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In light of the continuing impact COVID-19 is having on public companies, the Securities and Exchange Commission (the "SEC" or the "Commission") has taken several actions to provide "temporary, targeted relief to issuers" that are affected by COVID-19,1 along with guidance to assist issuers in fulfilling their disclosure obligations under the securities laws:
- Public Filing Relief.2 On March 25, 2020, the SEC issued a new order extending the timeframe of its previously issued relief to provide public companies with a 45-day extension to file certain disclosure reports that are due between March 1 and July 1, 2020.
- Disclosure Guidance.3 On the same day, the staff of the Division of Corporation Finance (the "Staff") issued comprehensive disclosure guidance for public companies, including guidance on reporting earnings and financial results and the use of non-GAAP metrics, as they prepare disclosure documents during this uncertain time.
- Temporary Relief from Form ID Notarization; Statement on Manual Signatures.4 The SEC also provided temporary relief from the Form ID notarization process where circumstances related to COVID-19 render it impracticable or impossible to obtain a notarization in a timely fashion, and the Staff issued a statement on manual signatures.
Public Company Filing Relief
Recognizing that public companies continue to face challenges in meeting the federal reporting and proxy delivery requirements in a timely manner, the Commission issued an order (the "New Order") that, subject to certain conditions, provides public companies with a 45-day extension to file certain disclosure reports that would otherwise have been due between March 1 and July 1, 2020. The New Order supersedes and extends the SEC's original March 4, 2020 order (the "Original Order"),5 which provided relief for filings due between March 1 and April 30, 2020. The requirements of the Original Order remain unchanged. Accordingly, companies that are unable to meet a filing deadline due to circumstances related to COVID-19 must:
- Furnish to the SEC a Form 8-K (or Form 6-K) by the original filing deadline of the relevant report stating:
- That it is relying on the New Order;
- The reasons why it could not complete such filing on a timely basis;
- The estimated date by which the report, schedule or form is expected to be filed;
- A company specific risk factor explaining, if material, the impact of COVID-19 on its business; and
- If the reason the subject report cannot be timely filed relates to the inability of any person, other than the registrant, to furnish any required opinion, report or certification, the Form 8-K (or Form 6-K) shall attach as an exhibit a statement signed by such person stating the specific reasons why such person is unable to furnish the required opinion, report or certification by the filing deadline.
- File the required report, schedule or form no later than 45 days after the original due date; and
- In the filed report, schedule or form, disclose that it is relying on the New Order and state the reasons why it could not file such document on a timely basis.
Any registrant relying on the New Order would not need to file a Form 12b-25 so long as the report, schedule or form is filed within the time period permitted.
The relief provided by the New Order extends to any filings and amendment thereto required to be made pursuant to Sections 13(a), 13(f), 14(a), 14(c), 14(f), 15(d) and Regulation 14A, 14C and 15D of the Securities Exchange Act of 1934, as amended.6 This now includes the following upcoming filings for calendar year-end companies:
- Annual Meeting Proxy Statements. For purposes of SEC rules, companies must generally file proxy statements no later than 120 days after the end of the fiscal year to meet the deadline for filing the Part III information of a Form 10-K that is included in a proxy statement and incorporated by reference into the Form 10-K. Accordingly, companies should be assessing whether they can meet this deadline. Under the New Order, companies can file their definitive proxy statement or Part III information in a Form 10-K/A no later than 45 days from the original filing deadline. However, companies should consider other annual meeting requirements, including Rule 14a-16 if a company is using notice and access to mail materials 40 days before the annual meeting, applicable state law and companies' organizational documents in determining when they must file their proxy statement.
- Form 10-Qs. The deadline for first quarter 10-Qs for accelerated and large accelerated filers for calendar year-end companies is 40 days after March 31, 2020. If a company were to use the New Order to delay this filing, the new deadline would be 45 days later. Accordingly, as many companies close their books for the first quarters, they should also be assessing the steps and timeline needed to gather, process, review and prepare the information for their Form 10-Q in this current environment.
As a reminder, companies must also assess the effectiveness of their disclosure controls and procedures as of the end of their first quarter and disclose their conclusions in their Form 10-Qs. As defined in the Exchange Act, disclosure controls and procedures include those procedures designed to ensure that information required to be disclosed is recorded, processed, summarized and reported within the time periods required by the SEC's rules and forms. Accordingly, if a company were to delay its filing in accordance with the New Order, it should carefully assess any appropriate disclosure in its disclosure controls and procedures section of its Form 10-Q, including a reference to its previously filed Form 8-K disclosing reliance on the New Order and the reasons it could not complete the filing on a timely basis.
