In mid-June, a large group of nonprofits, socially responsible investors, labor unions and others submitted a letter to SEC Chair Jay Clayton, stating that, while the guidance related to COVID-19 disclosure that he and Corp Fin Director Bill Hinman provided in April exhorting companies “to provide as much information as practicable” was a “step in the right direction” (see this PubCo post), it really did not go far enough in mandating the necessary transparency. They urged the SEC to impose new requirements for disclosure about how “companies are acting to protect workers, prevent the spread of the virus, and responsibly use any federal aid they receive.” With the SEC’s current propensity for principles-based disclosure, will it be persuaded to adopt these mandates?
In early April, the SEC approved and declared immediately effective an NYSE rule change to waive, through June 30, 2020 and subject to compliance with conditions, application of certain of the shareholder approval requirements in Section 312.03 of the NYSE Listed Company Manual. The waiver was designed to address the concern that, as a result of the impact of COVID-19, many listed companies with urgent liquidity needs had to access additional capital from insiders, but the NYSE’s shareholder approval requirements could have created impediments to quickly satisfying those capital needs. Since the implementation of the original waiver in April, the NYSE notes, “a number of listed companies have completed capital raising transactions that would not have been possible without the flexibility provided by the Waiver.” While equity markets have generally recovered from their initial precipitous declines, the NYSE observes, many listed companies are continuing to experience difficulty. Accordingly, the NYSE has now proposed to extend this temporary relief through September 30, 2020, and the SEC has declared the proposal immediately effective.
Tuesday afternoon, SEC Chair Jay Clayton moderated a virtual roundtable, with Corp Fin Director Bill Hinman alongside, to hear how investors viewed current disclosure in connection with COVID-19 and, given that Q2 reporting is around the corner, what they would like to see. Participants on the panel included Gary Cohn, Former Director of the National Economic Council; Glenn Hutchins, Chair of North Island; Tracy Maitland, President and CIO of Advent Capital; and Barbara Novick, Vice Chair and Co-Founder of BlackRock. While it was entirely predictable that forward-looking information about liquidity would be a key concern, the call by all the participating investors for disclosure about social issues—particularly human capital and diversity—was something of a revelation.
For those interested in a summary and update of the SEC’s and its staff’s targeted relief to address COVID-19, you may want to look at this updated statement issued today by SEC Chair Jay Clayton and the Directors of Corp Fin, Investment Management and Trading and Markets. The statement summarizes the current temporary relief and indicates the staff’s views on whether the relief should be extended or otherwise adjusted: “It is clear that the need for certain relief remains, such as relief to ensure continued remote operations and to provide flexibility in light of continued market volatility. Other forms of current relief, however, are unlikely to be extended.”
In March and April, the Corp Fin staff issued three statements providing temporary relief to address various logistical issues and other complications resulting from the COVID-19-related shutdowns. The relief related to authentication document retention requirements under Rule 302(b) of Reg S-T, submission of Forms 144 in paper and submission of a variety of other paper forms outside of Form 144. In two cases, the staff statements had provided relief only through June 30. Unfortunately, that turned out to be much too optimistic. Today, the staff extended the time frames for all three statements for an indeterminate period. The new statements can be found here, here and here. In each case, the temporary relief applies “until the staff provides public notice that it no longer will be in effect; that notice will be published at least two weeks before the announced termination date.”
A couple of days ago, Sagar Teotia, SEC Chief Accountant, issued a Statement on the Continued Importance of High-Quality Financial Reporting for Investors in Light of COVID-19. The Statement, issued in advance of the close of the second quarter, follows on Teotia’s earlier Statement, issued in April, in which Teotia addressed, among other topics, estimates and judgments as well as temporary relief provided under the CARES Act for banks and other financial institutions. (See this PubCo post.) In this new Statement, Teotia again addresses estimates and judgments, as well as disclosure controls and procedures and internal control over financial reporting, going-concern issues, engagement by the Office of Chief Accountant with FASB, the PCAOB and international standard setters and OCA’s engagement with audit committees.
Yesterday, the staff of Corp Fin issued Disclosure Guidance: Topic No. 9A, which supplements CF Topic No. 9 with additional views of the staff regarding disclosures related to operations, liquidity and capital resources that companies should consider as a consequence of business and market disruptions resulting from COVID-19. You might recall that, in March, the staff issued CF Topic No. 9, which offered the staff’s views regarding disclosure considerations, trading on material inside information and reporting financial results in the context of COVID-19 and related uncertainties. (See this PubCo post.) As with the original guidance, the new supplemental guidance includes a valuable series of questions designed to help companies assess, and to stimulate effective disclosure regarding, the impact of COVID-19, in advance of the close of the June quarter. As always these days, the guidance makes clear that it represents only the views of the staff, is not binding and has no legal force or effect.
What has been the impact of the COVID-19 pandemic on companies’ sustainability efforts? On the one hand, as discussed in this article from the WSJ, C-suite occupants have been “trying to figure out what they’re willing to throw overboard as the economic storm spawned by the pandemic is swamping their ships. Businesses that were planning to help save the world are now simply saving themselves….History suggests this new [sustainability] paradigm is probably on the back burner.” Even BlackRock, which had previously announced that it was putting “sustainability at the center of [its] investment approach,” acknowledged in April, that “certain non-financial projects like sustainability reports had been ‘de-prioritized’ due to COVID-19. ‘We recognize that in the near-term companies may need to reallocate resources to address immediate priorities in these uncertain times.’ BlackRock’s report stated. BlackRock said it would ‘expect a return to companies focusing on material sustainability management and reporting in due course.’”
On the other hand, however, as this article from Financial Executives International observed, the COVID-19 pandemic has highlighted “the very issues that have been driving ESG concerns—managing resources, sustainability, community impact and employee well-being.” While it might have been “easy to assume the current crisis may permanently shift attention away from environmental, social and governance (ESG) concerns as management teams grapple with existential issues,” it turned out that “the very actions companies are taking will likely bring them closer to the multi-stakeholder, long-term value principles that lie at the heart of ESG.” How are companies viewing the effects?
To gain insight into the new governance challenges faced by boards over the next few months as companies begin a reopening and recovery process—hopefully a permanent one—the NACD undertook a pulse survey of 306 directors across multiple industries, conducted between May 14 and May 21. The survey revealed that directors expect the COVID-19 pandemic to have lasting effects—on business strategy, on the nature of work and on board-management interactions.