Securities Regulation and Corporate Governance

​Due to the ongoing assessment of the impact of COVID-19 on companies' operations, liquidity and capital resources and overall economic and market conditions, companies should take special care in preparing for their quarterly reporting. To aid in this effort, the staff (the “Staff") of the Securities and Exchange Commission (“SEC") has posted a new set of questions that companies should consider in evaluating whether certain disclosures should be included in their earnings release and, in light of its potential materiality, in the management discussion and analysis (“MD&A") included in the periodic reports (e.g., the Form 10-Q for second quarter 2020).

On June 23, 2020, the Division of Corporation Finance of the SEC issued disclosure guidance in the form of CF Disclosure Guidance: Topic No. 9A (“Topic 9A") providing additional views regarding operations, liquidity, and capital resources disclosures that companies should consider with respect to business and market disruptions related to COVID-19. This complements CF Disclosure Guidance: Topic No. 9 (“Topic 9") published on March 25, 2020 (which was addressed on our previous post, available here).

Separately, on June 23, 2020, the SEC Chief Accountant issued a Statement on the Continued Importance of High-Quality Financial Reporting for Investors in Light of COVID-19, highlighting the Office of the Chief Accountant's recent work to promote high-quality financial reporting, and its engagement with the Financial Accounting Standards Board, the Public Company Accounting Oversight Board, the International Accounting Standards Board, the International Organization of Securities Commissions, the International Federation of Accountants, and the Public Interest Oversight Board. This complements the Chief Accountant's previous Statement on the Importance of High-Quality Financial Reporting in Light of the Significant Impacts of COVID-19 issued on April 3, 2020.

With many public companies now preparing for their next reporting cycle (e.g., the Form 10-Q for second quarter 2020), the SEC continues to emphasize the important role the financial reporting system plays in the functioning of the markets and in the national effort to mitigate the COVID-19 pandemic (see, e.g., SEC Chairman Jay Clayton, Remarks to the Financial Stability Oversight Council) and, consequently, the importance of disclosure controls and procedures and internal control over financial reporting. As Chairman Clayton recently stated in testimony before the House Committee on Financial Services:

A fundamental principle for the SEC and our capi​tal markets has always been—and today is even more important than ever—the importance of issuers providing investors with financial and operational disclosures that are clear, high-quality and timely.  Staff has been monitoring and providing guidance with respect to corporate an​d municipal filings and disclosures of U.S. issuers, as well as foreign companies listed in the United States…. I believe that the timely disclosure of high-quality information—be it positive, negative or neutral, and be it definitive or subject to uncertainty in light of the circumstances—increases credibility and has a generally calming value that contributes to market function, and in turn, reduces the potential for systemic risk.

Relatedly, the SEC announced a roundtable to be held on June 30, 2020: “Q2 Reporting: A Discussion of COVID-19 Related Disclosure Considerations." Moderated by SEC Chair Jay Clayton, the roundtable's participants will include National Economic Council former director Gary Cohn, Silver Lake Partners co-founder Glenn Hutchins, Advent Capital Management President Tracy Maitland, and BlackRock Vice Chair Barbara Novick. The roundtable will be webcast live on the SEC's website.

Disclosure Considerations Raised in Topic 9A

As with Topic 9, Topic 9A includes questions companies can ask when considering their disclosure obligations. The Staff makes clear that Topic 9A represents the Staff's views and does not change applicable law or add new disclosure obligations.

Topic 9A advises that companies consider how operational adjustments undertaken due to COVID-19 (e.g., transition to telework, supply chain and distribution adjustments, and suspending or modifying certain operations to comply with health and safety guidelines) and financing activities undertaken due to COVID-19 (e.g., obtaining and utilizing credit facilities, accessing public and private markets, implementing supplier finance programs, and negotiating new or modified customer payment terms) may be required to be disclosed in MD&A under Item 303 of Regulation S-K.  While each company must consider its own specific facts and circumstances, the questions posed by the Staff can help a company identify factors that may need to be addressed as a result of their impact on the company's operations, liquidity, and capital resources. Some of the questions include:

• “What are the material operational challenges that management and the Board of Directors are monitoring and evaluating? How and to what extent have you altered your operations, such as implementing health and safety policies for employees, contractors, and customers, to deal with these challenges, including challenges related to employees returning to the workplace? How are the changes impacting or reasonably likely to impact your financial condition and short- and long-term liquidity?"
• “Have COVID-19 related impacts affected your ability to access your traditional funding sources on the same or reasonably similar terms as were available to you in recent periods? Have you provided additional collateral, guarantees, or equity to obtain funding? Have there been material changes in your cost of capital? How has a change, or a potential change, to your credit rating impacted your ability to access funding? Do your financing arrangements contain terms that limit your ability to obtain additional funding? If so, is the uncertainty of additional funding reasonably likely to result in your liquidity decreasing in a way that would result in you being unable to maintain current operations?"
• “Have you reduced your capital expenditures and if so, how? Have you reduced or suspended share repurchase programs or dividend payments? Have you ceased any material business operations or disposed of a material asset or line of business? Have you materially reduced or increased your human capital resource expenditures? Are any of these measures temporary in nature, and if so, how long do you expect to maintain them? What factors will you consider in deciding to extend or curtail these measures? What is the short- and long-term impact of these reductions on your ability to generate revenues and meet existing and future financial obligations?"

• conditions and events that give rise to the substantial doubt about the company's ability to continue as a going concern (e.g., any default on outstanding obligations, any labor challenges or work stoppage); and
• management's plans to address these challenges and whether any portion of those plans have been implemented.