On March 25, the Securities and Exchange Commission’s (SEC) Division of Corporate Finance (CorpFin) issued Disclosure Guidance Topic No. 9, which provides its views on disclosure and other securities law obligations companies should consider with respect to the impact of and future risks presented by COVID-19 on their businesses, financial condition and results of operations.

The guidance recognizes the challenges that reporting companies are facing in formulating disclosure, as the effects of COVID-19 “are difficult to assess or predict with precision” and “depend on many factors beyond a company’s control and knowledge.” The staff notes that targeted regulatory relief is being provided “where appropriate in light of evolving circumstances,” but that “timely, robust, and complete information is essential to functioning markets” and companies are encouraged to provide this information to facilitate an understanding of management’s views on COVID-19’s future impact and resulting contingency planning.

CorpFin also stressed consideration of these disclosure obligations in the context of the principles-based disclosure system, in that “its disclosure requirements can apply to a broad range of evolving business risks even in the absence of a specific line item requirement that names the particular risk presented” and that this information can be material to both investment and voting decisions.

Specifically, the guidance:

• Provides a non-exhaustive list of issues to consider as companies analyze the specific effects of COVID-19 in light of the companies’ disclosure obligations, and questions to ask with respect to their operations both now and in the future, being mindful that information is more likely material in these times. The issues and questions to consider include:
  • Impacts on financial condition: In light of changing trends and the overall economic outlook, companies may examine how COVID-19 will impact future operating results and near- and long-term financial condition. This analysis should consider whether COVID-19 will impact future operations differently than how it affects the current period.
  • Impact on capital and financial resources: Companies may examine whether cost of or access to capital and funding sources, such as revolving credit facilities or other sources, have or are reasonably likely to change. Questions to consider here include whether sources or uses of cash otherwise have been materially impacted; whether there is a material uncertainty about the ongoing ability to meet the covenants of credit agreements; and if a material liquidity deficiency has been identified, the courses of action a company has taken or has proposed to take to remedy the deficiency.
  • Balance sheets: Companies may examine how COVID-19 impacts assets reflected on the balance sheet and the company’s ability to timely value and account for those assets.
  • Remote work arrangements: Companies could reflect on remote work arrangements, if applicable, and how those arrangements may have adversely impacted the ability to maintain operations, including financial reporting systems and internal control over financial reporting and disclosure controls and procedures.
  • Travel: The guidance asks that companies consider examining whether travel restrictions and border closures are expected to have a material impact on the ability to operate and achieve business goals.
• Advises companies to provide disclosures that allow investors to evaluate the current and expected impact of COVID-19 through the lens of company management.
• Reminds companies to be mindful of a duty to update prior disclosures – whether made voluntarily or as required by law – to the extent that the information becomes materially inaccurate.
• Reminds companies that disclosures of forward-looking information can be made in a manner that falls under the safe harbors in Section 27A of the Securities Act and Section 21E of the Exchange Act.
• Following on the statements from the SEC’s Division of Enforcement released earlier in the week, emphasizes the importance of the company, as well as its directors, officers and other insiders, refraining from purchases and sales in the market unless all material information regarding the impact of COVID-19 on the company has been disclosed, and that companies should consider whether a broader group of people may have access to material information in these times and should be subject to insider trading policy requirements.
• Reminds companies of the application of Regulation FD to situations where they may be making selective disclosure of material information, and that they may instead need to disseminate material information broadly.
• Suggests that companies engage in discussions with auditors and other experts earlier in the process as needed to proactively consider accounting and financial reporting considerations, such as impairment of goodwill or other assets, to facilitate timely filing.
• Reminds companies of their need to comply with their obligations under Item 10 of Regulation S-K and Regulation G regarding the presentation of non-GAAP financial measures, as well as the SEC’s recent guidance with respect to disclosure of performance metrics. CorpFin understands that there are instances in which GAAP measures may not be 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. The staff notes that it would not object in circumstances where GAAP financial statements are not otherwise required (such as in an earnings release) to companies reconciling a non-GAAP financial measure to preliminary GAAP results that include either provisional amounts based on a reasonable estimate or a range of reasonably estimable GAAP results along with an explanation as to why the GAAP number is not available. The non-GAAP measure should not be presented with greater prominence than the preliminary or estimated number with which it is being reconciled. The staff also indicates that companies taking advantage of this relief should disclose only measures that are also being reported to its board of directors and considered by management in analyzing the effects of COVID-19, and should not be using the non-GAAP measure solely to present a more favorable view of the company. In addition, in filings where GAAP financial statements are required, such as filings on Form 10-K or 10-Q, companies should reconcile to GAAP results and not include provisional amounts or a range of estimated results.

Finally, CorpFin expressed its continuing view that “health and safety are the first priority and that, as the Commission’s relief and staff guidance makes clear, they should not be compromised to meet reporting requirements” and the staff will provide additional guidance as conditions change, if appropriate. CorpFin also encourages companies to contact them with any questions or if the company believes there are additional areas where guidance or temporary relief may be necessary.