Morris Manning & Martin, LLP

COVID-19 And The Latest SEC Disclosure Expectations


Law360 -- The COVID-19 pandemic has substantially impacted the financial disclosure landscape for public companies, making it difficult for companies to know how to address the effects of the crisis on business, financial condition and results of operations in their public disclosure statements. Further, those challenges are amplified by increased scrutiny on public filings and corresponding litigation that tend to occur during economic downturns.


In response to the continually evolving effects that the pandemic has on reporting companies, on March 25, the U.S. Securities and Exchange Commission released guidance on disclosure and other securities law obligations with respect to COVID-19 and related business and market disruptions (Disclosure Guidance: Topic No. 9).

In subsequent guidance released on June 23, the commission provided additional views of the Division of Corporation Finance regarding operations, liquidity and capital resources disclosures with respect to business and market disruptions related to COVID-19 (Disclosure Guidance: Topic No. 9A).

Since these releases, the commission has provided further guidance on disclosure through other means such as comment letters and roundtable discussions.

This article attempts to provide decision makers at public companies with guidance on how best to comply with the commission's expectations regarding disclosure and limit liability relating to potential investor litigation related to third-quarter reporting.

By this point in time, companies have dealt with two quarters of COVID-19-related reporting concerns and are preparing for third-quarter filings. However, due to the ongoing and rapid changes caused by COVID-19, and in light of the disclosure guidance, it is important that companies remain vigilant on this front, particularly with regard to risk factors, management discussion and analysis, and issues surrounding human capital.

Below are some key considerations on these topics that companies will need to be cognizant of when preparing their Form 10-Q filings for the third quarter.

Risk Factors

Most companies included risk factors in their first- and second-quarter 10-Q filings to reflect the risks and uncertainties caused by COVID-19. Going forward, the best practice is to update any such risk factors by providing additional details that may have come to light since the initial disclosure.

For instance, if a material risk was disclosed in the second-quarter 10-Q filing as hypothetical or probable but then subsequently actually occurred, the risk factor should be updated to indicate the actual adverse effects such occurrence had on the company's business, financial condition or results of operations in order to provide investors adequate information to more fully assess the risk.

Recently, given the difficulty in specifying the effects of COVID-19 and the probabilities of such effects occurring, companies have taken the approach of including a broad statement that all risk factors disclosed may be amplified or further materially adversely affected by COVID-19.

While the commission's long-standing policy of specificity in risk factors is still applicable, given the current circumstances, the commission has recently been willing to permit disclosure of such general risks as long as they are clarified, if possible, in other sections of the disclosure. Additionally, the commission has reiterated that mitigating factors should not be included in any COVID-19-related risk factors.

Management Discussion and Analysis

Companies should be careful to revise and update their Form 10-Q management's discussion and analysis of financial condition and results of operation, or MD&A, disclosure for the third quarter proactively, continuing to disclose any known trends and uncertainties.

Particular attention should be directed to the qualitative and quantitative effects of COVID-19 on the company's operations and both short-term and long-term financial condition and liquidity prospects.

A good starting point for this analysis is determining the material operational and liquidity challenges affecting the company as a result of COVID-19 and describing how the company is dealing with such challenges. From there, the company will likely be in a better position to consider the guidance provided by the commission in the disclosure guidance and incorporate responsive disclosure into its own MD&A.

Furthermore, companies should take steps to ensure that risks identified in the risk factors section are also addressed in the MD&A section, to the extent that such risks are actual and the effects are known. For instance, in a recent comment letter, the commission advised a company that included COVID-19 as a risk factor that may have a material adverse effect to expand its MD&A discussion to address any known effects of COVID-19-related risks on its financial condition for the current reporting period.

Human Capital Disclosures

In line with the commission's proposal to modernize Regulation S-K to require an expanded discussion of human capital, the disclosure guidance explicitly references human resource disclosures. Specifically, the commission's view that human capital should no longer be viewed as a cost, but rather as an asset, coupled with the temporary and permanent reductions in human capital as a result of the COVID-19 pandemic, have brought human capital disclosure even further into the forefront and amplified its relevance to a reasonable investor in making an investment decision.

In light of the disclosure guidance, layoffs, furloughs, terminations or other reductions and their effects on the company's business and operations should be disclosed to the extent that they are material.

Additionally, companies should also consider disclosures concerning the effect teleworking arrangements have on operations, as well as any issues the company has experienced with existing remote working arrangements and plans to transition back to the office. The effects of material changes to human resources should be disclosed in risk factors as well as the MD&A, to the extent quantifiable.

A company's public disclosure should always reflect, as accurately as possible, the current state of the company's affairs, including any known or probable issues affecting the company. As public companies begin drafting third-quarter disclosures, they should consider the commission's disclosure guidance as well as any additional commentary the commission has provided on COVID-19-related disclosure considerations in order to ensure adequate public disclosure.


Naveen Pogula is of counsel at Morris Manning & Martin LLP.

This article was originally published by on Sepember 14, 2020. 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.

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