5 Considerations For Enhancing SEC Disclosures Amid Crisis

By Sean Dowd and Eileen Kamerick
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Law360 (August 18, 2020, 5:48 PM EDT) --
Sean Dowd
Sean Dowd
Eileen Kamerick
Eileen Kamerick
The continuing economic and stock market tumult is prompting new behaviors from companies and regulatory bodies alike. As second-quarter earnings season wraps up, public companies have new guidelines from the U.S. Securities and Exchange Commission around how much information to disclose to stakeholders in their quarterly and annual forward-looking statements.

Through these new guidelines, the SEC, by its own admission,[1] has taken on a larger role in trying to use the power of disclosure to support broad economic recovery.

The SEC statement not only gives companies greater responsibility in clarifying what is otherwise a confusing and chaotic situation, but also raises the stakes around disclosure practices vis-a-vis the possibility of future litigation.

While recognizing that the current time is especially rife with various variables and unknowns, the onus would be on public companies to create robust disclosure statements. And even as organizations continue to use their best business judgment, it would be prudent to err on the side of disclosing more.

The SEC guidelines recommend that companies provide information on both financial health as well as operational changes being made in a broad range of areas to deal with the continuing fallout of COVID-19. This would require that companies step far outside of their comfort zones to provide much more extensive forward-looking statements at precisely a time when uncertainties appear to be multiplying rather than diminishing.

The SEC has provided a comprehensive but nonexhaustive list of areas[2] of disclosure that should be considered by companies regarding operations, liquidity and capital resources.

Companies in the U.S. have the advantage of learning from countries that are more advanced in the process of economic reopening. And class actions related to disclosures have already started to come for China-based companies operating in the U.S.

Chembio Diagnostics Systems Inc. has been accused of misrepresenting the efficacy[3] of a COVID-19 diagnostic test, leading to what has been described as artificial inflation of its stock price and an eventual precipitous drop.

In another example, a securities fraud class action has been filed against Ideanomics Inc. for failing to disclose[4] the accurate size of its sales center in China as well as the actual strength of its electric vehicle business.

With that in mind, here are some considerations for information companies could include in their disclosures.

1. Risk Assessment

There is a need for companies and boards to be proactive in ascertaining any reputational, legal or insurance-related risks stemming out of the crisis related to customers, employees, supply chain and other business operations.

This will vary depending on the business. For example, retailers may have extended or otherwise altered payment terms for suppliers and vendors while manufacturing companies have had to consider new workforce-related safety and distancing measures in plants and factories.

Risk-related disclosures could also include details around labor shortages or other reasons for business interruptions as well as provisions made for employees in either the workplace or in work-from-home situations.

2. Corporate Governance Framework

This could include any changes made to the leadership of the company, the role and responsibilities of the board, or actions that affect employees or customers. At times of crisis, it is expected that boards would take on the role of being the ethical and transparency overseer. However, communicating developments as they pertain to the successful governance and functioning of the business will ideally be communicated to all stakeholders. 

3. Capital Disclosures and M&A Activity

With many companies dealing with short- and long-term working capital and funding concerns, it may be appropriate to create a framework around regularly disclosing financial health information to stakeholders, particularly investors. This would include any new public or private funding acquired during this period and/or any loan payment defaults or deferrals, if applicable.

And as M&A activity picks back up, creating increased transparency around the effective net value of the transaction, any potential new liabilities taken on as a result of the transaction, and how the combination may affect the overall business as recovery efforts continue would be examples of pertinent information.

4. Federal and Local Regulations

As federal, state and local government measures, both recommended and enforced, continue to change in this ever-evolving environment, companies must keep stakeholders informed about any plans to reopen or close any part of the business. Government guidance and, consequently, actions may vary not only on the kind of business or workplace but also among various locations of the same business.

5. Government Funding

There will be an expectation from stakeholders to understand the company's justifications for applying for government relief funds as well as exactly how any received funding is being or will be used. This would include both tax relief and low-interest loans as part of the Coronavirus Aid, Relief and Economic Security Act.

Additionally, it would be prudent to make proactive disclosures related to any activity or provision made as a result of government-mandated requirements that companies receiving relief must adhere to. Passenger airlines receiving financial support, for instance, have been asked to adhere to additional requirements related to employee pay, executive compensation and payment of dividends, among others.

The SEC has recognized the challenges of providing forward-looking guidance and making relevant information available to all stakeholders in a timely manner at this time. However, the overarching recommendation from the oversight agency is that high-quality information from businesses is essential as it will both be consumed more widely and have a deeper impact on economic recovery.



Sean Dowd is a managing director at AlixPartners LLP.

Eileen Kamerick is a National Association of Corporate Directors Board leadership fellow and sits on the board of directors for Associated Banc-Corp., the Legg Mason Closed-End Mutual Funds, the AIG funds and Anchor Series Trust and Hochschild Mining PLC.


The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] https://www.sec.gov/news/public-statement/statement-clayton-hinman.

[2] https://www.sec.gov/corpfin/covid-19-disclosure-considerations.

[3] https://securitiesclasslaw.com/securities/co-diagnostics-inc-loss-submission-form/?id=7855&from=1.

[4] https://www.globenewswire.com/news-release/2020/07/01/2056564/0/en/Kessler-Topaz-Meltzer-Check-LLP-Securities-Fraud-Class-Action-Filed-Against-Ideanomics-Inc-IDEX.html.

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