federal securities laws and should be accompanied by a statement disclaiming any affirmative duty to update such statements. By doing so, your company can feel comfortable issuing new guidance or updating prior guidance as may be dictated by evolving circumstances.
- In addition to the questions your company routinely fields on earnings calls, your management team should also be prepared to answer analysts’ specific questions relating to COVID-19’s impact on your earnings call. We strongly advise anticipating the content of those questions, scripting answers and practicing responses in advance of the call so that management’s answers are delivered in a manner that instills confidence and displays a command over the situation at issue.
- With respect to the timing of your company’s upcoming earnings release, were you to postpone or delay your earnings announcement or call, we would expect you would be in good company this quarter. If you do postpone or delay, you must be cognizant of your notice requirements to ensure that you are giving adequate notice, if possible, for Regulation FD purposes.
- To the extent you are comfortable with the numbers and metrics, you could either move up your release date or issue an interim or preliminary set of results and guidance. Doing so may help manage analyst and investor expectations and bridge any disconnect that may exist between management and the public regarding disparate views of company performance and the trading price of its stock. This is especially important given the rapid pace at which the market is changing each day. Additionally, an interim or preliminary release of financial and operational information may “cleanse” the company and its insiders of material non-public information (if all such information is publicly disclosed) and provide your company and its insiders with an earlier opportunity to commence stock repurchase and other trading activity given the recent precipitous drops in the stock markets.
Your Upcoming Annual or Quarterly Report or Registration Statement
As a public filer, your next periodic report or registration statement provides a myriad of opportunities to address the impact of COVID-19 on your company. In particular, the following sections of your periodic report or registration statement should be reviewed in light of COVID-19:
- You should review the last set of risk factors that your company disclosed and consider whether they need to be updated for any material changes, including any changes related to COVID-19, which have occurred in the interim.
- Risk factors are intended to discuss the material risks that threaten your company and the impact that any of those risks would likely have were they to occur. For instance, if your company is in the financial services sector, you may consider the impact that COVID-19 has on customers’ economic positions generally, increased risks of defaults in certain industry segments, increased risk resulting from the uncertainty regarding SBA-backed loans, margin pressure in light of federal interest rate actions, credit card and fee revenue in an inactive consumer environment, etc. Conversely, risk factor disclosure is not intended to be an exercise of creating a “parade of horribles” or hypotheticals that may or may not ever affect your company. (**Updated)
- However, if you determine that a particular risk relating to COVID-19 has materially impacted or is reasonably expected to impact (i.e., not could or might possibly impact) your company such that it should be disclosed in real time, your company may consider disclosing that risk factor in a Form 8-K.
Management’s Discussion and Analysis
- The “Management’s Discussion and Analysis” (“MD&A”) portion of your next periodic report or registration statement (if applicable) must discuss your financial condition, changes in financial condition and results of operations and any other information that you believe to be necessary to an understanding of your company’s condition and operations.
- To the extent that COVID-19 has had a material impact upon your company’s financial condition and results of operations, your management team should discuss those effects in the MD&A. We recommend that your management team tailor this discussion to your company’s business and the industry in which it operates and discuss with specificity the impact that COVID-19 has had on your company’s financial condition and results of operations.
- The MD&A is not only intended to be historical in nature but also prospective in its focus. Accordingly, your management team should also address known trends (whether favorable or unfavorable), commitments and events and uncertainties that are reasonably expected to have a material impact on your company.
- From a historical perspective, we recommend discussing the impact of COVID-19 on your company since the beginning of the outbreak until the date of the periodic report or registration statement. From a forward-looking perspective, we recommend that you discuss the reasonably anticipated material consequences that COVID-19 may have on your company in the short- and long-term, including those affecting your employees, supply chain, operational contracts, insurance coverage, financing arrangements, capital expenditures and access to additional sources of liquidity and capital.
- Throughout your periodic report or registration statement, you’ll want the protection of the federal securities law safe harbor when making any forward-looking statements. In light of the rapidly changing nature of COVID-19 and the potential for new disclosures in your Risk Factors and MD&A, taking advantage of the safe harbor is particularly important.