Disclosure Guidance Topic No. 9 (the "Guidance") provides the Staff's views regarding disclosure and other securities law obligations that public companies should consider with respect to COVID-19 and related business and market disruptions.
The Guidance emphasizes that the impact of COVID-19 and management's response to the evolving situation, while difficult to precisely predict or accurately assess, can be material to investment and voting decisions. Given the tension between these two realities, companies are encouraged to consider the need for COVID-19-related disclosures within the principles-based, materiality-oriented disclosure system of the federal securities laws. Several existing rules or regulations require disclosure about the known or reasonably likely effects of and the types of risks presented by COVID-19; therefore, disclosure of these risks and effects may be necessary or appropriate in:
- Management's discussion and analysis (Item 303 of Regulation S-K);
- The Business section (Item 101 of Regulation S-K);
- Risk factors (Item 105 of Regulation S-K );
- Legal proceedings (Item 103 of Regulation S-K );
- Disclosure controls and procedures (Item 307 of Regulation S-K);
- Internal control over financial reporting (Item 308 of Regulation S-K); and
- Financial Statements.
In addition, the Commission has made it clear that "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."
Assessing and Disclosing the Evolving Impact of COVID-19
The Guidance emphasizes that assessing the evolving effects of COVID-19 and related risks will be a "facts and circumstances" analysis, and that disclosure about these risks and effects should be specifically tailored to a company's situation and "allow investors to evaluate the current and expected impact of COVID-19 through the eyes of management." It also provides helpful questions that are illustrative of what companies should consider as they assess COVID-19-related effects and evaluate their disclosure obligations, such as effects on:
- Current, near and long-term financial condition and results of operations;
- Capital and financial resources, including: overall liquidity position and outlook, cost of or access to capital and funding sources, sources or uses of cash, ongoing ability to meet the covenants of credit agreements and the impact of known trends and uncertainties on the ability to service debt or other financial obligations;
- Any material impairments (e.g., with respect to goodwill, intangible assets, long-lived assets, right of use assets, investment securities), 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;
- Ability to maintain operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures, including any changes in controls that materially affect or are reasonably likely to materially affect a company's internal control over financial reporting;
- Demand for products or services and related supply chain or the methods used to distribute such products or services, or the relationship between costs and revenues; and
- Operations due to any constraints or other impacts on human capital resources and productivity.
The Guidance notes that much of this disclosure would involve forward-looking information that may be based on assumptions and expectations regarding future events; companies should therefore provide such forward-looking information in a way as to avail themselves of the safe harbors in Section 27A of the Securities Act and Section 21E of the Exchange Act for this information.
Issues with Respect to Dissemination of Material Non-Public Information
The Guidance reminds companies and other related persons that if COVID-19 has affected a company in a way that would be material to investors or if a company has become aware of a risk related to COVID-19 that would be material to investors, the company, its directors and officers, and other corporate insiders who are aware of these matters should refrain from trading in the company's securities until this information is disclosed to the public.
When companies do disclose material information, they must avoid selective disclosure and ensure any such material information is disseminated broadly in accordance with Regulation FD (such as through a broadly disseminated press release or a Form 8-K filing). Depending on a company's particular circumstances, it should be considering whether it may need to revisit, refresh or update previous disclosure to the extent that the information becomes materially inaccurate.
The Guidance further notes that although foreign private issuers are not subject to Regulation FD, they are required to make timely disclosures of material information pursuant to listing rules and policies, and their disclosure practices remain subject to liability for conduct that violates the antifraud provisions of the federal securities laws.
Start Addressing Financial Reporting Matters Early
The ongoing and evolving COVID-19 impact will likely make it more difficult for companies and their auditors to complete the work required to maintain timely filings, and companies are encouraged to proactively address financial reporting matters earlier than usual. For example, if a company or its auditors will need to consult with experts to determine how the COVID-19 situation may impact its assets, including impairment of goodwill or other assets, it should consider engaging with those experts promptly so that its reporting will be as timely as possible.
Reporting Earnings and Financial Results
Use of Non-GAAP Financial Measures
The Guidance further reminds companies of their obligations under Item 10 of Regulation S-K and Regulation G with respect to the presentation of non-GAAP financial measures, as well as the Commission's recent guidance with respect to performance metrics disclosure.7 Specifically:
- To the extent a company presents a non-GAAP financial measure or performance metric to adjust for or explain the impact of COVID-19, it should highlight why management finds the measure or metric useful and how it helps investors assess the impact of COVID-19 on the company's financial position and results of operations;
- A non-GAAP financial measure should not be disclosed more prominently than the most directly comparable GAAP financial measure or range of GAAP measures; and
- 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.
