April 14, 2020

U.S. SEC COVID-19 Statements Highlight the Importance of First Quarter Disclosures – A Review and Practical Guide

Recent statements by the Chair and the Directors of the Division of Corporation Finance and the Division of Enforcement of the U.S. Securities and Exchange Commission (SEC) highlight the challenges that companies face as they prepare disclosure materials for the quarter ended March 31, 2020 that take account of COVID-19 impacts on their business and their recent and near-term future financial condition and results of operations. For this quarter, the still-developing effects of the COVID-19 pandemic and governmental and private sector responses present a perfect storm of disclosure updating issues, including forward-looking statements, selective disclosure prohibitions, general disclosure updates, risk factors, non-GAAP financial measures, disclosure of known trends, uncertainties and forward-looking statement disclaimers. This client alert summarizes recent SEC guidance on these topics, as well as related disclosure topics that companies should consider for their upcoming earnings releases, calls with investors and analysts, and Form 10-Q reports.

What Companies Should Be Doing Now

With earnings releases and calls with investors and analysts rapidly approaching, companies should consider the following:

  • Consider forward-looking statement disclosure about the impact of COVID-19 on the company’s future business, operations, and financial condition and results;
  • Protect the confidentiality of material non-public information, take appropriate steps to prevent illegal use of this information for purchases and sales of company securities and, when companies disclose this information, ensure broad public dissemination, as required by Regulation FD;
  • Review and update or correct prior disclosures that may have become incorrect or incomplete, to the extent material;
  • Consider whether to revise, or rescind, previously-issued guidance;
  • Review and update risk factors to avoid inaccurately disclosing existing events or conditions as hypothetical future risks and update risk factors to reflect current expectations of any material new risks that have arisen;
  • Review non-GAAP financial measures and other key metrics for compliance with SEC rules and recent guidance;
  • Review Form 10-Q quarterly reports to ensure that known events, trends and uncertainties are disclosed, to the extent required by SEC rules and informed by enforcement actions; and
  • Review the cautionary statements (disclaimers) regarding any forward-looking statements to ensure that they accurately reflect current assumptions and uncertainties, and comply with applicable legal requirements.

Forward-Looking Statements

On April 8, 2020, SEC Chair Jay Clayton and Director of the Division of Corporation Finance William Hinman issued a public statement on The Importance of Disclosure – For Investors, Markets and Our Fight Against COVID-19. The Clayton-Hinman statement expresses their views on the importance of COVID-19-related disclosures, and particularly forward-looking information, in upcoming quarterly earnings releases and analyst and investor calls.

The Clayton-Hinman statement emphasizes the importance of providing investors and analysts with “detailed information” about the company’s future operations and financial condition and how these may change as a result of COVID-19 impacts, in addition to information concerning the company’s current operational and financial position and response to COVID-19 issues. On the other hand, in light of the rapid evolution of the COVID-19 pandemic and its implications over the past month, the Clayton-Hinman statement acknowledges that, “[i]n many cases, historical information may be substantially less relevant” for this quarter than information about a company’s plans for adjusting to and addressing the effects of COVID-19 going forward.

In particular, the statement repeatedly stresses the importance of forward-looking statements for upcoming quarterly earnings releases and calls. The statement calls on companies to provide “as much information as is practicable” regarding future operating plans, the impact of COVID-19 on operations, expected future financial resource needs and the impact of financial assistance under the CARES Act or other federal or state COVID-19 programs, if material.

Clayton and Hinman recognize that information “of the type [they] are requesting” may be based on forward-looking information and assumptions and expectations regarding future events, “including assumptions regarding matters beyond the control of the company” that “are likely to undergo material change.” Nevertheless, Clayton and Hinman encourage companies to take on their challenge to “convey meaningful information” that “provides investors a level of insight that allows them to see the key operational and financial considerations and challenges the company faces through the eyes of management.” Such robust disclosures, the Clayton-Hinman statement contends, will bolster confidence in the markets and ultimately benefit investors, companies, and the collective national effort to deal with the effects of COVID-19. The statement encourages companies to take advantage of the safe harbors for forward-looking statements, which are discussed below.

Selective Disclosure/Regulation FD and Insider Trading

As discussed in greater detail in a March 26, 2020 client alert, the Co-Directors of the SEC’s Division of Enforcement recently expressed their view on related issues in a Public Statement Regarding Market Integrity. In light of the speed and significance of COVID-19 impacts on the economy generally and companies’ business and finances, their March 23, 2020 statement underscores the obligations of companies to avoid selective disclosure and comply with Regulation FD, and to keep this information confidential and comply with prohibitions on illegal securities trading.

Companies should review all market activity by the company and its insiders – including purchases and sales of company securities by the company or its insiders, or entering into, terminating, or amending Rule 10b5-1 plans – to prevent such activity while there is undisclosed material non-public information. Companies should also evaluate trading windows carefully and continuously to prevent inadvertent insider activity.

