Coronavirus & SEC Disclosure
Do Publicly-Traded Companies Have a Duty to Disclose Coronavirus Cases Under SEC Rules?
The coronavirus pandemic has sent shockwaves through the U.S. and global securities markets. The Dow Jones industrial average has plunged into its first bear market since the financial crisis of the late 2000s, and the federal government is contemplating various measures to prop up the U.S. economy amidst concerns that the downward spiral has only just begun. Companies in multiple industries are feeling the pressure already, and investors are facing the potential for significant market losses.
Given all of the above, it would seem that publicly-traded companies have enough to worry about already. But, while companies are focusing on protecting their employees’ and customers’ health while also protecting their own bottom lines, do they need to be concerned about making coronavirus-related SEC disclosures as well?
The SEC Issues Guidance on Public Company Filings During the Coronavirus Pandemic
In a word, “yes.” On March 4, the U.S. Securities and Exchange Commission (SEC) issued a press release addressing public companies’ disclosure obligations during the coronavirus (COVID-19) crisis. While the SEC announced the issuance of an order that gives companies up to a 45-day grace period for certain filings, it also made clear that companies’ substantive filing obligations remain in full force. In the words of SEC Chairman Jay Clayton:
“We also remind all companies to provide investors with insight regarding their assessment of, and plans for addressing, material risks to their business and operations resulting from the coronavirus to the fullest extent practicable to keep investors and markets informed of material developments. How companies plan and respond to the events as they unfold can be material to an investment decision, and I urge companies to work with their audit committees and auditors to ensure that their financial reporting, auditing and review processes are as robust as practicable in light of the circumstances in meeting the applicable requirements.”
In the SEC’s press release, Chairman Clayton goes on to add that, “Companies providing forward-looking information in an effort to keep investors informed about material developments, including known trends or uncertainties regarding coronavirus, can take steps to avail themselves of the safe harbor in Section 21E of the Exchange Act for forward-looking statements.”
The key takeaway here is that while the coronavirus (COVID-19) outbreak is impacting the securities markets and publicly-traded companies in a number of different ways, it is not fundamentally altering their disclosure obligations. If any direct or indirect impact of the coronavirus pandemic has the potential to be material to prospective investors’ investment decisions, then it needs to be appropriately disclosed consistent with public companies’ reporting obligations under the Securities Act of 1933, the Securities Exchange Act of 1934, and all other pertinent laws and regulations.
SEC Disclosure Obligations that May Be Triggered By Events Linked to the Coronavirus (COVID-19) Pandemic
Specifically, there are a number of disclosure and reporting obligations that may be triggered by events linked to the coronavirus (COVID-19) pandemic. Publicly-traded companies will need to carefully monitor these events and be prepared to promptly make filings as necessary. For example, new and revised disclosures that may become necessary as result of issues linked to the coronavirus include:
1. Earnings Guidance
If the coronavirus is likely to impact a company’s financial performance, then the company may have an obligation to either revise or withdraw its previously-reported earnings guidance. While the usual course of action is to revise earnings guidance downward when an unexpected contingency negatively impacts a company’s earnings forecast, in unusual and unpredictable circumstances, simply withdrawing the company’s earnings guidance may be a more prudent strategy.
2. Forward-Looking Statements and Safe Harbor Disclosures
With respect to forward-looking statements in companies’ Form 10-K and Form 10-Q reports, the coronavirus pandemic may necessitate revisions to the safe harbor language contained therein. Some companies meticulously update their Form 10-K and Form 10-Q safe harbor language with each filing, while others tend to recycle generic language from prior reports. In either case, companies’ re-existing safe harbor language is almost certainly not tailored to the specific risks associated with the coronavirus outbreak; and, as a result, revisions to the Form 10-K and Form 10-Q safe harbor may be necessary.
3. Management’s Discussion and Analysis (MD&A)
MD&A disclosures are an important aspect of the SEC’s investor protection efforts effectuated through public companies’ reporting and disclosure obligations, and they are intended to provide prospective investors with the information they need in order to gain an adequate understanding of publicly-traded companies’ “financial condition, changes in financial condition and results of operations.” This includes information about events, changes in circumstances, and uncertain conditions that have a reasonable probability of impacting companies’ financial performance.
