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March 27, 2020

SEC Staff Expresses Its Views on COVID-19 Disclosures as Earnings Season Commences; Exemptive Relief Extended for Filings with Deadlines on or Before July 1, 2020

Coronavirus: Corporate Governance, SEC Reporting and Compliance Advisory

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The rapidly changing and unprecedented nature of the coronavirus pandemic has presented companies across all industries with the difficult task of providing investors with management's view on the known or reasonably likely effects of COVID-19 on their businesses. To assist companies in addressing these challenges, on March 25, 2020, the SEC's Division of Corporation Finance issued CF Disclosure Guidance: Topic No. 9, setting forth its views regarding disclosure and other securities law obligations that may arise as a result of the impact of COVID-19.


While recognizing that it may be difficult to assess the effects of COVID-19, and that actual impacts will depend on a host of factors, many beyond a company's control, companies should consider these risks in the context of the securities laws and the SEC's principles-based disclosure system. Specifically, the Division reminds companies:

  • that COVID-19 impacts and management's expectation of future COVID-19 impacts may constitute material, non-public information; selective disclosure must be avoided; and companies and their insiders should refrain from trading until such information is widely disseminated;
  • to avoid boilerplate disclosures, and tailor disclosure of risks and effects (to assist companies, the Division has provided a non-exhaustive list of potential impacts to consider);
  • that companies can avail themselves of applicable safe harbors for forward-looking statements; and
  • that even in the absence of a specific line item, a number of existing rules or regulations require disclosure about the known or reasonably likely effects of, and the types of risks presented by, COVID-19.

The Guidance also includes a discussion of the use of non-GAAP financial measures with respect to COVID-19-related adjustments..

Disclosure Guidance

Principles-Based Disclosure

As the SEC has noted in other contexts, disclosure obligations apply to evolving business risks, even in the absence of specific "line item" requirements. As a result, disclosure of COVID-19-related risks may be necessary or appropriate in a number of disclosure items, including MD&A, the business section, risk factors, legal proceedings, disclosure controls and procedures, internal control over financial reporting, and/or the financial statements. Companies will need to be particularly careful with pre-earnings guidance, earnings press releases and disclosures during earnings conference calls to account for the swiftly changing environment and related financial and operational risks, balancing the demand for accurate and timely reporting against the significant uncertainty of both the immediate and longer-term impact of COVID-19.

In order to help formulate applicable disclosures, the Guidance includes a detailed, non-exhaustive list of questions the company should consider in analyzing COVID-19-related effects, which pertain to how (and whether) COVID-19 has impacted (or is expected to impact): financial condition and results of operations; capital and financial resources, including overall liquidity position and outlook; impairment analyses; financial statements; financial reporting systems, internal control over financial reporting and disclosure controls and procedures; expenses; the demand for the company's products or services; supply chain and distribution; and human capital resources and productivity. Disclosure should be tailored and should allow investors to evaluate the current and expected impact of COVID-19 through the eyes of management.

What Obligations Do Companies Have to Update Disclosure as Facts and Circumstances Change?

The Guidance encourages companies to "proactively revise and update disclosures as facts and circumstances change." In addition, stock exchange rules require the immediate release of material information. Further, many companies believe that it is in their interest to ensure that information in the market remains accurate on a current basis. However, this may be easier said than done in an environment in which circumstances change daily, and the Guidance explicitly states that it "does not alter or amend applicable law, and it creates no new or additional obligations for any person." Federal securities laws do not require continuous disclosure - duties to disclose arise due to requirements in periodic and current reports and registration statements, the rules related to selective disclosure, and rules prohibiting trading while in possession of material, non-public information.

Courts considering the issue have generally found that there is no duty to update previous statements that were true when made to reflect new developments, and courts that have found such a duty have done so in only limited circumstances. Companies considering whether to update previous disclosures in the face of changing facts and circumstances should consult with counsel and carefully assess the particular facts and attendant risks.

Any disclosure that includes forward-looking information should be consistent with established best practices with respect to forward-looking statements, and include appropriate cautionary language at the time the statements are made, specifically tailored to address the risks to the company and its business presented by COVID-19.

Trading by the Company and Insiders

A company, its directors and officers, and other corporate insiders who are aware of material COVID-19-related risks and impacts, should not trade in the company's securities until such information is disclosed to the public. Given the rapidly evolving nature of the COVID-19 pandemic and its consequences, companies should be cautious in permitting trading by insiders, avoid selective disclosure by broad dissemination of information to the public, and frequently review whether previous disclosure has become materially inaccurate and should be updated. Companies considering whether to open "trading windows" in the ordinary course following release of first quarter earnings should monitor developments on an ongoing basis with an eye to changing facts and circumstances, and consider whether such windows should remain closed as a matter of prudence, to avoid trading that may in hindsight appear to have occurred while in possession of material non-public information.

Impacts of COVID-19 on Reporting Financial Results

The uncertain impact of COVID-19 may make it more difficult for companies and their auditors to complete the work required to maintain timely filings. As a result, companies are encouraged to proactively address financial reporting matters earlier than usual.

The Guidance 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 recent SEC guidance with respect to performance metrics disclosure. If a company presents a non-GAAP financial measure or performance metric to adjust for or explain the impact of COVID-19, management should highlight why it finds the measure or metric useful, and how it helps investors assess the financial impact of COVID-19.

If a GAAP financial measure is not available at the time of an earnings release, because additional information is required to complete the COVID-19-related adjustments, a company may reconcile the 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. For example, if a company discloses EBITDA on an earnings call, 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. In accordance with current requirements, a non-GAAP financial measure should not be disclosed more prominently than the most directly comparable GAAP financial measure or range of GAAP measures. 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. It is important to note, however, that 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.

However, a company may not present non-GAAP financial measures that are reconciled to provisional amount(s) or an estimated range of GAAP financial measures as described above unless those non-GAAP measures are used to report financial results to the Board of Directors. 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.

Additional Guidance

The Division encouraged companies to contact the Staff with questions or if they believe there are additional areas where guidance or temporary relief may be necessary.

Filing Deadlines

In recognition of continued challenges faced by public companies in meeting the reporting and proxy delivery requirements of the federal securities laws in a timely manner, the SEC has issued a modified exemptive order, further extending the time period during which, subject to the conditions set forth in the original order and described in our Advisory, companies with operations affected by COVID-19 may delay their SEC filings (by 45 days after the original due date). The modified order applies to specified filings that would otherwise have been due between March 1 and on or before July 1, 2020 (the original order applied to specified filings that would otherwise have been due between March 1 and April 30, 2020).

As was the case with the original order, for eligibility to use Form S-3 (and for well-known seasoned issuer status), a company relying on the modified exemptive order will be considered current and timely in its Exchange Act reporting if it was current and timely as of March 1st and files any report during the relief period within 45 days of the filing deadline. For purposes of Form S-8 eligibility and the current public information eligibility requirement of Rule 144(c), a company relying on the modified exemptive order will be considered current in its Exchange Act reporting if it was current as of March 1st and files any report during the relief period within 45 days of the filing deadline. In addition, companies that rely on the extension for filing Exchange Act annual or quarterly reports pursuant to the modified exemptive order will be considered to have a due date 45 days after the filing deadline for the report. As such, those companies will be permitted to rely on Rule 12b-25 if they are unable to file the required reports on or before the extended due date.

© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.