The Clayton-Hinman statement also encourages companies to maintain the confidentiality of material non-public information until such information is publicly disclosed. When companies do disclose this information, the statement reminds them to take the necessary steps to avoid selective disclosure by ensuring that the information is broadly disseminated to the public, as Regulation FD requires.

Relatedly, and consistent with Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (2011), companies that choose to speak to the market should ensure that their communications on a given topic are complete, and avoid cherry-picking the information they share. While Section 10(b) and Rule 10b-5 do not create an affirmative duty to disclose any and all material information, nor does Matrixx impose a real-time duty to update previously-disclosed information, companies should bear in mind that disclosure is required when necessary to “make statements made, in the light of the circumstances under which they were made, not misleading.” As the SEC announced in a March 4, 2020 order, companies should therefore consider whether “to revisit, refresh, or update previous disclosures” to the extent that previously-disclosed information has become materially inaccurate in light of COVID-19-related developments. Companies should be particularly mindful of any potential duty to update as they may find themselves speaking publicly to investors and analysts more frequently than usual in this unprecedented time—which could, in turn, trigger a duty to update those statements to the extent that rapidly-evolving circumstances render prior statements materially misleading.

Updating Prior Disclosures

Companies should review and update, where appropriate, their existing disclosure to reflect the risks, uncertainties and impacts of COVID-19 on the company. This client alert discusses updates to guidance, risk factor disclosure, and disclosure of known events, trends and uncertainties as examples that companies should review, but companies should review all existing disclosure in this light. Particularly this quarter, companies should consider more broadly whether they may need to revisit, refresh, update or correct previous disclosure to the extent that the information becomes materially inaccurate.


Companies should consider whether to revise, or rescind, previously-issued guidance as a result of the impact of COVID-19 on their forecasted financial results. Companies should evaluate how COVID-19-related developments may impact guidance they have issued concerning ongoing or upcoming operations or cash runway, and how those developments may in turn impact overall spending, earnings, or revenue guidance. Companies that become aware they are going to miss guidance due to COVID-19 should consider whether to revise prior guidance, and whether to pre-announce (i.e., announce before their next periodic reports are due). Companies should also consider whether to withdraw guidance altogether, and advise the market that they do not intend to issue guidance on a going-forward basis for the remainder of the fiscal year or for some other shorter period in light of the unprecedented market disruption caused by COVID-19.

Risk Factors

As companies have grappled with and begun to understand the potential impact of COVID-19 on their businesses and the economy in general, many have filed Form 8-K reports to update their risk factor disclosure. We expect that almost all companies will reassess their risk factor disclosure when they file their next Form 10-Q quarterly report. Companies may benefit from considering the principles summarized below as they review and update their risk factor disclosure.

Update hypothetical risk factor disclosure if the risk has already occurred. Risk factor disclosure typically speaks in terms of hypothetical future risks. The SEC takes a very strong position that presenting a risk that has already had a negative effect on the company as a potential future risk is misleading. By way of example, the Division of Enforcement brought two actions involving disclosure of existing conditions as hypothetical risks during 2018, settling one for $100 million and the other for $30 million. Conditions that currently exist and events that have already occurred should be disclosed as such if they have had or may have a material impact on the company, and should not be disclosed as hypothetical risk factors.

Risk factors should reflect management’s current expectations. Even if the company cannot estimate or predict the impact of current conditions or events, the company’s risk factor disclosure should reflect what management currently expects, rather than referring to management’s “belief” that future conditions or events may have a material impact on the company.

Update risk factors to reflect new risks and changes in existing risks. As the COVID-19 pandemic and its impacts evolve, companies should update their risk factor disclosure to reflect new risks that have developed as a result. Review of risk factor disclosure by competitors and other companies in a company’s industry may be helpful in identifying some of these risks. In addition, companies should review their current risk factor disclosure and update this disclosure to reflect changes in the potential impact or underlying facts.

Non-GAAP Financial Measures

On March 25, 2020, the staff of the Division of Corporation Finance issued CF Disclosure Guidance Topic No. 9, “Coronavirus (COVID-19),” which provides important guidance on disclosure considerations in light of the COVID-19 crisis. CF Disclosure Guidance Topic No. 9, discussed in greater detail in a Goodwin client alert published on March 26, 2020, includes the following guidance on disclosure of non-GAAP financial measures:

Reconciliation to estimate or range. In limited circumstances where it is not possible to determine the equivalent GAAP financial measure when the company issues its earnings release, CF Disclosure Guidance Topic No. 9 states that the staff will not object if the company satisfies its obligations under Regulation G and Item 10(e) to reconcile a non-GAAP financial measure to the most nearly comparable GAAP financial measure. The staff’s position is limited to specific circumstances, and does not apply in any case to reports, registration statements or other documents filed with the SEC.

