In 2020, the SEC issued new guidance on MD&A in light of COVID-19. The authors discuss this guidance in detail, as well as recent amendments to Item 303 of Regulation S-K, and guidance on key performance indicators. They then turn to discussions of disclosure obligations relating to cybersecurity and the SEC's focus on MD&A in comment letters.

Management's discussion and analysis of financial condition and results of operations (MD&A) is a very important portion of a public company's filings with the Securities and Exchange Commission, enabling investors to see the company through the eyes of management. As such, companies should revisit their MD&A disclosure each time they prepare an SEC filing that requires it. This is especially true at this time because of both the ongoing need to describe the various effects of the global outbreak of COVID-19, and recent rule changes and guidance impacting MD&A disclosure.

CF DISCLOSURE GUIDANCE: TOPIC NO. 9

In connection with COVID-19, the SEC's Division of Corporation Finance issued CF Disclosure Guidance: Topic No. 9 (CF #9) on March 25, 2020. 1 This guidance addresses two areas that are particularly relevant to MD&A: assessing and disclosing the evolving impact of COVID-19 and reporting earnings and financial results, including non-GAAP financial measures. In addition, CF #9 discusses insider trading in a company's securities before material non-public information relating to COVID-19 has been disseminated.

Assessing and disclosing the evolving impacts of COVID-19

CF #9 includes a list of questions that companies should consider when assessing and disclosing the effects of COVID-19 on their specific circumstances. The list is not exhaustive. Companies should certainly consider these questions when assessing the impacts of COVID-19 and drafting the related disclosures of such impacts. Even if not all of the questions are relevant to a particular company, they provide insight into the type of information the SEC is looking for. The suggested questions may prompt parallel lines of inquiry for companies to think about. Moreover, in line with the principles-based disclosure system of the federal securities laws, the Division encourages companies to provide disclosure that is tailored and provides material information about the impact of COVID-19 to investors and market participants. Thus, disclosure that provides rote answers to each question may not be appropriate or desirable. But, information that is material to investment and voting decisions should be disclosed even if there is no "line-item" disclosure requirement.

The non-exhaustive list of questions in CF #9 includes consideration of the following:

  • How has COVID-19 impacted your financial condition and results of operations? How do you expect COVID-19 to impact future operating results and near- and long-term financial condition?
  • How has COVID-19 impacted your capital and financial resources, including your overall liquidity position and outlook?
  • How do you expect COVID-19 to affect assets on your balance sheet and your ability to timely account for those assets?
  • 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?
  • Have COVID-19-related circumstances, such as remote work arrangements, adversely affected your ability to maintain operations, including financial reporting, internal controls over financial reporting, and disclosure controls and procedures?
  • Have you experienced challenges in implementing business continuity plans?
  • Do you expect COVID-19 to materially affect the demand for your products or services?
  • Do you expect a material adverse impact on your supply chain or the methods used to distribute your products or services?
  • Will your operations be materially impacted by any constraints or other impacts on your human capital resources and productivity.
  • Are travel restrictions and border closures expected to have a material impact on your ability to operate and achieve your business goals?

The Division acknowledges in CF #9 that it may be difficult for companies to assess or predict with precision the broad effects of COVID-19, and that the actual impact will depend on many factors beyond a company's control and knowledge. At the same time, the Division observes that certain facts are known, such as the effects that COVID-19 already has had on a company, what management expects its future impact will be, how management is responding, and how the company is planning for COVID-19-related uncertainties. These facts can be material to both investment and voting decisions, and thus companies should consider the need for disclosure in the context of the principles-based disclosure system. The Division encourages companies to provide disclosure that allows investors to evaluate the impact of COVID-19 on the company through the eyes of management.

CF #9 reminds companies that they can present forward-looking information in a manner that would allow companies to avail themselves of statutory safe harbors. 2 It is helpful for discussions of COVID-19's future impact to be drafted in a way that takes advantage of the safe harbors for forward-looking statements. For example, when the company is providing forward-looking information in discussing COVID-19 matters, consider clearly stating that actual results could differ materially from those contained in the forward-looking statements because the impact of COVID-19 is uncertain and could be materially different than management's current expectations. Identify forward-looking remarks with words such as "believe" or "expect." If a company's safe harbor language includes a list of factors that could impact actual results, add the uncertain effects of COVID-19 to the list.

MD&A must include information that a company "believes to be necessary to an understanding of its financial condition, changes in financial condition, and results of operations."3 In addition, MD&A must specifically address any known trends or any known demands, commitments, events, or uncertainties that will result in, or that are reasonably likely to result in, the company's liquidity increasing or decreasing in any material way. MD&A should discuss COVID-19 as a known trend or uncertainty, and give management's perspective on the type and extent of COVID-19's effect on the company, to the extent material. There are many possible questions for companies to consider when assessing what is material in the COVID-19 context as they prepare their MD&A, including the questions contained in CF #9. For example, if a company has experienced supply chain issues, are they anticipated to be ongoing? How has COVID-19 affected liquidity? Has the company drawn down on bank facilities for any reason, including because it has not been able to finance in the capital markets? Is there a material risk that the company may not meet covenants in its credit or other agreements? Is the company able to service its debt and other obligations? Has the company needed to close any locations? Does the company operate any facilities where there has been a significant outbreak of COVID19? Has there been any reduction in productivity or other consequences as a result of employees working from home? Is the company party to contracts with force majeure provisions that have been, or may be, triggered by the COVID-19 pandemic and, if so, is there a material impact on the company's business? Is the company having a dispute with its insurance carrier regarding business continuity coverage?

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Footnotes

1. Coronavirus (COVID-19), Division of Corporation Finance, Securities and Exchange Commission, CF Disclosure Guidance: Topic No. 9, available at https://www.sec.gov/corpfin/coronavirus-covid-19.

2. Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

3. Regulation S-K, Item 303(a).

Originally Published by The Review Of Securities & Commodities Regulation on 21stof April, 2021.

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