On April 8, 2020, Jay Clayton, Chairman of the Securities and Exchange Commission (“SEC”) and William Hinman, Director of the Division of Corporation Finance, released a public statement (the “Statement”) entitled “The Importance of Disclosure – For Investors, Markets and Our Fight Against COVID-19.” The Statement addresses concerns of the SEC regarding COVID-19 disclosure for public companies, many of whom will soon report earnings and host analyst and investor calls. The Statement is the most complete discussion to date by the SEC as to its concerns and expectations regarding disclosure by issuers of publicly traded securities regarding the effects of COVID-19 on their financial condition and operations. Although the Statement applies directly to public companies, it offers insight into how the SEC expects issuers of municipal securities to make COVID-19-related disclosures.
Background
The Statement discusses the impact of the coronavirus pandemic on the economy and suggests the type of disclosures public companies should consider when releasing earnings reports and hosting analyst and investor calls:
- “We urge companies to provide as much information as is practicable regarding their current financial and operating status, as well as their future operational and financial planning.”
- “Company disclosures should reflect [the] state of affairs and outlook and, in particular, respond to investor interest in: (1) where the company stands today, operationally and financially[;] (2) how the company’s COVID-19 response, including its efforts to protect the health and well-being of its workforce and its customers, is progressing[;] and (3) how its operations and financial condition may change as all our efforts to fight COVID-19 progress. Historical information may be relatively less significant.”
- “Providing detailed information regarding future operating conditions and resource needs is challenging, including because our response strategies are in their incipient stages (and are likely to change), but it is important on many levels.”
- “[P]roviding forward-looking information, particularly detailed information regarding future operating conditions and resource needs, may present difficulties, including because any shift to a forward-looking health and welfare strategy is at most in its incipient stage. As time passes, and our strategies come into greater focus, making and refining these estimates should become less difficult.”
Our takeaways
SEC concerns regarding COVID-19 disclosure are clear
On one hand, the SEC understands how difficult it will be for public companies to provide current, timely disclosure about the impact COVID-19 has had and will have on the company’s financial condition and operations. On the other hand, the SEC realizes that investors increasingly will strain to understand how COVID-19 is uniquely impacting the financial condition and operations of each company. As a result, the SEC is encouraging companies (and arguably by extension all issuers in the capital markets) to understand the needs of investors for good quality information regarding these impacts, while acknowledging that companies will have limits on what information they can actually provide.
The SEC underscores the importance of forward-looking information that meaningfully informs investors
The Statement also notes how difficult it is for a public company to accurately explain how coronavirus will impact its finances and operations, as the effects of COVID-19 are developing. Yet, the SEC requests that public companies “provide as much information as is practicable regarding their current operating status and their future operating plans under various coronavirus-related mitigation conditions.” The SEC notes that in this environment, historical results (e.g., financial statements) “may be relatively less significant.” That is, while noting the “challenges inherent,” the SEC urges public companies to provide as much forward-looking information to the markets as possible so that they can start to “digest” the information.
Reliance on safe harbors for forward-looking statements
The SEC notes that “companies often are cautioned to limit their forward-looking disclosures, and particularly specific estimates, to those required by our rules to limit legal risk in the event the forward-looking estimates prove to be incorrect.” But the SEC encourages companies to rely on existing safe harbors for forward-looking statements and acknowledges that, in many cases, “actual financial and operating results may differ substantially from what would now appear to be reasonable estimates.” The SEC specifically provides in the Statement, “[g]iven the uncertainty in our current business environment, we would not expect to second guess good faith attempts to provide investors and other market participants appropriately framed forward-looking information.” Thus, the SEC is focused on public companies providing good faith estimates that are properly framed so that investors and the market understand the uncertainty inherent in those estimates and understands that many of those good faith estimates may prove to be significantly incorrect after the fact.
How can the Statement help municipal and corporate issuers?
Currently, many issuers of municipal securities are struggling with difficult questions such as:
- Should we disseminate a voluntary disclosure to investors concerning how COVID-19 has impacted our revenues?
- How can we disclose anything to investors if we do not know how COVID‑19 will ultimately impact us?
- Are we assuming legal risks if we tell investors what we think will happen to our financial condition and it turns out to be incorrect?
The Statement helps answer these questions with the following guidance:
Tilting the balance toward disclosure of what issuers know now, as opposed to waiting for certainty
The primary point of the Statement appears to encourage issuers to tell investors what they know as the crisis evolves, rather than waiting for the crisis to be resolved before disclosing meaningful information to investors.
The SEC is focused much more on what issuers know as opposed to what they don’t
While the SEC appreciates the situation is changing rapidly, it suggests that issuers disclose what is currently known about the impact of the COVID-19 crisis. The SEC acknowledges there are many unknowns about how coronavirus will impact the economy and, by extension, the operations and financial condition of issuers. But the SEC encourages issuers to focus on what they do know and what plans they have made or actions they are taking, and disclose that to investors.
Providing the best forward-looking information available
Noting that forward-looking estimates made in good faith do not always prove to be true, the SEC nonetheless encourages issuers to disclose estimates to investors. The SEC acknowledges that historical information about issuers is likely to be less relevant given recent developments, and may not be helpful at all. Accordingly, what the management of an issuer projects as to its financial and operating condition will likely be the most valuable information that investors receive.
Consider framing of forward-looking statements to ensure investors understand the level of uncertainty
The SEC is encouraging issuers to provide good faith forward-looking estimates that are correctly framed so that investors understand the limits of those estimates and the ways that they can change. Some of the framing of those statements may be boilerplate, but some should be specific statements to explain the assumptions underlying the forward-looking statements and what could happen to cause those assumptions to prove incorrect.
The SEC specifically encourages issuers to provide disclosure in reliance on legal protections that mitigate perceived legal risk
The SEC encourages issuers regarding the legal risks of forward-looking statements in two regards. First, by encouraging issuers to rely on the legal protections under the federal securities laws that protect issuers who make forward-looking statements in good faith. Second, by specifically stating that it is not interested in pursuing enforcement actions against issuers who make good faith estimates that are correctly framed, should those estimates prove wrong. The SEC is by no means encouraging reckless statements by issuers concerning the anticipated impact of the pandemic. But it is noteworthy that the SEC is not only encouraging—but is “requesting”—issuers to make “all reasonable efforts” to tell it as it is to their investors without worry about the SEC second guessing properly considered statements.