March 31, 2020

COVID-19: SEC Division of Corporation Finance Issues Disclosure Guidance (Topic 9)

Holland & Knight Alert
Ivan A. Colao


  • The U.S. Securities and Exchange Commission's (SEC) Division of Corporation Finance has released a non-exhaustive list of illustrative questions for public companies to consider in evaluating their disclosure obligations based on the impact of COVID-19.
  • The guidance includes considerations for refraining from trading prior to dissemination of material non-public information based on the impact of COVID-19.
  • Considerations for reporting earnings and financial results, including non-GAAP financial measures, are also included.

The U.S. Securities and Exchange Commission's (SEC) Division of Corporation Finance (the Division) on March 25, 2020, released CF Disclosure Guidance: Topic No. 9 (the Guidance), which provides the Division's current view regarding disclosure and other securities law obligations that companies should consider with respect to the COVID-19 pandemic and related business and market disruptions.1

In the Guidance, the Division recognizes that it may be difficult to assess or predict the broad effects of COVID-19 on industries or individual companies, and that the actual impact will depend on many factors beyond a company's control and knowledge. The effects that COVID-19 has had on a company, management's expectation of future impacts and management's response plan can be material to investment and voting decisions. In the Guidance, the Division encourages companies to consider the need for COVID-19-related disclosures within the context of federal securities laws and the principles-based disclosure system, noting that a number of existing rules or regulations require disclosure about the known or reasonably likely effects of, and the types of risks presented by, COVID-19. As a result, disclosure of COVID-19 related risks and effects may be necessary or appropriate in the management's discussion and analysis, the business section, risk factors, legal proceedings, disclosure controls and procedures, internal control over financial reporting and the financial statements.

Assessing and Disclosing the Evolving Impact of COVID-19

The Division states that disclosure of these risks and effects, including how the company and management are responding to them, should be specific to the company's situation. The Division encourages disclosure that is tailored to the company and provides material information about the impact of COVID-19's impact to investors and market participants. In particular, the Division encourages companies to provide disclosures that allow investors to evaluate the current and expected impact of COVID-19 through the eyes of management, and that companies proactively revise and update disclosures as facts and circumstances change.

The Guidance includes the following list of questions, which is illustrative but not exhaustive, for companies to consider when evaluating their disclosure obligations:

  1. How has COVID-19 impacted your financial condition and results of operations? In light of changing trends and the overall economic outlook, how do you expect COVID-19 to impact your future operating results and near-and-long-term financial condition? Do you expect that COVID-19 will impact future operations differently than how it affected the current period?
  2. How has COVID-19 impacted your capital and financial resources, including your overall liquidity position and outlook? Has your cost of or access to capital and funding sources changed, or is it reasonably likely to change? Have your sources or uses of cash otherwise been materially impacted? Is there a material uncertainty about your ongoing ability to meet the covenants of your credit agreements? If a material liquidity deficiency has been identified, what course of action has the company taken or proposed to take to remedy the deficiency? Do you expect to disclose or incur any material COVID-19-related contingencies?
  3. How do you expect COVID-19 to affect assets on your balance sheet and your ability to timely account for those assets?
  4. Do you anticipate any material impairments, increases in allowances for credit losses, restructuring charges, other expenses, or changes in accounting judgments that have had or are reasonably likely to have a material impact on your financial statements?
  5. Have COVID-19-related circumstances such as remote work arrangements adversely affected your ability to maintain operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures? If so, what changes in your controls have occurred during the current period that materially affect or are reasonably likely to materially affect your internal control over financial reporting? What challenges do you anticipate in your ability to maintain these systems and controls?
  6. Have you experienced challenges in implementing your business continuity plans or do you foresee requiring material expenditures to do so? Do you face any material resource constraints in implementing these plans?
  7. Do you expect COVID-19 to materially affect the demand for your products or services?
  8. Do you anticipate a material adverse impact of COVID-19 on your supply chain or the methods used to distribute your products or services? Do you expect the anticipated impact of COVID-19 to materially change the relationship between costs and revenues?
  9. Will your operations be materially impacted by any constraints or other impacts on your human capital resources and productivity?
  10. Are travel restrictions and border closures expected to have a material impact on your ability to operate and achieve your business goals?

