Throughout the coronavirus (COVID-19) pandemic, the Securities and Exchange Commission (SEC) has continued to provide both substantive guidance and logistical relief to public companies as they navigate these unprecedented times. This client alert updates and supplements our prior client alerts and describes recently issued guidance and regulatory extensions.
CF Disclosure Guidance: Topic 9A
On June 23, 2020, the Staff of the SEC’s Division of Corporation Finance issued CF Disclosure Guidance: Topic No. 9A to supplement CF Disclosure Guidance Topic: No. 9, which the Staff issued on March 25, 2020 (see our prior client alert discussing the original guidance). Topic No. 9A provides additional guidance and considerations for public companies regarding COVID-19 disclosures, focusing on the following:
- Operations, Liquidity and Capital Resources:
- Operational Adjustments: The Staff acknowledged that public companies have faced and continue to face many challenges as a result of, and have implemented a number of operational adjustments to respond to, COVID-19, including transitioning to telework; making supply chain and distribution adjustments; and suspending or modifying certain operations to comply with health and safety guidelines to protect employees, contractors and customers, including in connection with transitions back to the workplace. The Staff reminded public companies to carefully consider whether these types of adjustments may have a material effect meriting disclosure to investors.
- Financing Activities: The Staff emphasized the importance of "robust and transparent" disclosures from public companies about how they are addressing short- and long-term liquidity and funding risks in the current environment, particularly in the context of the types of financing activities they are undertaking, which may include, among others, obtaining (or upsizing) and utilizing credit facilities, accessing public and private markets, implementing supplier finance programs and negotiating new or modified customer payment terms. The Staff highlighted disclosure about the extent to which financing activities present new risks or uncertainties to public companies’ businesses (such as through restrictive covenants in a new or upsized credit facility). While the Staff noted that companies have been including disclosures regarding financing activities in their earnings releases, the Staff suggested that companies should evaluate whether any of the information, in light of its potential materiality, should also be included in management’s discussion and analysis (MD&A).
- Illustrative Considerations: In an attempt to help focus public companies on specific issues that should be considered for disclosure, the Staff encouraged management teams of public companies to ask probing questions regarding, among others, material operational challenges, current and projected liquidity (including sources of capital, debt covenant compliance, cash burn and ability to service debt), capital expenditures, concessions to customers and supply chain risks. The Staff included a list of these questions in its guidance but also noted that the list was not exhaustive.
- CARES Act: The Staff advised companies that received federal assistance through the CARES Act, such as loans or tax relief, to consider the short- and long-term impact of that assistance on their financial condition, results of operations, liquidity and capital resources, as well as related disclosures and critical estimates and assumptions. The Staff provided questions for companies to consider when analyzing disclosure requirements related to this assistance, such as those relating to restrictions imposed by such assistance (e.g., maintaining certain employment levels for a certain period).
- Going Concern: In light of the challenges presented by the pandemic, the Staff reminded public companies that management should consider all conditions and events that, if taken as a whole, would raise substantial doubt about the company’s ability to continue as a going concern.
- Financial Statements: If there is a substantial doubt about the company’s ability to continue as a going concern or if management’s plans alleviate such doubt, the Staff noted that management should provide appropriate disclosures in the company’s financial statements.
- MD&A: The Staff provided questions for public companies to consider regarding MD&A disclosure with respect to a company’s ability to continue as a going concern, such as the company’s plans to address the challenges it faces and whether any portion of those plans has been implemented.
The Staff reminded public companies that the disclosures impacted by the pandemic are broader than are covered in Topic No. 9A and that, as discussed in Topic No. 9, those disclosures may cover a number of other areas, such as disclosure controls and procedures and internal control over financial reporting.
OCA Statement on the Continued Importance of High-Quality Financial Reporting for Investors in Light of COVID-19
On June 23, 2020, the SEC’s Office of the Chief Accountant (OCA) issued a statement supplementing its April 3, 2020 statement and, again and with the benefit of additional experience, stressed the importance of high-quality reporting during the pandemic that addressed the following topics:
- Significant Estimates and Judgments; Reasonable Judgments: Acknowledging that public companies have needed to make significant judgments and estimates to address a variety of unprecedented accounting and financial reporting matters, the OCA stated that it typically has not objected to and will continue to not object to well-reasoned judgments. The OCA noted that significant judgments and estimates should be disclosed in a manner that is understandable and useful to investors and that the resulting financial reporting should reflect and be consistent with the company’s specific facts and circumstances.
