SEC Leadership Issues Statement on Disclosures in Light of COVID-19

Wilson Sonsini Goodrich & Rosati

With earnings season rapidly approaching for many public companies, the uncertain and fluid nature of the COVID-19 pandemic is giving rise to complex determinations of what must, should, or can be disclosed and when. In light of these unique challenges, on April 8, U.S. Securities and Exchange Commission (SEC) Chairman Jay Clayton and William Hinman, the Director of the SEC's Division of Corporation Finance, issued a public statement entitled The Importance of Disclosure – For Investors, Markets and Our Fight Against COVID-19, urging "companies to provide as much information as is practicable regarding their current financial and operating status, as well as their future operational and financial planning."

The statement offers several observations and requests, including, among others:

  • First Quarter Earnings Seasons Will Not Be Routine. The statement acknowledges that first quarter earnings announcements and related investor calls will not be routine, further stating that in this unprecedented time, disclosures relating to "historical information may be relatively less significant." In response to the demands of the market, the statement suggests that disclosures should be responsive to investor interest in the following matters: "(1) where the company stands today, operationally and financially, (2) 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 (3) how its operations and financial condition may change as all our efforts to fight COVID-19 progress."

    In addition, in perhaps one of the more key takeaways from this statement for companies preparing for earnings season, the statement provides the following request:

    "We Request that Companies Provide as Much Information as is Practicable Regarding Their Current Status and Plans for Addressing the Effects of COVID-19. Speaking for ourselves, and recognizing the challenges inherent in our request, we urge our public companies, in their earnings releases and analyst calls, as well as in subsequent communications to the marketplace, to provide as much information as is practicable regarding their current operating status and their future operating plans under various COVID-19-related mitigation conditions. Detailed discussions of current liquidity positions and expected financial resource needs would be particularly helpful to our investors and markets. Beyond the income statement and the balance sheet effects, we recognize that COVID-19 may significantly impact operations, including as a result of company efforts to protect worker health and well-being and customer safety. The impact of company actions and policies in this area may be of material interest to investors, and we encourage disclosures that address that interest. In addition, companies and financial institutions may be receiving financial assistance under the CARES Act or other similar COVID-19 related federal and state programs. Such assistance may take various forms and is intended to mitigate COVID-19 effects for companies and their workers. If these or other types of financial assistance have materially affected, or are reasonably likely to have a material future effect upon, financial condition or results of operations, the affected companies should provide disclosure of the nature, amounts and effects of such assistance."

  • Generic Versus Company-Specific Information. The statement recognizes that much of the information relating to the COVID-19 pandemic continues to evolve, and that some of the key drivers for future operations and financial results, including time frames for social distancing guidelines and other requirements, are not uniform. Given these uncertainties, the statement notes that while it may be tempting to use generic or boilerplate disclosure, it encourages "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."
  • Forward-Looking Information. The statement acknowledges the challenges of providing forward-looking information in these unprecedented times, noting that "one of the 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." However, the statement encourages companies to take on the challenges of providing forward-looking information for the benefit of the markets and facilitating communication between the public and private sectors. The statement encourages public companies to avail themselves of the safe harbors for such statements. Notably, the statement explicitly provides that given the current uncertainty in the market, the SEC "would not expect to second guess good faith attempts to provide investors and other market participants appropriately framed forward-looking information." Companies are advised to work with their advisers on the disclosures and the safe harbor language.
  • High-Quality Disclosure Beneficial for the Economy Generally. The statement highlights the potential benefits of "high quality disclosure" beyond just investors and companies, noting that such disclosure will "also enhance valuable communication and coordination across our economy—including between the public and private sectors—as together we pursue the fight against COVID-19." For instance, the statement provides the example of an owner of an industrial laundry business. If that owner ultimately becomes comfortable that the hotel industry will soon credibly increase its activity, then that laundry business may be less likely to furlough its employees.
  • Protection of Material Non-Public Information. The statement affirms the importance of "good corporate hygiene," noting that the type of information outlined in the statement should be "held closely until disclosed, and, when disclosed, [be] broadly disseminated."

What to Do Now?

Given the wide-ranging and significant nature of the statement, we recommend reading the statement in its entirety as companies prepare their earnings materials, including presentations, press releases, earnings call scripts, and earnings call practice Q&A. In addition, this statement should be read in conjunction with other guidance and statements issued by the SEC, including, among others, CF Disclosure Guidance: Topic No. 9 – Coronavirus (COVID-19) issued by the SEC's Division of Corporation Finance, and the Statement on the Importance of High-Quality Financial Reporting in Light of the Significant Impacts of COVID-19 issued by the SEC's Chief Accountant. For more information on Topic No. 9, please see our prior alert.

Furthermore, given that this earnings season is not expected to be routine, and we expect there may be some companies that may be in a difficult position with regard to providing forward-looking statements because of their particular facts and circumstances, we suggest that companies engage with their advisers earlier than usual to work through issues related to disclosure, guidance, underlying assumptions, and liability considerations.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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