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On March 23, the Division of Enforcement of the Securities and Exchange Commission (SEC) issued a Statement warning against insider trading during the ongoing COVID-19 pandemic.  In particular, the SEC cautioned that insiders are “regularly learning” new material non-public information (MNPI) that may “hold an even greater value than under normal circumstances.”  The SEC also noted that unique circumstances mean more people may have access to MNPI than may typically be the case.  This is particularly true for companies that delay earnings releases and SEC filings due to the pandemic.

Recognizing the heightened risk of illegal securities trading as a result of these and other factors, the SEC urged publicly traded companies to be mindful of their established controls and policies to protect against the improper dissemination and use of MNPI.

Proactive Steps for Public Companies

In light of the SEC’s Statement and the unique circumstances that companies are facing during the pandemic, publicly traded companies should take affirmative steps to mitigate insider trading risks.

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Please join the Bass, Berry & Sims Corporate & Securities Practice Group for a series of complimentary webinars exploring various public company-related securities law issues. These programs are an extension of our Securities Law Exchange Blog and feature timely and practical guidance to SEC disclosure counsel on key topics of interest.

The COVID-19 global pandemic…

The Securities Exchange Commission (SEC) recently issued interpretive guidance, effective February 25, 2020, regarding the disclosure of key performance indicators and metrics (KPIs) in Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A).

While this guidance may not have been an area of significant focus for many companies in the recent periodic reporting cycle given that the effective date of this guidance was after the time that many calendar-year public companies filed their Annual Reports on Form 10-K, this guidance will need to be considered in connection with the preparation of upcoming Quarterly Reports on Form 10-Q.

Overview of the Staff’s Recent Guidance Regarding KPIs in MD&As

The MD&A is generally required to contain discussion of a company’s financial condition, changes in financial condition, and results of operations. Also, according to Item 303(a) of Regulation S-K, the MD&A is also required to contain discussion of information not specifically referenced in the item that the company believes is necessary to an understanding of its financial condition, changes in financial condition, and results of operations. Instruction 1 to Item 303(a) also provides that the MD&A should include a discussion and analysis of other statistical data that in the company’s judgment enhances a reader’s understanding of MD&A.

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As companies continue to evaluate the impact of the novel coronavirus (COVID-19) pandemic on their business, public companies will be facing challenging disclosure considerations in connection with their upcoming first-quarter earnings calls and earnings releases.

As a backdrop, a significant number of public companies, concentrated in industries which have felt the strongest immediate impact of the crisis (such as companies whose business is tied to the travel industry), have either updated (e.g., Mastercard) or withdrawn (e.g., Hyatt Hotels, MGM Resorts, Twitter) their 2020 guidance due to the economic fallout and the uncertainty surrounding this pandemic.

Whether or not a public company has updated or withdrawn its 2020 guidance based on COVID-19 considerations, public companies will face challenging disclosure decisions as they approach their first-quarter (for calendar year-end companies) earnings releases and earnings calls.  A key reference point in this regard is CF Disclosure Guidance, Topic No. 9, issued by the Division of Corporation Finance on March 25, which highlights the perspective of the Staff regarding various disclosure considerations related to the COVID-19 pandemic.

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The COVID-19 pandemic has created a disclosure nightmare for public companies.  The Securities and Exchange Commission (SEC) has recognized this challenge and, to its credit, has provided relief to public companies by, among other things, extending the deadline for companies to file certain disclosure reports.  Nonetheless, companies are faced with the challenge of crafting disclosures regarding the risks presented by the coronavirus crisis to their business and operations and their plans for addressing those risks.  This challenge is made all the more difficult by the looming presence of securities class action firms, which already have sued companies over coronavirus-related disclosures.  In addition, the SEC in the recent past has charged companies for allegedly insufficient disclosures made in reaction to crisis situations.

