On Friday, December 4, the SEC announced that it had settled charges against a publicly traded restaurant chain for misleading disclosures about the impact of the COVID-19 pandemic on its business operations and financial condition. This was the SEC's first publicly reported action relating to allegations of a company having misled investors about the financial effects of COVID-19; one may reasonably expect that it won't be the last.
Early on in the pandemic (April), the SEC released a statement from Chairman Jay Clayton and William Hinman, Director of the Division of Corporation Finance, regarding a variety of considerations for companies relating to the disclosures that would be essential in investor communications and SEC filings as a result of the widespread effects of the virus on American businesses. Among their recommendations were:
"Company disclosures should reflect this state of affairs and outlook and, in particular, respond to investor interest in:
- where the company stands today, operationally and financially,
- how the company’s COVID-19 response, including its efforts to protect the health and well-being of its workforce and its customers, is progressing, and
- how its operations and financial condition may change as all our efforts to fight COVID-19 progress. Historical information may be relatively less significant."
Two areas cited by the SEC in its settlement of the disclosure case relate to disclosures concerning (1) liquidity and (2) the ability to pay rent on the company's properties. Liquidity in particular will be a carefully scrutinized metric in the annual reports filed in early 2021; we recommend companies carefully consider their presentation of this information to ensure both accuracy and consistency with disclosures to all stakeholders. Particularly this year, with the increased focus by the SEC and investors alike on the financial impacts of the pandemic, ensuring the highest degree possible of confidence in these disclosures will be essential.
"When public companies describe for investors the impact of COVID-19 on their business, they must speak accurately," said Stephanie Avakian, Director of the Division of Enforcement. "The Enforcement Division, including the Coronavirus Steering Committee, will continue to scrutinize COVID-related disclosures to ensure that investors receive accurate, timely information, while also giving appropriate credit for prompt and substantial cooperation in investigations."
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