Chairman Jay Clayton during an open meeting of the U.S. Securities and Exchange Commission on June 5, 2019. Photo: Diego M. Radzinschi/ALM
As nearly every public company struggles with what to say about the impact of COVID-19 on the business and how to say it, two officials at the U.S. Securities and Exchange Commission on Wednesday released an unprecedented statement detailing what companies should disclose.
As most general counsel already realize, "this quarter, earnings statements and calls will not be routine," the statement said.
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It urged public companies and their general counsel to disclose where the company stands today, how the company's COVID-19 response is progressing, and how its operations and financial condition may change as the fight against the virus continues. And it urged them to embrace looking forward.
"Historical information [such as comparisons with past revenues] may be relatively less significant," said the statement from Chairman Jay Clayton and corporate finance division director William Hinman. They made clear the statement represented their own views, and was not an official agency policy approved by the commission.
It also said good-faith efforts to look forward will not be second-guessed.
Deborah Meshulam, former assistant chief litigation counsel in the SEC's Enforcement Division, told Corporate Counsel on Thursday she viewed the statement as a roadmap for how public companies and regulated entities "can navigate what is an unprecedented circumstance."
Meshulam, now a partner in the Washington, D.C., office of DLA Piper, said she found interesting the two officials' tying the nation's recovery from COVID-19 to companies' willingness to file robust disclosures. "The reality is," she said, "that part of that fight and recovery from the disease will relate to our economy."
Sabastian Niles, a partner in the corporate practice at Wachtell, Lipton, Rosen & Katz in New York, said, "This is a clarion call to speak out … [and] an affirmative push to get people in the midst of the uncertainty to lean in and provide forward-looking forecasts, even if they will have to update them later."
Niles called the Clayton-Hinman statement unusual and groundbreaking. "I can tell you that companies are having a hard time closing their books for this quarter," he said, because of the COVID-19 disruption. "People are not sure what to do about the calls."
In light of the forecasting challenges caused by the evolving health crisis, the statement said, "It may be tempting to resort to generic, or boilerplate, disclosures that do little to inform investors of company-specific status, operational strategies and risks."
But the Clayton and Hinman urged companies not to do that. "We encourage companies and their advisers to make all reasonable efforts to convey meaningful information," they said.
The statement said robust disclosures can contribute to the nation's efforts to recover by instilling investor confidence. It also said forward-looking information is essential to any recovery.
Their statement cited as an example the owner of an industrial laundry business who might be less likely to lay off, or more likely to rehire, employees if hotel chains make public credible plans for increasing business activity.
"This type of positive dynamic plays out across our economy in countless ways," the statement said.
The two officials said they recognize that companies often limit 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. In this regard, we encourage companies to avail themselves of the safe-harbors for forward-looking statements."
While not changing any rules or laws, the statement concluded, "We appreciate that in many cases actual financial and operational results may differ substantially from what would now appear to be reasonable estimates.
"Given 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."
Noting the interconnectivity of business, Niles said the quarterly reports in the coming weeks will be consumed by a vastly broader audience than ever before, including employees, supply-chain partners and customers as well as Main Street and institutional investors.
Niles asked, "What if every company in the next few weeks on the record includes a real statement of what they are doing to contribute and make a difference?"
He added, "These earnings calls and public releases that companies can issue in this moment of time can provide a guidepost for people."
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Sue Reisinger
Senior reporter at ALM since 2004; based in Florida; covers general counsel and white collar crime; contact: [email protected]