Limited to non-GAAP financial measures presented to the Board of Directors. CF Disclosure Guidance Topic No. 9 specifically states that “if a company presents non-GAAP financial measures that are reconciled to provisional amount(s) or an estimated range of GAAP financial measures in reliance on the above position, it should limit the measures in its presentation to those non-GAAP financial measures it is using to report financial results to the Board of Directors.” The guidance also states the staff’s view that it is inappropriate for a company “to present non-GAAP financial measures or metrics for the sole purpose of presenting a more favorable view of the company.”

Changes in calculation method; disclosure of new metrics. CF Disclosure Topic No. 9 reminds companies that when they present metrics related to COVID-19, or change the method by which they calculate a metric as a result of COVID-19, they should review the disclosure in light of the SEC’s recent guidance on metrics. This includes, among other things and depending on the company’s specific facts and circumstances:

  • A clear definition of the metric and how the company calculates the metric;
  • A statement indicating the reasons why the metric provides useful information to investors;
  • A statement indicating how management uses the metric in managing or monitoring the performance of the company’s business;
  • Disclosure of any estimates or assumptions underlying the metric or its calculation is necessary for the metric not to be materially misleading;
  • When a company changes the method by which it calculates or presents the metric from one period to another or otherwise, to the extent material, (1) the differences in the way the metric is calculated or presented compared to prior periods, (2) the reasons for the changes, (3) the effects of any such change on the amounts or other information being disclosed and on amounts or other information previously reported; and (4) any other differences in methodology and results that would reasonably be expected to be relevant to an understanding of the company’s performance or prospects; and
  • Whether it is necessary to recast prior metrics to conform to the current presentation and place the current disclosure in an appropriate context.

Known Trends and Uncertainties

For more than 30 years, the SEC has reiterated that if the company is aware of an existing event, trend or uncertainty, disclosure is required unless the company can make an objectively reasonable determination that either:

  • The event, trend or uncertainty is not reasonably likely to occur; or
  • Assuming that the event, trend or uncertainty does occur, it is not reasonably likely to result in a material effect on the company’s financial condition or results of operation.

The SEC position has been the basis for many enforcement actions over the years and the failure to disclose required information about known events, trends or uncertainties is commonly cited in plaintiff’s class action lawsuits. The company’s inability to quantify the nature or extent of the impact does affect the SEC’s position that the company has an obligation to disclose what it knows about the event, trend or uncertainty as an existing fact or condition rather than a hypothetical future risk.

The SEC’s guidance on this topic over the years has included, among others:

  • 1989 interpretive guidance by the SEC, which articulates the two-part inquiry that is the foundation for required MD&A disclosure of known events, trends or uncertainties and includes useful examples;
  • 2001 statement by the SEC regarding critical accounting policies;
  • 2003 interpretive guidance by the SEC, which includes discussions of liquidity and capital resources, cash requirements, material covenants relating to outstanding debt and required disclosure of critical accounting estimates and assumptions, among other things; and
  • 2020 interpretive guidance by the SEC regarding key performance indicators and metrics.

In light of the unique challenges and uncertain economic environment that many companies currently face, the SEC’s historical guidance relating to known events, trends and uncertainties will be particularly relevant to companies preparing their Form 10-Qs for the quarter ended March 31, 2020.

Forward-Looking Statement Safe Harbor

As discussed above, the Clayton-Hinman statement encourages companies to disclose forward-looking information, even though the impacts of COVID-19 and responses to the pandemic are still in many cases in their early stages and the “key drivers of future operational status and financial results…are likely to undergo material change.” Recognizing that legal risks may lead companies to limit forward-looking disclosures, the statement also encourages companies to take advantage of the protections offered by the safe harbors for forward-looking statements. 

Acknowledging that, “in many cases actual financial and operational results may differ substantially from what would now appear to be reasonable estimates,” Clayton and Hinman state that, in the 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.” Companies and their advisors should note, however, that forbearance by the SEC in the current environment may have no effect on claims by other parties, including private investors.

When reviewing forward-looking statement disclaimers, companies should review and update the cautionary statements to cover any new forward-looking statements and reflect current assumptions and uncertainties. Forward-looking statement disclaimers should also comply with the requirements for the safe harbor under the Private Securities Litigation Reform Act of 1995, which requires, among other things, that the forward-looking statements to be protected by the safe harbor must be “accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement.” This means that disclaimers in another document or location (such as other company SEC filings or the company’s website) may not satisfy the requirements for safe harbor protection of forward-looking statements. Additionally, in order to ensure that cautionary statements will be considered meaningful, companies should carefully review the specific forward-looking statements that are made and include specific, well-tailored disclosure of the important factors that could cause actual results to differ, rather than just a general boilerplate list of factors.

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