In further recognition of the challenges to conducting business during the COVID-19 pandemic:
- On March 25, 2020, the Securities and Exchange Commission extended through July 1, 2020, and clarified the conditions for, the conditional relief from reporting and proxy delivery requirements for public companies, funds, and investment advisers that was originally granted on March 4, 2020;
- On March 24, 2020, the SEC staff announced conditional accommodations with respect to the existing requirements that documents filed with the SEC must be manually signed and that filers must retain such manually signed documents for five years; and
- On March 25, 2020, the Division of Corporation Finance issued guidance highlighting disclosure considerations and other securities law obligations that companies should consider with respect to COVID-19.
Commission Extends Conditional Relief Until July 1, 2020; Clarifies Conditions for Relief
The Commission extended from April 30 until July 1 the time period covered by its original Order granting conditional relief from certain filing obligations under the Securities Exchange Act of 1934 for companies unable to meet a filing deadline due to circumstances related to COVID-19. The Commission's original Order was described in our March 5 client alert. Under the updated Order, the 45-day extension of filing deadlines applies to covered filings due on or before July 1.
In addition, the Commission made three noteworthy changes to the original Order:
- The updated Order explicitly brings amendments required to be filed under the Exchange Act within the scope of the relief. This clarification will be especially helpful to a company that omitted Part III information (i.e., specified information about directors, director independence, executive officers, executive compensation, corporate governance, principal stockholders, related person transactions, and audit fees and services) from its initial Form 10-K filing intending to forward incorporate it by reference from the proxy statement, but is now unable to file the definitive proxy statement within 120 days after fiscal year-end due to circumstances related to COVID-19. Such a company can take advantage of the updated Order with respect to the amendment to their Form 10-K adding Part III information that would otherwise be required when the definitive proxy statement is not filed within such 120-day period.
- The updated Order includes a footnote clarifying that companies must furnish a Form 8-K or Form 6-K for each filing that is delayed.
- The updated Order requires the relevant Form 8-K or Form 6-K to include "a company specific risk factor or factors explaining the impact, if material, of COVID-19 on its business." The original Order required "if appropriate, a risk factor explaining, if material, the impact of COVID-19 on its business."
SEC Staff Announces Limited Conditional Relief from Manual Signature Requirement
The staff of the Division of Corporation Finance, the Division of Investment Management, and the Division of Trading and Markets said that they will not recommend the Commission take enforcement action with respect to the manual signature and retention requirements contained in Rule 302(b) under Regulation S-T in situations where compliance with the requirements is affected by circumstances arising from COVID-19, if:
- a signatory retains a manually signed signature page or other document authenticating, acknowledging or otherwise adopting his or her signature that appears in typed form within the electronic filing;
- the signatory provides such document, as promptly as reasonably practicable, to the filer for retention in the ordinary course pursuant to Rule 302(b);
- such document indicates the date and time when the signature was executed; and
- the filer establishes and maintains policies and procedures governing this process.
The staff noted that the signatory could provide to the filer an electronic record (such as a photograph or pdf) of such document when it is signed. This may prove useful in situations where the signatory does not have access to a printer.
To satisfy the first two bullets above, the staff indicated that if a signatory is teleworking, the signatory could execute a hard copy of the signature page remotely and hold that page for delivery to the filer upon his or her return to the place of work.
Because a manually signed document remains required, as is the case in normal circumstances, electronic signature programs such as DocuSign continue to be unavailable.
Division of Corporation Finance Provides Disclosure Guidance and Compliance Reminders
In CF Disclosure Guidance: Topic No. 9, the SEC's Division of Corporation Finance highlights the staff's current views regarding disclosure and other securities law obligations that companies should consider with respect to COVID-19 and the related business and market disruptions. The guidance reminds companies 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 guidance also reminds companies to consider the need for COVID-19 related disclosures within the context of federal securities laws and the SEC's principles-based disclosure system.
Most notably the guidance:
- Includes a non-exclusive list of illustrative issues for companies to consider as they perform the facts-and-circumstances assessment of what disclosure should be made in light of the company's situation. This guidance should be considered by all companies as they prepare their SEC filings, especially their next periodic report. A copy of the list is included at the end of this alert for ease of reference.
- Once again reminds companies and insiders that they need to be mindful of compliance with the insider trading laws and Regulation FD with respect to material information about the impact of COVID-19.
- Advises companies, depending on their particular circumstances, to consider whether the company needs to "revisit, refresh, or update" prior disclosures that are now materially inaccurate.
- Encourages companies to get a head start with respect to accounting and financial reporting issues that may take time to resolve, such as impairment analyses.
- Reminds companies of the need to comply with the SEC's rules on the use and presentation of non-GAAP financial measures and recent staff guidance regarding disclosure of key performance metrics. Recognizing that the most directly comparable GAAP measure may not be available at the time of an earnings release because the measure may be impacted by COVID-19-related adjustments that require additional information and analysis to complete, the staff states that it will not object to companies reconciling 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. The non-GAAP measure, however, 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 only disclose measures that are also being reported to its board of directors.
Excerpt from CF Disclosure Guidance: Topic No. 9 (footnotes omitted)
As companies assess COVID-19-related effects and consider their disclosure obligations, questions to consider with respect to their present and future operations include:
- How has COVID-19 impacted your financial condition and results of operations? In light of changing trends and the overall economic outlook, how do you expect COVID-19 to impact your future operating results and near-and-long-term financial condition? Do you expect that COVID-19 will impact future operations differently than how it affected the current period?
- How has COVID-19 impacted your capital and financial resources, including your overall liquidity position and outlook? Has your cost of or access to capital and funding sources, such as revolving credit facilities or other sources changed, or is it reasonably likely to change? Have your sources or uses of cash otherwise been materially impacted? Is there a material uncertainty about your ongoing ability to meet the covenants of your credit agreements? If a material liquidity deficiency has been identified, what course of action has the company taken or proposed to take to remedy the deficiency? Consider the requirement to disclose known trends and uncertainties as it relates to your ability to service your debt or other financial obligations, access the debt markets, including commercial paper or other short-term financing arrangements, maturity mismatches between borrowing sources and the assets funded by those sources, changes in terms requested by counterparties, changes in the valuation of collateral, and counterparty or customer risk. Do you expect to disclose or incur any material COVID-19-related contingencies?
- How do you expect COVID-19 to affect assets on your balance sheet and your ability to timely account for those assets? For example, will there be significant changes in judgments in determining the fair-value of assets measured in accordance with U.S GAAP or IFRS?
- Do you anticipate 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?
- Have COVID-19-related circumstances such as remote work arrangements adversely affected your ability to maintain operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures? If so, what changes in your controls have occurred during the current period that materially affect or are reasonably likely to materially affect your internal control over financial reporting? What challenges do you anticipate in your ability to maintain these systems and controls?
- Have you experienced challenges in implementing your business continuity plans or do you foresee requiring material expenditures to do so? Do you face any material resource constraints in implementing these plans?
- Do you expect COVID-19 to materially affect the demand for your products or services?
- Do you anticipate a material adverse impact of COVID-19 on your supply chain or the methods used to distribute your products or services? Do you expect the anticipated impact of COVID-19 to materially change the relationship between costs and revenues?
- Will your operations be materially impacted by any constraints or other impacts on your human capital resources and productivity?
- Are travel restrictions and border closures expected to have a material impact on your ability to operate and achieve your business goals?
- The above list is illustrative but not exhaustive and each company will need to carefully assess COVID-19's impact and related material disclosure obligations.