As the market impact of the coronavirus (COVID-19) pandemic continues to evolve, companies will need to carefully assess when, why, and how the virus impacts their MD&A disclosures. Impacts on companies’ operations (i.e. due to travel bans or employees becoming sick) and on their financial performance (i.e. due to limited consumer demands and impaired cash flow) can both potentially trigger updated MD&A reporting requirements.
4. Proxy Statements
For companies that have filed proxy statements for their annual meetings, it will be necessary to consider whether the coronavirus (COVID-19) outbreak presents previously-unforeseen material risks that require enhanced disclosures. Based on recent SEC guidance, publicly-traded companies may need to reconsider their proxy statement disclosures regarding their boards’ oversight of the material impacts of the coronavirus on their finances and operations.
5. Risk Factors
Publicly-traded companies must also carefully consider whether the risk factor disclosures in their most-recent Form 10-K, Form 20-F, and Form 40-F reports are sufficient in light of the current status and impacts of the coronavirus pandemic. This is true even if their prior disclosures referenced coronavirus-related risk factors—as the market risks linked to COVID-19 are constantly (and rapidly) changing.
Due to the potential for additional risk factors to develop (and for previously-identified risks to evolve), publicly-traded companies will need to carefully select the language they use for their risk factor disclosures, and they will need to continuously reevaluate whether updated risk factor disclosures are necessary.
Examples of Events, Issues, and Circumstances that May Trigger Coronavirus-Related SEC Disclosure Obligations
When deciding whether revised, updated, or additional SEC disclosures are necessary, publicly-traded companies must examine an exhaustive list of internal and external factors. For example, a recent article from B oomberg Law advises that companies should be mindful of disclosure obligations potentially being triggered by events such as:
- Planning for uncertainties linked to the spread of the coronavirus (COVID-19) in the U.S. and other countries around the world
- Companies’ responses to coronavirus-related events as they unfold
- Senior management or board members becoming infected with the coronavirus
- Potential insider trading concerns related to not-yet-disclosed material information
- Potential Regulation FD violations
- The exercise of business interruption insurance policies and force majeure clauses in major contracts
Managing Risk and Ensuring SEC Compliance During the Coronavirus (COVID-19) Pandemic
In light of public companies’ ongoing disclosure obligations and the inherent unpredictability of the coronavirus pandemic, what can – and should – these companies be doing to mitigate their risk and ensure SEC compliance?
1. Internal Communication Between Management and the Board of Directors
Effective internal communication between management and the board of directors will be critical. Company leadership should have scheduled and structured meetings to openly discuss potential risks linked to the coronavirus outbreak that have the potential to trigger SEC disclosure obligations.
2. Communications with Analysts
When conducting conference calls and one-on-one communications with analysts, company insiders must be mindful of the information they disclose, and any decisions to discuss coronavirus-related information should be made strategically and in coordination with the company’s broader disclosure and reporting compliance efforts.
3. Remedying SEC Disclosure (and Other) Violations
If a disclosure violation occurs (or if any other violation, such as insider trading or a misstep under Regulation FD is identified), the company should address the issue promptly. Due to the uncertainty of the present circumstances, the SEC may give companies a certain amount of discretion; however, companies should still focus on maintaining compliance (including compliance with self-reporting obligations as necessary) on an ongoing basis.
4. Working with Auditors and Legal Counsel
In order to make informed decisions, companies’ management teams and boards of directors should work closely with their auditors and legal counsel with respect to all SEC disclosure-related matters. As the situation continues to evolve, company insiders will need to continue to seek guidance from their outside advisors in order to mitigate the risk of non-compliance to the greatest extent possible.
5. Responding to SEC Inquiries and Investigations
Finally, companies must be prepared to respond to SEC inquiries and investigations related to their public disclosures or alleged lack thereof. Among other things, this means maintaining documentation to support all disclosure-related decisions, ensuring ongoing corporate compliance, and having defense counsel prepped to engage with the SEC on your company’s behalf.
Contact Oberheiden P.C. | SEC Compliance and Defense Counsel for Public Companies Nationwide
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