The COVID-19 pandemic is wreaking havoc on the world economically.  Businesses are being harmed in a myriad of ways, from losing customers, to supply chain disruptions, to employee layoffs.  Many businesses and industries will change their operations in the short term and possibly permanently, while others will cease to exist.  Public companies have a unique responsibility under federal securities laws to disclose information to the public, including assessments and plans relating to their business and operations and related risks.  Such assessments and disclosures become thorny in the face of volatile markets, unprecedented events, and colossal business uncertainty.

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Jay Knight (far right) discusses disclosure challenges for public companies at the 2020 Securities Regulation Institute.

The Bass, Berry & Sims Corporate & Securities Practice Group kicked off the new year by participating as a sponsor of the 47th Annual Securities Regulation Institute, which is held annually in San Diego by Northwestern University. Jay Knight, head of the firm’s Capital Market Subgroup, was featured as a speaker in a well-attended panel discussing recurring disclosure challenges faced by public companies and their advisors. Each year, the conference draws SEC staffers and many of the leading practitioners of the public company industry, and the keynote speaker for this year’s conference was SEC Commissioner Jay Clayton.

Our key takeaways from the conference follow:…
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One thing I appreciate about the SEC comment letter process is that it gives real life examples to what is often discussed hypothetically.  Take, for example, cybersecurity and steps management should take when a data incident occurs.  How quickly should a public company make its public disclosure of a data incident?  What should it say?  What should the process look like?

In 2018, the SEC issued helpful interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents.  This was in addition to the Division of Corporation Finance’s 2011 guidance regarding disclosure obligations relating to cybersecurity risks and incidents.  In addition, our friends at corporatecounsel.net ran a helpful blog post on February 18 related to cyber response plan testing.

It is clear there is no single playbook for a data incident response, and the appropriate response is driven by the facts and circumstances of the situation.  One size does not fit all.  However, it is helpful when preparing a response plan to analyze a real life example.  That is why the SEC comment exchange recently made public between the Staff and Chegg, Inc. last fall is particularly insightful.

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Given the high profile nature of Boeing’s ongoing saga with the grounding of its 737 MAX aircraft, perhaps it should come as no surprise that the Securities Exchange Commission (SEC) Staff was particularly focused on the company’s disclosure of this issue in its recent review of Boeing’s SEC filings.

In monitoring SEC comment letters, we came across this SEC comment letter exchange with Boeing made public this week where the Staff questions the company about its commitments and contingencies footnote disclosures as required by Accounting Standards Codification (ASC) 450 – Contingencies.

Staff Requests More Disclosures in Contingency Footnote

In its Form 10-Q for the quarterly period ended June 30, 2019, Boeing discloses that it recorded in the second quarter an earnings charge of $5.6 billion, net of insurance recoveries of $500 million, in connection with “estimated potential concessions and other considerations to customers for disruptions related to the 737 MAX grounding and associated delivery delays.”

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Register for the Corporate & Securities Counsel Public Company Forum on December 12Bass, Berry & Sims invites you to join us for our inaugural Corporate & Securities Counsel Public Company Forum on Thursday, December 12.

This half-day program will feature timely and practical guidance on the latest developments in corporate and securities matters impacting public company in-house counsel.

Panel discussion topics will include:

  • Upcoming proxy season
  • Financial

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The recent SEC enforcement action against ADT Inc. for its failure to comply with the SEC’s equal prominence requirements applicable to non-GAAP financial measures, as outlined in our recent blog post, is a clear reminder that public companies need to continue to be vigilant about the SEC’s non-GAAP financial measure rules.  Also, the Staff has continued to focus on non-GAAP compliance in its comment letters, with non-GAAP financial measures being one of the leading areas of Staff comment over the last couple of years.

There are different layers of the SEC’s non-GAAP financial measures rules which apply to public companies in varying circumstances, depending on the nature of the public disclosure.  Comprehensive knowledge regarding which level of the SEC’s non-GAAP financial measure rules applies to any particular disclosure is a key component when assessing legal considerations and risk in connection with the disclosure of non-GAAP financial measures.

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