SEC Extends Filing Relief and Provides Disclosure Guidance in Response to COVID-19
March 25, 2020
On March 25, 2020, the Securities and Exchange Commission (SEC) announced in a press release that it has issued an exemptive order granting a filing deadline extension for public companies that are unable to timely comply with their filing obligations as a result of the novel coronavirus (COVID-19) outbreak and that the Division of Corporation Finance has provided new disclosure guidance, through Disclosure Guidance Topic No. 9, to express its current views regarding disclosure consideration and other securities law matters related to COVID-19. The exemptive relief provides companies an additional 45 days to file specified Exchange Act reports, forms, or schedules due between March 1 and July 1, 2020, subject to meeting certain conditions, including the filing of an 8-K disclosing reliance on such relief by the later of March 16 or the original filing deadline of the report. Disclosure Guidance Topic No. 9 provides a list of items for companies to consider when disclosing information to the market, and notes that companies should consider, depending on their particular circumstances, whether they should revise, refresh, or update materially inaccurate information. In addition, the disclosure guidance reminds companies and insiders of their obligations under Regulation FD and insider trading laws. The guidance also provides certain relief for the reconciliation of non-GAAP measures to GAAP measures when the GAAP measures may not yet be finalized. The SEC staff is continuing to address issues on a case-by-case basis in light of their fact-specific nature and encourages companies to contact the SEC staff with questions or to seek additional guidance.
Extension of Filing Relief
The new exemptive order supersedes and extends the prior order issued by the SEC on March 4, 2020 and provides an additional 45 days to file Exchange Act reports, schedules or forms under Exchange Act Sections 13(a), 13(f), 13(g), 14(a), 14(c), 13(d) and related rules and regulations (e.g., among others, Forms 10-K, 20-F, 10-Q, 8-K, 6-K and proxy statements) due between March 1 and July 1, 2020. The exemptive relief does not apply to the filing of Schedule 13Ds or the filing of Section 16 reports.
To take advantage of such relief, the company must furnish a Form 8-K or 6-K by the later of March 16 or the original filing deadline that discloses:
- that the company is relying on the exemptive relief;
- a brief description of why the company could not file the report, schedule or form on a timely basis;
- the estimated date by which the report, schedule or form is expected to be filed;
- a company specific risk factor or factors explaining the impact, if material, of COVID-19 on its business; and
- if the delay is due to the inability of any person other than the company to furnish a required opinion, report or certification, the Form 8-K or 6-K is required to 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 prior to the filing deadline.
The report, schedule or form itself, when subsequently filed in reliance on the exemptive order, must also disclose that the company relied on the order and state why the company could not make such filing on a timely basis. Companies that rely on this 45-day relief period will not need to file a Form 12b-25 as long as the filing is made within the 45-day relief period. However, if companies are unable to file the required reports on or before the extended due date, they will be permitted to rely on Rule 12b-25.
For purposes of eligibility to use Form S-3 or F-3, the company will be considered current and timely in its Exchange Act filing requirements if it was current and timely as of the first day of the relief period and it files any report due during the relief period within 45 days of the filing deadline for the report. Similarly, the company will be eligible to use Form S-8 and meet the current public information eligibility requirements of Rule 144(c) if it was current as of the first day of the relief period and it files any report due during the relief period within 45 days of the filing deadline for the report.
The order also exempts companies preparing for their upcoming annual meetings from the requirement to furnish proxy statements and other soliciting materials to stockholders when mail delivery is impossible. The relief is available to companies located in regions affected by COVID-19 where delivery service of the type customarily used by the company or other person making the solicitation has been suspended and the company or other person making the solicitation has made a good faith effort to furnish the soliciting materials to the stockholder.
The SEC staff is monitoring the situation and may, if necessary, provide extensions to the time period for the relief with any additional conditions it deems appropriate or provide additional relief as circumstances warrant.
Disclosure Guidance Topic No. 9
Assessing and Disclosing the Impact of COVID-19
The SEC’s Division of Corporation Finance has been monitoring disclosure and has issued Disclosure Guidance Topic No. 9 to provide disclosure guidance for companies related to the effects and risks of COVID-19 on their business, financial condition and results of operations. The guidance reminds companies that disclosure about the risks and effects, including how the company and management are responding to them, should be specific and tailored to a company’s situation. The SEC staff also encourages companies to proactively revise and update disclosures as facts and circumstances change. In particular, the SEC staff notes that the effects COVID-19 has had on a company, what management expects its future impact will be, how management is responding to evolving events, and how it is planning for COVID-19-related uncertainties can be material to investment and voting decisions.