If a GAAP financial measure is not 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 will not object to companies reconciling a non-GAAP financial measure to preliminary GAAP results that either include provisional amount(s) based on a reasonable estimate, or a range of reasonably estimable GAAP results.8 If a company presents non-GAAP financial measures that are reconciled to provisional amount(s) or an estimated range of GAAP financial measures, it should explain, to the extent practicable, why the line item(s) or accounting is incomplete, and what additional information or analysis may be needed to complete the accounting.
The Staff reminds companies that it is not appropriate for a company to present non-GAAP financial measures or metrics for the sole purpose of presenting a more favorable view of the company. Rather, the Staff believes the acceptable purpose of non-GAAP measures is to share with investors "how management and the Board are analyzing the current and potential impact of COVID-19 on the company's financial condition and operating results."
The Guidance further notes that if a company is considering presenting metrics related to COVID-19, or changing the method by which it calculates a metric as a result of COVID-19, it should consider the principles explained in recent Commission guidance related to key performance indicators, including the need to disclose the differences in the way the metric is calculated or presented compared to prior periods, the reasons for such changes, and the effects of any such change on the amount or other information being disclosed.9
Temporary Relief from Form ID Notarization; Staff Statement on Manual Signatures Signature Requirements
Temporary Relief from Form ID Notarization
In order to make filings on the EDGAR system, a person such as a Section 16 reporting person required to file Forms 3, 4 and 5 must first complete an online Form ID application that includes a notarized document, manually signed by the applicant over the applicant's typed signature, to confirm the authenticity of the Form ID filing.
In light of the fact that a number of filers indicated they were having difficulty securing the required notarization at this time, the SEC adopted a temporary final rule10 that will allow filers to gain access to the EDGAR system on a temporary basis, from March 26, 2020 through July 1, 2020, without initially providing the required notarization to the manually signed document by indicating on the face of the signed document that the filer could not obtain the required notarization due to circumstances relating to COVID-19.
Staff Statement on Manual Signatures
In light of COVID-19 related developments, the Staff issued a statement on manual signatures that largely emphasizes existing requirements and the need for companies to comply with them. In particular, Rule 302(b) of Regulation S-T requires that:
- Each signatory to documents electronically filed with the SEC "manually sign a signature page or other document authenticating, acknowledging or otherwise adopting his or her signature that appears in typed form within the electronic filing";
- The document be executed before or at the time the electronic filing is made; and
- Companies retain such documents for a period of five years.
In response to inquiries about these requirements, the SEC issued a statement stating that it expects companies to comply with these requirements, but that it would not recommend enforcement action if:
- The signatory retains a manually signed signature page or other document authenticating, acknowledging or otherwise adopting his or her signature and provides such document, as promptly as reasonably practicable, to the filer for retention in the ordinary course;
- Such document indicates the date and time when the signature was executed; and
- The filer establishes and maintains policies and procedures governing this process.
Accordingly, this statement both emphasizes the existing requirements with respect to manual signatures, while providing some relief for companies from the requirement to continuously retain the document for a period of five years by allowing a company to obtain the signature "as promptly as reasonably practicable," as noted above.
1 SEC Chairman, Jay Clayton, quoted in the press release "SEC Extends Conditional Exemptions From Reporting and Proxy Delivery Requirements for Public Companies, Funds, and Investment Advisers Affected By Coronavirus Disease 2019 (COVID-19)" available here.
2 The order is available here.
3 Disclosure Guidance Topic No. 9 is available here.
4 The temporary relief from the Form ID notarization requirement is explained here. The Staff statement on manual signatures is available here.
5 For a description of the original order, see our prior alert, "SEC Provides Conditional Relief from Filing SEC Reports for Companies Affected by COVID-19."
6 For a complete list of the applicable sections and regulations see the New Order starting on page 2.
7 See our prior alert, "SEC Releases New Guidance on KPIs."
8 For example, if a company intends to disclose on an earnings call its earnings before interest, taxes, depreciation and amortization (EBITDA), it could reconcile that measure to either its GAAP earnings, a reasonable estimate of its GAAP earnings that includes a provisional amount, or its reasonable estimate of a range of GAAP earnings. The provisional amount or range should reflect a reasonable estimate of COVID-19 related charges not yet finalized, such as impairment charges.
9 For a more complete discussion of the Commission's guidance on metrics, see our prior alert, "SEC Releases New Guidance on KPIs."
10 Under a new paragraph (c) to Rule 10 of Regulation S-T. See the temporary rule available here.
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