SEC Urged To Upgrade Disclosures On COVID-19, Diversity

By Tom Zanki
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Law360 (June 30, 2020, 10:10 PM EDT) -- Market participants on Tuesday urged U.S. Securities and Exchange Commission officials to improve consistency in public company disclosures on matters ranging from how the pandemic is impacting operations to how businesses are addressing social concerns like diversity, so investors can make apples-to-apples comparisons among different companies.

SEC Chairman Jay Clayton led a virtual roundtable on Tuesday, querying investors and asset managers as to what they would like to see in public companies' second-quarter disclosures given fallout from the coronavirus pandemic and related economic uncertainty.

Tracy Maitland, president of investment manager Advent Capital, called for more "standardization and transparency" of forward-looking guidance in which companies describe their liquidity outlook in light of recent events. Maitland said company disclosures often lack sufficient detail about things like cash flow, working capital and inventory levels.

"A lot of their statements are backward looking as opposed to forward looking," Maitland said. "I think forward guidance is really critical for investors to be able to make a prudent understanding and investment in a particular company."

Maitland acknowledged that different industries will rely on different metrics to measure cash flow, noting retailers have vastly different business models than airplane companies. He added that disclosures should be flexible enough to reflect those differences but wants investors to have more tools to compare companies within the same industry.

The SEC has focused more attention on forward-looking assessments in corporate disclosures lately given investor demand for insight into how companies are coping with the pandemic. The SEC, which released updated guidance on the matter last week, has said it wants companies to provide as much clarity as possible while acknowledging the uncertainty posed by a pandemic.

Clayton and Bill Hinman, director of the SEC's Division of Corporation Finance, said regulators won't second-guess companies, provided their assessments are made in "good faith" and that what companies tell shareholders is consistent with what they tell analysts and boards of directors.

"Q2 is going to be a lot more revealing than Q1 just because we have been dealing with this longer," Hinman said regarding companies' COVID-19-related disclosures.

Barbara Novick, co-founder of asset management BlackRock, said investors are also watching how companies are responding to social unrest that has escalated over the past month following mass demonstrations protesting racism and police brutality.

Novick said investors want companies to disclose more about human capital matters, such as their hiring practices and how they "are addressing the race issues that have come up."

"It's not just about COVID," Novick said, adding that more transparency in disclosures could have a "sunshine effect" that leads to more changes in company cultures and policies.

Gary Cohn, a former director of the National Economic Council for President Donald Trump, predicted that social matters will be a bigger topic in corporate boardrooms once the economy settles.

"We are going to switch very quickly to a lot more of these social issues: the hiring practices, the wage scale, living wages, and diversity of the workforce," Cohn said. "It's here to stay and it's not going anywhere. Outside of the fact that businesses are fighting for survival, this would occupy 95 percent of their time right now."

The SEC proposed a rule change last year to require companies to disclose more about their human capital policies, including how they attract, develop and retain personnel.

"As the materiality of some of these issues increases and becomes more obvious, I think it will drive more disclosure," Hinman said. "To the extent that you have thoughts on what we proposed and think we should be more specific, please send in comments."

--Editing by Janice Carter Brown.

For a reprint of this article, please contact reprints@law360.com.

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