- When making forward-looking statements, we recommend that you properly phrase these discussions through the use of words like “expect,” “anticipate,” “intend,” “hope,” or “believe” to clearly signal their prospective focus. Additionally, in the actual forward-looking statements disclaimer located within your periodic report or registration statement, you should advise readers not to unduly rely on forward-looking statements and caution them that these statements and the results and effects that they discuss or imply may be materially different from those actually realized. You should also include COVID-19 in your list of factors that could affect your actual results.
- If your periodic report or registration statement requires a description of your business, then you should similarly consider the need to discuss the impact of COVID-19 on your business.
- Although the “Business” section of your periodic report or registration statement is primarily historical in its focus, you may wish to apply the prospective disclosure principles discussed above under the caption “Management’s Discussion & Analysis” equally to your “Business” section if material to a reader’s understanding of your company’s business.
- If your annual or quarterly report or registration statement requires a description of any material pending legal proceedings to which your company is a party, then you should disclose any such litigation that your company is involved in that is related to COVID-19. Notably (and unfortunately), the first wave of stock price drop class action lawsuits have been filed as of the date of this article.
Footnotes to the Financial Statements
- When appropriate, you should discuss with your accounting firm whether COVID-19 requires disclosure pursuant to ASC 450 as a potential loss contingency (e.g., you are involved in pending litigation) or whether it requires disclosure in a “Subsequent Event” footnote.
Disclosure Controls and Procedures
- In light of the complications caused by COVID-19, including the potential for inconvenience and delay due to remote working arrangements, you should immediately evaluate your disclosure controls and procedures to ensure that all COVID-19 related information that may be required to be disclosed is accumulated and communicated to your management team to allow timely decisions regarding required disclosure.
- You should also consider whether your disclosure committee (if your company has one), as well as the employees involved in producing your public disclosure, should meet more frequently than usual in light of any remote working arrangements and social distancing.
- Lastly, with respect to your certification and sub-certification processes (e.g., the Sarbanes-Oxley Act Section 302 and Section 906 certifications), you should consider whether any changes are needed in those processes to ensure that such certifications can be made.
Complex Accounting Issues and Non-GAAP Disclosure (*Updated)
- The SEC also (i) recognized that the impact of COVID-19 may present a number of novel or complex accounting issues that, depending on the particular facts and circumstances, may take time to resolve, (ii) acknowledged that COVID-19 will likely make it more difficult for companies and their auditors to complete the work required to maintain timely filings, and (iii) encouraged companies to proactively address financial reporting matters earlier than usual.
- The SEC reminded companies of their obligation to comply with, and reiterated with specificity certain portions of, the federal securities laws relating to the presentation of non-GAAP financial metrics. The SEC acknowledged that there may be situations when there may not be a GAAP financial measure available at the time of the earnings release because the measure may be impacted by COVID-19-related adjustments that may require additional information and analysis to complete. In these situations, the SEC stated that it would not object to companies reconciling a non-GAAP financial measure to preliminary GAAP results that either include provisional amount(s) based on a reasonable estimate, or a range of reasonably estimable GAAP results. In such instances, however, companies should limit the measures in its presentation to those non-GAAP financial measures it is using to report financial results to its Board of Directors. Further, with respect to a periodic report such as a Form 10-K or a Form 10-Q in which GAAP metrics are required to be presented, the SEC stated that companies should reconcile to GAAP results and not include provisional amounts or a range of estimated results.
Don’t forget about Corporate Governance (**Updated)
As we’ve noted in our prior blog post, continuing and/or implementing good corporate governance practices during a crisis can directly impact your ability to respond in an effective manner to ongoing disclosure obligations or emergency situations. If robust corporate governance controls and procedures are not in place, you may be susceptible to known and unknown risks. Specifically, with respect to the known risk if, you engage in executive compensation practices that don’t account for the pandemic, you don’t have robust board succession an diversity policies, or you give short shrift to shareholder proposals or participation, you are opening yourself up to certain risks. With regards to unknown risk, if you are not appropriately monitoring your stock ownership in light of rapidly changing market conditions, you may be faced with swift and undisclosed changes in your ownership, as investors take advantage of the current market conditions and opportunities to invest in large, and potentially influential, portions of your company stock.
If you have any questions or need assistance navigating your company’s SEC reporting obligations, please contact any of the Related Professionals, any other member of Waller’s Capital Markets & Securities practice or your regular Waller contact at (615) 244-6380.