SEC's Chairman Clayton and Director Hinman Issue Statement on Disclosure During COVID-19

Alerts / April 10, 2020

Building on the Securities and Exchange Commission’s (SEC) prior guidance and updated Compliance and Disclosure Interpretations regarding disclosures in the COVID-19 environment, on April 8, Chairman Jay Clayton and William Hinman, Director of the Division of Corporation Finance, issued a Statement stressing the importance of high-quality disclosures about companies’ current and future financial and operational conditions and planning during the COVID-19 outbreak. The Statement recognizes the evolving national strategy to “effectively address the health risks of COVID-19 while fostering a meaningful, responsible increase in economic activity” and highlights the importance of sharing data in our markets as well as to facilitate the necessary constant coordination among workers, consumers, businesses, governmental authorities and investors.

Against that backdrop, the Statement urges companies to provide as much disclosure as practicable, including forward-looking statements, particularly in upcoming quarterly earnings releases and analyst and investor calls. These quarterly earnings releases and analyst and investor calls will not be routine. Historical information may not be as relevant, as investors and analysts are more interested in knowing about a company’s strategy and its future financial and operational plans; specifically, where companies stand today and how they have adjusted, and expect to adjust in the future, in response to the COVID-19 pandemic. The Statement identifies particular information that would be helpful to investors and markets, including:

  • Detailed discussions of current liquidity positions and expected financial resource needs.
  • The impact of COVID-19 on operations, including as a result of company efforts to protect worker health and well-being and customer safety.
  • The impact of the company’s actions and policies responding to COVID-19.
  • How the company’s response to COVID-19 is progressing.
  • How operational and financial conditions may change as the company’s response to COVID-19 evolves.
  • Disclosure as to whether a company is receiving financial assistance under the CARES Act or other COVID-19-related programs if such assistance has materially affected, or will likely materially affect, the company’s financial condition or results of operations.

The Chairman, in a recent interview, emphasized that “information is the lifeblood of our markets” and investors are thirsting for the foregoing type of information. The Statement stresses the benefits these statements can have on a company; on its investors, employees and consumers; and on the economy as a whole. Transparent, informative disclosures are critical to:

  • Informing investors, employees, other businesses and the economy on a company’s strategy.
  • Increasing confidence and understanding in the market.
  • Promoting broad coordination among all parties (governmental authorities, companies, employees, consumers, investors, etc.) in the collective fight against COVID-19, as the exchange of forward-looking information is essential to our coordination (e.g., if an industry will soon pursue a credible plan for increased business activity, downstream or related industry business owners may be less likely to terminate employees or more likely to rehire employees).

The Statement acknowledges that detailed forward-looking statements can be challenging for a company to make as they are “unavoidably based on a mix of assumptions, including assumptions regarding matters beyond the control of the company” and “key drivers of future operational status and financial results—most notably, the time frames for current COVID-19 social distancing guidelines and other mitigation-related requirements—are not uniform and are likely to undergo material change.” The Statement further notes that “in light of these forecasting challenges, it may be tempting to resort to generic, or boilerplate, disclosures that do little to inform investors of company-specific status, operational strategies and risks. We encourage companies and their advisers 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.”

The Statement suggests that, over time, updates and refinements to such disclosures should become easier. It also states that good faith estimates will not be second-guessed by the staff. But even though the SEC will not take action against “good faith attempts to make appropriately framed forward-looking information,” companies should nevertheless be mindful that nothing prohibits stockholders from bringing actions against companies for their COVID-19-related disclosures and forward-looking statements. As a result, companies should continue to be mindful of making forward-looking statements while availing themselves of available safe harbors for such statements.

Finally, no SEC statement these days would be complete without a further warning that the SEC is “laser-focused on identifying bad actors who would seek to use the current uncertainty to prey on our investors” and reminding companies to “ practice good corporate hygiene, particularly with regard to the protection and distribution of material non-public information” to avoid insider trading and Regulation FD violations.

Authorship Credit: Teresa Goody Guillén, Janet A. Spreen and Charlotte W. Pasiadis

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