In a Public Statement issued by the SEC, Chairman Jay Clayton and Division of Corporate Finance Director William Hinman urged public companies to include corporate disclosures related to the effects of COVID-19 in their “quarterly earnings releases and analyst calls, as well as in subsequent communications to the marketplace.” The SEC requested that corporate disclosures address: “(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 [ ] efforts to fight COVID-19 progress.” Suggested disclosures include, “[d]etailed discussions of current liquidity positions,” “expected financial resource needs,” “efforts to protect worker health and well-being and customer safety,” and “financial assistance received under the CARES Act or other similar COVID-19 related federal and state programs.”
The SEC acknowledged that “providing detailed information regarding future operating conditions and resource needs is challenging . . . but is important on many levels.” For investors, forward-looking COVID-19 disclosures foster more well-reasoned investment decisions. For the market more-generally, such disclosures “enhance valuable communication and coordination across our economy—Including between the public and private sectors." And for the greater fight against COVID-19, such disclosures increase confidence and understanding about particular business and industries which, in turn, “reduces risk aversion and facilitates action.” As an example of this third, “less familiar” policy consideration, the SEC explained, for example, that “if the owner of an industrial laundry business becomes comfortable that the hotel industry is soon to pursue a credible plan for increasing activity, the laundry business may be less likely to furlough (or may plan to rehire) employees.”
The SEC warned that even though “it may be tempting to resort to generic, or boilerplate, disclosures,” such disclosures “do little to inform investors.” Instead, the SEC urged companies to convey “meaningful information” that give investors “a level of insight that allows them to see the key operation and financial considerations and challenges the company faces through the eyes of management” even though such information will be “unavoidably based on a mix of assumptions, including assumptions regarding matters beyond the control of the company.”
Of course, companies are typically cautioned to limit the forward-looking disclosures—they are discouraged from making forward-looking financial estimates. Recognizing this, the SEC stated that companies should still try their best to make forward-looking disclosures related to COVID-19 and to “avail themselves of the safe-harbors” found in Section 27A of the Securities Act and Section 21E of the Exchange Act. In effect, companies should avoid making boilerplate COVID-19 disclosures, but should identify them as “forward-looking statement[s]” and couple them with customary “cautionary statements identifying factors that could cause actual results to differ materially from those in the forward-looking statement.”
The SEC concluded by assuring public companies that “[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.” Nevertheless, the SEC continues to closely monitor markets for fraud relating to COVID-19, suspending trading of stock for companies making questionable claims. See, e.g., Predictive Tech. Group, Inc., SEC Order of Suspension of Trading, File No. 500-1 (April 21, 2020) (suspending trading “because of questions regarding . . . statements PRED made about being able to immediately distribute large quantities of serology tests to detect the presence of COVID-19 antibodies”). The best course remains for public companies to follow the SEC’s guidance in order to inform their investors, assure markets, assist in the nation-wide fight against COVID-19, and ultimately protect themselves from enforcement actions and shareholder litigation.