The Division reminds companies that when they disclose forward-looking information based on assumptions and expectations regarding future events, it is important for companies to avail themselves of the safe harbors in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

Need to Refrain from Trading Prior to Dissemination of Material Non-Public Information

The Division reminds companies and other related persons to consider their market activities, including the issuance or purchase of securities, in light of their obligations under the federal securities laws. For example, directors and officers as well as other corporate insiders who are aware of certain impacts or risks related to of COVID-19 that would be material to investors should refrain from trading in the company's securities until such information is disclosed to the public. Furthermore, the Division reminds companies that disclose material information related to the impacts of COVID-19 to take the necessary steps to avoid selective disclosures by disseminating such information broadly to the public and to revisit, refresh or update previous disclosure to the extent that the information becomes materially inaccurate.

Reporting Earnings and Financial Results

With respect to earnings releases and other disclosure of financial results, the Division acknowledges that the impact of COVID-19 on businesses may present a number of novel or complex accounting issues that, depending on the particular facts and circumstances, may take some time to resolve. In light of this, the Division encourages companies and their auditors to proactively address financial reporting matters earlier than usual to ensure complete and accurate reporting as timely as possible.

The Division also reminds companies of their obligations under Item 10 of Regulation S-K and Regulation G with respect to the presentation of non-GAAP financial measures, as well as the SEC's recent guidance with respect to performance metrics disclosure. To the extent a company presents a non-GAAP financial measure or performance metric to adjust for or explain the impact of COVID-19, the Division explains that it would be appropriate to also highlight why management finds the measure or metric useful and how it helps investors assess the impact of COVID-19 on the company's financial position and results of operations.

Where a GAAP financial measure is not available at the time of the earnings release because the measure may be impacted by COVID-19-related adjustments that may require additional information and analysis to complete, the Guidance states that the Division would not object to companies reconciling a non-GAAP financial measure to preliminary GAAP results that either include provisional amounts based on a reasonable estimate, or a range of reasonably estimable GAAP results. Also, where a company presents non-GAAP financial measures that are reconciled to provisional amounts or an estimated range of GAAP financial measures in reliance on the above position, the Division states that the company 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.

In the Guidance, the Division also reminds companies that the Division does not believe it is appropriate for a company to present non-GAAP financial measures or metrics for the sole purpose of presenting a more favorable view of the company, and companies should use only non-GAAP financial measures metrics for the purpose of sharing with investors how management and the company's board of directors are analyzing the current and potential impact of COVID-19 on the company's financial condition and operating results. When using non-GAAP financial measures, companies should explain why the line item(s) or accounting is incomplete, and what additional information or analysis may be needed to complete the accounting.

Any non-GAAP financial measures should not be disclosed more prominently than the most directly comparable GAAP financial measures or range of GAAP measures. In addition, in filings where GAAP financial statements are required, such as filings on Form 10-K or 10-Q, companies should reconcile to GAAP results and not include provisional amounts or a range of estimated results.

As the COVID-19 situation continues to evolve, Holland & Knight's Public Companies and Securities Team will provide additional guidance for its clients.

DISCLAIMER: Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in these publications may change on a daily basis. Please contact your responsible Holland & Knight lawyer or the author of this alert for timely advice.


1 Coronavirus (COVID-19): Division of Corporation Finance Securities and Exchange Commission, CF Disclosure Guidance: Topic No. 9, March 25, 2020, and SEC Extends Conditional Exemptions from Reporting and Proxy Delivery Requirements for Public Companies, Funds, and Investment Advisers Affected by Coronavirus Disease 2019 (COVID-19), March 25, 2020.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

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