The following is an illustrative but not exhaustive list included in the guidance that companies should consider in assessing disclosure obligations with respect to COVID-19:
- the impact on the company’s financial condition and results of operations (in light of changing trends and overall economic outlook, consider how COVID-19 will impact future operating results and near-and-long-term financial condition);
- the impact on the company’s capital and financial resources, including overall liquidity position and outlook (consider, among other things: changes to cost of or access to capital and funding sources; material impacts to sources or uses of cash; ongoing ability to meet debt covenants; steps taken or proposed to remediate any material liquidity deficiency identified; ability to service debt or other financial obligations and access the debt markets including short-term financing arrangements; maturity mismatches between borrowing sources and assets funded by those sources; changes in terms requested by counterparties; changes in valuation of collateral, and counterparty or customer risk; and any material COVID-19 related contingencies);
- any expected effect on assets on the company’s balance sheet and ability to timely account for those assets (e.g., will there be significant changes in judgments in determining the fair-value of assets measured in accordance with U.S. GAAP or IFRS);
- any anticipated 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 the company’s financial statements;
- whether COVID-19-related circumstances such as remote work arrangements have adversely affected the company’s ability to maintain operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures (consider what changes in the company’s controls have occurred during the current period that materially affect or are reasonably likely to materially affect internal control over financial reporting and challenges the company anticipates in its ability to maintain these systems and controls);
- any challenges in implementing the company’s business continuity plans or expected material expenditures to do so or material resource constraints in implementing such plans;
- any expected material impact on demand for the company’s products or services;
- any anticipated material adverse impact on the company’s supply chain or distribution methods for the company’s products or services (including any anticipated material change to the relationship between costs and revenues);
- if the company’s operations will be materially impacted by any constraints or other impacts on human capital resources and productivity; and
- any expected material impact of travel restrictions and border closures on the company’s ability to operate and achieve its business goals.
In recognition of the fact that disclosure addressing the considerations noted above will likely involve forward-looking information, the disclosure also reminds companies that they can avail themselves of the safe harbors for forward-looking statements in Section 27A of the Securities Act and Section 21E of the Exchange Act with respect to the forward-looking information they provide to keep investors informed about material developments, including known trends or uncertainties regarding COVID-19.
The disclosure guidance reminds companies seeking to adjust a non-GAAP financial measure or performance metric for the impact of COVID-19 of their obligations under Item 10 of Regulation S-K and Regulation G as well as the SEC’s recent January 2020 interpretive guidance related to disclosure of performance metrics. With respect to any such adjustments, the guidance notes that a company’s disclosures should highlight why management finds any such non-GAAP measure or performance metric useful and how it helps investors assess the impact of COVID-19 on the company’s financial position and results of operations.
In addition, in recognition of the fact that final GAAP financial measures may not be available at the time of an earnings release by the company due to the impact of COVID-19-related adjustments that may require additional information and analysis, the disclosure guidance also provides that the SEC staff would not object if a company reconciled a non-GAAP financial measure to preliminary GAAP results that either include provisional amounts based on a reasonable estimate or a range of reasonably estimable GAAP results. In this circumstance, the guidance provides that the company should explain, to the extent practicable, why the line item or accounting is incomplete, and what additional information or analysis may be needed to complete the accounting. The SEC staff notes, however, that in filings where GAAP financial statements are required (such as Forms 10-K or 10-Q), companies should reconcile to GAAP results and not include provisional amounts or a range of estimated results. The disclosure guidance also provides that a company’s presentation of non-GAAP financial measures that are reconciled to provisional amounts or an estimated range of GAAP financial measures should be limited to those non-GAAP financial measures that it uses to report financial results to its Board of Directors, and that it is not appropriate for a company to present non-GAAP measures for the sole purpose of presenting a more favorable view of the company. Instead, companies should use non-GAAP financial measures and performance metrics for the purpose of sharing with investors how management and the Board of Directors are analyzing the current and potential impact of COVID-19 on the company’s financial condition and operating results.
Reminder on Insider Trading, Selective Disclosure and Updating Materially Inaccurate Information
In addition, the disclosure guidance also reminds companies that they should refrain from engaging in market activities, and that the company, its directors and officers and other corporate insiders should refrain from trading in the company’s securities until investors have been appropriately informed about all material information related to the impacts of COVID-19, including risks related to COVID-19 that would be material to investors, and the company should consider what disclosures may be required in order to inform the public of this material information. The SEC also reminded companies to take the necessary steps to avoid selective disclosure and that companies should consider whether it may need to revisit, refresh or update previous disclosure to the extent information becomes materially inaccurate.
This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Shelly Heyduk, an O'Melveny partner licensed to practice law in California, John Paul Motley, an O'Melveny partner licensed to practice law in California, Robert Plesnarski, an O'Melveny partner licensed to practice law in the District of Columbia and Pennsylvania, and Su Lian Lu, an O'Melveny senior counsel licensed to practice law in California and New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.
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