Q2 2020-The SEC and Investors Weigh in on Disclosure

The SEC Division of Corporate Finance issued supplemental disclosure guidance last week calling for high-quality financial reporting and urged public companies to thoroughly update their disclosures to give investors a clear picture of their financial health and their ability to survive the COVID-19 disruption. On June 30, SEC Chairman Jay Clayton and Corporate Finance Director Bill Hinman participated in a virtual roundtable with investment community leaders to discuss these disclosure considerations.

In preparation for the second quarter earnings season, below please find links to a summary of the roundtable discussion prepared by law firm Cleary Gottlieb, as well as a recent article published by law firm Troutman Pepper on the SEC's guidance on high-quality financial reporting in light of the COVID pandemic:

COVID-19 in Q2 Reporting – What the SEC is Looking For, Cleary Gottlieb

SEC's COVID-19 Supplemental Guidance Reinforces the Importance of High-Quality Financial Reporting, Troutman Pepper

Chairman Clayton and Director Hinman have both previously stressed that under the current circumstances, forward-looking information can be more valuable than historical information. The SEC noted that "these disclosures should enable an investor to understand how management and the Board of Directors are analyzing the current and expected impact of COVID-19 on the company's operations and financial condition, including liquidity and capital resources."

The SEC went on to say, "It is important that companies provide robust and transparent disclosures about how they are dealing with short- and long-term liquidity and funding risks in the current economic environment, particularly to the extent efforts present new risks or uncertainties to their businesses."

COVID-19 presents a new set of disclosure challenges

As companies have faced a broad range of material operational changes in response to the pandemic, as well as undertaking a wide range of financial activities, the SEC suggested that companies carefully consider disclosing such substantial changes to investors.

In addition, while many companies have been receiving financial assistance through the CARES Act, the SEC recommended that companies consider the short- and long-term effects of that assistance on their businesses and provide appropriate disclosures. Companies should also evaluate whether the total effects of COVID-19 raise substantial doubt about their ability to continue as a going concern. If so, companies should provide appropriate disclosures as required by U.S. GAAP.

Call for more standardized and mandatory disclosure

In the June 30th roundtable discussion, panelists praised the SEC disclosure guidance, especially the list of questions for issuers contained in Disclosure Topic No. 9 (March 25) and No. 9A (June 23). Several members of the panel representing the investor viewpoint suggested that standardization of forward-looking information, including financials and human capital management, would be helpful. All the panelists called for more forward-looking disclosures. Recognizing that issuers cannot know how the current crisis will play out, panelists suggested issuers should be able to identify a range of alternative scenarios and their outcomes. They also emphasized that companies should consider what they learned about their adaptability and resiliency from the COVID-19 crisis and apply these lessons to other challenges such as diversity and climate change.

Commitment to the 'S' in ESG

The roundtable discussion also included a call for disclosure regarding social issues, reflecting concerns arising from the recent protests surrounding racial inequality and injustice. Panelists wanted to understand how companies are addressing this issue, and are asking for more transparency regarding diversity and the composition of the workforce. One panelist suggested that the SEC use its bully pulpit to highlight these social issues.

As you review the summaries and the SEC disclosure checklists, we are here to help craft second quarter earnings materials that satisfy the new SEC recommendations and meet the needs of your current and potential investor base, as well as other key stakeholders.