- Disclosure Controls and Procedures (DCP) and Internal Control Over Financial Reporting (ICFR): The OCA, in emphasizing the importance of robust internal accounting controls to high-quality, reliable financial reporting, noted that management is required to evaluate the effectiveness of DCP and ICFR for public companies at the end of each fiscal quarter and each fiscal year, respectively. The OCA acknowledged that, due to the pandemic, there may be changes in company’s financial reporting processes and that, if changes occur and any change materially affects, or is reasonably likely to materially affect, a company’s ICFR, then that change must be disclosed in the quarterly filing for the fiscal quarter in which it occurred. Examples of changes to financial reporting processes include consideration of how controls operate or can be tested (such as when offices are closed indefinitely) and if there is any change in the risk of the control operating effectively in a telework environment.
- Going Concern: The OCA reminded public companies that in each reporting period, including interim periods, management should evaluate whether relevant conditions and events, taken as a whole, raise a substantial doubt regarding the company’s ability to meet obligations as they become due within one year after the issuance of the financial statements. In instances where substantial doubt exists regarding an entity’s ability to continue as a going concern, management should consider whether its plans alleviate such substantial doubt and make appropriate disclosures to inform investors. The OCA reminded public companies that those disclosures include information about the principal conditions giving rise to the substantial doubt, management’s evaluation of the significance of those conditions relative to the company’s ability to meet its obligations and management’s plans that alleviated substantial doubt. If, after considering management’s plans, substantial doubt about a company’s ability to continue as a going concern is not alleviated, additional disclosure will be required.
- Vital Role of Audit Committees: The OCA emphasized the vital role of audit committees in financial reporting systems through their oversight of financial reporting, including ICFR and the external, independent audit process. Specifically, the OCA noted that the most effective audit committees are engaged and execute their responsibilities with diligence and that this engagement significantly enhances the quality of public companies’ financial reporting.
- NYSE Shareholder Approval Requirements: On April 6, 2020, the SEC approved and declared immediately effective, a proposed rule change filed by the New York Stock Exchange (NYSE) to temporarily waive, under limited circumstances, its shareholder approval requirements for certain capital raising transactions involving related party issuances as well as for the issuance of 20% or more of a company’s stock. This initial waiver extended until June 30, 2020, and, on July 2, 2020, the SEC approved the extension of this waiver through September 30, 2020. We discussed the application of this relief in our client alert issued on April 29, 2020, as updated on May 14, 2020.
- Staff Statement Regarding Rule 302(b) of Regulation S-T in Light of COVID-19; Form 144 Filings: The Staff extended its no-action relief related to Rule 302(b) of Regulation S-T (see our prior client alert for details) until such time as the Staff provides public notice that the relief is being withdrawn, which notice would be published at least two weeks before the announced termination date. Similarly, the Staff extended its no-action relief related to paper copies of Form 144 filings.
Although much has changed due to COVID-19, much remains the same. Public companies have obligations to provide complete and accurate information to investors, regardless of whether they are in the midst of a pandemic. To that end, we recommend that public companies:
- Communicate: While COVID-19 has created a great deal of uncertainty, it is still important for public companies to disclose material trends and uncertainties as required by SEC rules and to provide updates to investors and the market regarding prior disclosures and predictions.. Trend information should be included in MD&A, and risks associated with material trends and uncertainties should be included in risk factors.
- Make Reasonable Judgments: While it is necessary that all information is made in good faith and on a reasonable basis, public companies should provide appropriate forward-looking information to investors. Public companies should consider how to best provide appropriately qualified insight and predictions about how the company has changed since the beginning of the pandemic and how the company might look in the near future as the pandemic continues, as well as how the company might look as the economy evolves.
- Consider Impairment Testing: Public companies should consider whether the ongoing pandemic triggers the need for the company to test its assets for impairment. The Staff has already issued at least one comment in this regard.
- Convey the Narrative: Through their periodic reports, public companies should try to convey a narrative of how the company has reacted, adapted and been impacted due to COVID-19. Clear narrative disclosure not only helps protect a public company from liability, it also helps the company maintain and enhance its credibility with its investors.
- Be Specific: The Staff has consistently stated that risk factor disclosures should go beyond the general economic or societal impacts of COVID-19 and instead address the specific risks faced by the particular public company.
- Be Consistent: Public companies should include in SEC filings any and all material information that was included in any press release and ensure the presentation of the information is consistent across all channels of disclosure. The Staff has noted that it compares press releases to disclosures when it reviews SEC filings, ensuring that the material information is consistent between the two. Companies should also be careful when presenting at conferences that information is consistent with press releases and public filings.
If you have any questions related to this Alert, please feel free to reach out to the Smith Anderson lawyer with whom you work. Additionally, please visit and bookmark our firm’s Coronavirus (COVID-19) Business Resource Center, which is continuously updated with useful materials and resources related to COVID-19. This tool has been made available to ensure that our clients and the broader business community stay informed on key issues that may impact their operations and to navigate the related business and legal issues during these challenging times.
Special thanks to contributing author, Caitlin Augerson.