By Soyoung Ho
Efforts to contain the spread of a novel coronavirus have had a disastrous financial impact on many businesses, especially those in the retail sector, and the SEC put out a statement in early April urging public companies to provide forward-looking information to investors. This is because the market regulatory agency believes that during a financial crisis, investors find future projections about companies’ businesses to be very useful, oftentimes more so than historical data.
However, securities lawyers said that while companies are generally providing more tailored information for second quarter 2020 results, compared to the first quarter, it has proven to be difficult in giving forecasts for many companies. Stay-at-home orders related to the COVID-19 pandemic started in March. Restrictions have been eased since then, but financial challenges and uncertainties will continue for some time.
Pandemic or not, corporate attorneys say companies have always been careful when providing forward-looking information, even if there is a safe harbor provided to them. This means that companies have some liability protections when they use the safe harbor. Companies usually put a disclaimer that any forward-looking statement is true at the time the information was written.
“Companies are extremely cautious in providing any type of forward-looking information,” said Will Dorton, of counsel with corporate, M&A and securities practice group of Dickinson Wright PLLC. “I think what the SEC really wants is for companies to be honest and open about where they are and where they think they are going given these unusual circumstances.”
This does not mean that companies are not trying to provide forecasts, Dorton said. It just has to do with the unique circumstances presented by the virus.
“I think in some ways, there may be a little more appetite for companies to provide forward looking-information because it’s sort of known that everything is crazy right now,” he said. “If you are wrong, you may be given a little more break for being wrong.”
When the SEC encouraged companies to provide forward-looking information, the commission also said that it would not second guess companies’ good faith attempts to provide appropriate information.
“But in terms of disclosing to the market not just to the SEC but in putting information out to your investors, nobody really wants to tie themselves into something unnecessarily or give information out that may prove drastically wrong,” said Dorton, who previously worked as a staff member in the Division of Corporation Finance (CorpFin) at the SEC.
David Allen, a partner at Troutman Pepper Hamilton Sanders LLP, agreed.
“I don’t think it’s a lack of desire or lack of will,” he said, emphasizing the rapidly changing environment.
“Notwithstanding safe harbors, you have to be pretty confident in what you are saying,” Allen said. “When you introduce all the uncertainty that we have seen the last several months, even companies that are inclined to try to give forward-looking information to their investors and to the market are having trouble. They are having trouble figuring out what to say … when nobody knows what’s coming next or what government response is coming next.”
Further, in Allen’s view, the SEC has always “somewhat” encouraged forward-looking statements.
“I think it’s more of a reminder to companies and a way to encourage them not to be so conservative that they don’t say anything,” he said. “But at the same time, nobody wants companies doing wild speculations in the public arena.”
Improvements in Q2 Disclosures
While providing meaningful forward-looking information has been challenging, they say companies are getting better with disclosures in general as companies have more experience dealing with the challenges of the COVID-19 pandemic.
“It isn’t exactly rocket science, but the disclosures in the 10-Qs for the second quarter were much more targeted and tailored than what we saw in Q1,” Allen said. “I think Q1, companies were just trying to figure out what this all meant, and the impact was not as clear as it was after operating in the post-COVID environment for the quarter. So, my read is that Q2 disclosures were much more tailored and told the story for particular companies better.”
Dorton agreed and explained that in the first quarter, many companies were mainly focused on their ability to survive.
“First, it was sort of like triage, and the second quarter was ‘what do we need to tell our investors about this,’” he said.
On the upside, Dorton believes that COVID-19 has really forced companies to think about disclosures in ways they have not had to before.
“A lot of times, a company’s disclosures in certain areas were on auto pilot a little bit,” Dorton said. “They write it out and they disclose it once, and they don’t really change it unless something really significant happens. I think that COVID-19 has upended that a little bit.”
He said he is seeing companies are really looking at the processes and look at how COVID-19 specifically affected them.
Allen believes that disclosures in the third quarter and going forward will likely be even more tailored.
“I think that’s just a function of companies having more history, working through this COVID environment. It’s easier to tell the story with [more] facts.”
Best Practices Emerging
In the meantime, the SEC will not sit back and just monitor disclosures but help in coming up with best disclosure practices during the pandemic.
During an SEC roundtable about Q2 reporting at the end of June, SEC CorpFin Director William Hinman indicated that the staff will likely issue interpretive guidance or statement with model disclosures that will help companies provide useful information to investors.
“That is something we do from time to time,” Hinman said. “Q2s will be a lot more revealing than Q1s just because we’ve been dealing with this longer. And we will try to highlight what we think are good disclosures, thoughtful risk factors, things like that. We do that in any kind of developing emerging issues that’s not baked into our rules, things like you know Brexit or the impacts of LIBOR changes. We do try to find model disclosures. We will do that.”
This article originally appeared in the September 9, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.
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