COVID-19/Securities & Capital Markets Update

In response to the COVID-19 pandemic and the resulting disruptions to business and economic activity across the country, the Securities Exchange Commission (the “SEC”) and the SEC staff have taken steps to provide relief from certain filing and other regulatory requirements of the Securities Exchange Act of 1934 (the “Exchange Act”) and to give guidance to public companies on disclosure considerations related to the COVID-19 pandemic.

Disclosure Considerations

SEC Staff Guidance

            On March 25, 2020, the staff of the Division of Corporation Finance of the SEC issued guidance regarding their views regarding disclosure and other securities law obligations that public companies should consider with respect to the COVID-19 pandemic and related disruptions to business and market activity.  This guidance does not create a new legal or compliance obligation for public companies, but instead provides clarity as to the current thinking of the SEC staff and a framework for public companies as they consider how to comply with their disclosure obligations.

            As public companies prepare their periodic filings, they should consider the following questions:

• How has the COVID-19 pandemic impacted their financial condition and results of operations? In light of changing trends and the overall economic outlook, how do they expect the COVID-19 pandemic to impact their future operating results and near-and-long-term financial condition?  Do they expect that the COVID-19 pandemic will impact future operations differently than how it affected the current period?
• How has the COVID-19 pandemic impacted their capital and financial resources, including their overall liquidity position and outlook? Has their 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 their sources or uses of cash otherwise been materially impacted?  Is there a material uncertainty about their ongoing ability to meet the covenants of their 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 their ability to service their 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 they expect to disclose or incur any material COVID-19 pandemic-related contingencies?
• How do they expect the COVID-19 pandemic to affect assets on their balance sheet and their 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 they 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 their financial statements?
• Have they experienced challenges in implementing their business continuity plans or do they foresee requiring material expenditures to do so? Do they face any material resource constraints in implementing these plans?
• Do they expect the COVID-19 pandemic to materially affect the demand for their products or services?
• Do they anticipate a material adverse impact of the COVID-19 pandemic on their supply chain or the methods used to distribute their products or services? Do they expect the anticipated impact of the COVID-19 pandemic to materially change the relationship between costs and revenues?
• Will their operations be materially impacted by any constraints or other impacts on their human capital resources and productivity?
• Are travel restrictions and border closures expected to have a material impact on their ability to operate and achieve their business goals?

While the foregoing list is illustrative and not exhaustive, SEC Chairman Jay Clayton has referred to this guidance as “a model to follow” and public companies should give thoughtful consideration to the materiality of each question to their business and results of operation.  Each public company should carefully assess the COVID-19 pandemic’s impact on their business, financial condition and results of operation, including both the trends and uncertainties that are currently known and the risks that may materialize in the future.

Internal Control over Financial Reporting

As a part of their obligations under the Sarbanes-Oxley Act of 2002, as amended, public companies must establish policies and procedures designed to provide reasonable assurance regarding the reliability of financial reporting.  Each public company (other than a public company filing its first Annual Report on Form 10-K) must include in its Annual Report on Form 10-K a report of the company’s management concerning its internal control over financial reporting and include in its Quarterly Reports on Form 10-Q whether there was any change in the company’s internal control over financial reporting during the period then ended.

The impact of the COVID-19 pandemic may require public companies to implement new internal controls or modify existing ones. Public companies must disclose any changes in internal controls that have materially affected, or are reasonably likely to materially affect, their internal control over financial reporting. In assessing internal controls and the related disclosure implications, public companies should consider the following questions:

• Have COVID-19 pandemic-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?

Filing and other Regulatory Relief

            Periodic Disclosure Reports

            On March 4, 2020, the SEC issued an order that, subject to certain conditions, provided public companies particularly affected by the COVID-19 pandemic with a 45 day extension to file certain disclosure reports.  On March 25, 2020, the SEC issued a new order (the “Order”), expanding the scope of relief to filings that would otherwise have been due between March 1 and July 1, 2020, which for most public companies having a fiscal year ended on or about December 31, 2019, includes their Quarterly Report on Form 10-Q for the first fiscal quarter of 2020.

            As public companies consider whether to seek the relief provided by the Order, they should consider the statement issued by SEC Chairman Jay Clayton on April 2, 2020, in which he encouraged public companies to provide “information regarding their past and expected future efforts to address the effects of COVID-19, regardless of whether they are able to comply with filing deadlines” and emphasized the need for public companies “to provide as much information as is practicable.”  In order to qualify for the relief provided by the Order, public companies need to file a Form 8-K by the date on which they would otherwise be required to file the applicable disclosure report and include the following:

• a statement that the company is relying on the Order;
• a brief description of the reasons why it could not file the applicable report, schedule or form on a timely basis;
• the estimated date by which the applicable report, schedule, or form is expected to be filed (which may be no later than 45 days after it was originally required to be filed);
• a company specific risk factor or factors explaining the impact, if material, of the COVID-19 pandemic on the company’s business; and
• in the case where a report cannot be filed timely based on a third party’s inability to furnish a required opinion, report or certification, an exhibit signed by such third party stating the specific reason why such third party is unable to furnish the required opinion, report or certification on or before the date such report must be filed.

Manual Signature Retention

Furthermore, on March 24, 2020, the staff of the SEC provided their view regarding enforcement of Rule 302(b) of Regulation S-T, which requires each signatory to a document electronically filed with the SEC to manually sign a signature page prior to the time such document is filed with the SEC and to retain such signature page for five years so that copies may be furnished to the SEC or the staff of the SEC upon request.  The SEC staff will not recommend enforcement action with respect to Rule 302(b) if:

• a signatory retains a manually signed signature page and provides it, 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.

Signatories may also provide the filer with an electronic record (i.e., a PDF or photograph) of the signature page when it is signed.  Filers are reminded that this statement of the staff of the SEC reflects only the view of the staff and is not binding law. 

Please contact either Wade Sample at wadesample@mvalaw.com or D. Ryan Hart at ryanhart@mvalaw.com with any questions you may have about the issues that the COVID-19 pandemic presents for public companies or for assistance in determining the application of any particular rules, guidance or disclosure questions to your business or company.