This article was updated on May 6, 2020.
On March 25, 2020, the SEC issued an order extending the conditional regulatory relief for public companies affected by COVID-19.
Concurrently, the SEC’s Division of Corporation Finance issued CF Disclosure Guidance: Topic 9 to provide the SEC staff’s views regarding disclosure and other securities law obligations that companies should consider with respect to COVID-19.
Additionally, on March 31, 2020, the SEC staff published a number of Compliance and Disclosure Interpretations (C&DI), Exchange Act Rules to provide its views on the regulatory relief provided in the order.
On May 4, 2020, the SEC’s Division of Corporation Finance then published COVID-19 Related FAQs to provide the staff’s views on disclosures required under the order and guidance related to the use of registration statements on Form S-3.
This alert provides a summary of the order and the disclosure guidance.
The SEC is providing targeted regulatory relief and guidance to assist companies in preparing disclosure documents during this uncertain time.
Extended Filing Requirements Relief
On March 4, 2020, the SEC issued an order providing public companies affected by COVID-19 with an additional 45 days to file disclosure reports—including Forms 10-K and 10-Q—that would’ve been due between March 1, 2020, and April 30, 2020.
The order issued on March 25 supersedes the March 4 order and extends the time period that the filing relief can be applied to cover filings due through July 1, 2020. This means public companies unable to meet filing deadlines due to COVID-19 will have an additional 45 days to file disclosure reports that would have been due between March 1, 2020, and July 1, 2020.
Companies relying on this relief are required to furnish a current report on Form 8-K—or Form 6-K, for foreign private issuers—for each filing that is delayed by the later of March 16, 2020, or the original report filing deadline.
The current report must include the following:
- A statement that the company is relying on the order
- A brief description of the reasons why the company couldn’t file on a timely basis
- The estimated date by which the report, schedule, or form is expected to be filed
- A risk factor or risk factors explaining the impact of COVID-19 on the company’s business, if material
If the reason the report can’t be filed in a timely manner relates to the inability of any person other than the registrant to furnish an opinion, report, or certification, the Form 8-K or Form 6-K must have an exhibit statement signed by that person. The statement must include the specific reasons why the required opinion, report, or certification will be unable to be provided on or before the due date of a company’s filing.
Registrants relying on the order must make any filings within 45 days of the original filing deadline. Those filings must disclose that the company is relying on the order and state the reasons why the company couldn’t file on a timely basis. A registrant relying on the order doesn’t need to file a Form 12b-25 unless it’s still unable to file by the extended due date.
A company relying on the order will still be considered current in its Exchange Act filing requirements for purposes of eligibility to use Forms S-3 or S-8 and the current public information eligibility requirements of Rule 144(c), as long as the following criteria are met:
- The company was current and timely as of the first day of the relief period.
- The company files any report due during the relief period within 45 days of the filing deadline for the report.
The SEC staff also published several interpretations related to the application of the COVID-19 regulatory relief within the order. Under C&DI questions 135.12 and 135.13, the SEC staff clarified:
- A registrant that only files a Form 12b-25 by the original due date of the required report won’t meet the condition of the order to provide the statements called for by the original filing deadline on a furnished Form 8-K or Form 6-K.
- A registrant that files a Form 12b-25 can only rely on the regulatory relief under the order if it also furnishes a Form 8-K or Form 6-K by March 16, 2020, or the original due date of the report.
- A registrant that relies on the order could subsequently rely on Rule 12b-25 if unable to file the report on or before the extended due date under the order.
Proxy and Information Statements
The order provides relief by exempting a public company from the Exchange Act requirements to furnish proxy statements, annual reports, and other soliciting materials when mail delivery isn’t possible and both of the following conditions are met:
- The registrant’s security holder has a mailing address located in an area where delivery service has been suspended as a result of COVID-19.
- The registrant made a good-faith effort to furnish the materials to the security holder in accordance with the applicable rules.
The SEC staff encourage timely reporting while recognizing it may be difficult to assess or predict with precision the broad effects of COVID-19 on industries or individual companies. Assessing these effects on a company will be a facts-and-circumstances analysis.
A company should consider the need for COVID-19-related disclosures detailing potential risks as well as known or reasonably likely effects of these risks. It may be necessary to include disclosures in management’s discussion and analysis, the business section, risk factors, legal proceedings, disclosure controls and procedures, internal control over financial reporting, and the financial statements. Disclosure should generally include:
- The effects COVID-19 has had on a company
- What management expects its future impact will be
- How management is responding to evolving events
- How a company is planning for COVID-19-related uncertainties
Tailor Your Approach
Disclosures about the risks and effects of COVID-19 should be specific to a company’s situation, based on that company’s facts and circumstances.
The SEC staff encourage companies to tailor their disclosures and provide material information about the impact of COVID-19. As companies assess COVID-19-related effects and consider their disclosure obligations, they should consider the following illustrative questions with respect to both present and future operations:
- How has COVID-19 impacted your financial condition and results of operations?
- How has COVID-19 impacted your capital and financial resources, including your overall liquidity position and outlook?
- 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—with respect to goodwill, intangible assets, long-lived assets, right-of-use assets, investment securities—or 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?
- Have you experienced challenges in implementing your business continuity plans or do you foresee requiring material expenditures to do so?
- 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?
- 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?
There may be instances where a generally accepted accounting principles (GAAP) financial measure isn’t available at the time of the earnings release because the measure may be impacted by COVID-19 and require additional information and analysis to complete.
In these situations, the SEC wouldn’t object to companies reconciling a non-GAAP financial measure to a preliminary GAAP measure that includes a provisional amount based on a reasonable estimate or a range of reasonably estimable GAAP results.
However, this should be limited to non-GAAP measures that are presented to a company’s board of directors based on the view that companies should use non-GAAP measures and performance metrics for the purpose of sharing with investors how management and the Board are analyzing the current and potential impacts of COVID-19 on a company’s financial condition or operating results.
If a company presents a non-GAAP financial measure or performance metric to adjust for or explain the impact of COVID-19, management is expected to explain why the non-GAAP measure is useful and how it helps investors assess the impact of COVID-19 on the company’s financial position and results of operations.
Trading Prior to Disclosure
The SEC staff reminds companies and other related persons of their obligations under the federal securities laws when considering their market activities.
Corporate insiders shouldn’t trade in a company’s securities when the company has become aware of information that would be material to investors, or where a company has become aware of a risk related to COVID-19 that would be material until this material information is broadly disclosed to the public.
The SEC staff also suggests a company should consider whether it may need to revisit, refresh, or update previous disclosure to the extent that the information becomes materially inaccurate.
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Note on COVID-19
During this unparalleled time, we’re closely monitoring the COVID-19 situation as it evolves so we can provide up-to-date guidance and support to help you combat uncertainty. For regulatory updates, strategies to help cope with subsequent risk, and possible steps to bolster your workforce and organization, please see the following resources: