The COVID-19 Crisis: The SEC Steps In
Given the disruptive impact that the outbreak of the novel coronavirus (“COVID-19”) has had on virtually all aspects of social and economic life, including the financial markets, the SEC has offered guidance to ease some filing burdens. On March 4, 2020, the SEC issued an order providing regulatory relief and guidance for companies affected by the COVID-19 (the “SEC Order”).1 Along with the SEC Order, the Division of Investment Management (the “IM”) issued guidance on the impact of COVID-19 on advisors and funds (the “IM Statement”).2
The SEC Order
Pursuant to the SEC Order, the SEC has offered conditional relief from federal securities laws for certain companies. Notably, subject to several conditions, the SEC Order allows for a 45-day extension of filing deadlines for disclosures that would have otherwise been due between March 1 and April 30, 2020. These extensions apply to Securities and Exchange Act of 1934 (the “Exchange Act”) reports such as Forms 10-K, 20-F, 10-Q, 8-K, 6-K and proxy statements.
Conditions to Applicability
It is important to note that the SEC Order does not offer filing extensions for all companies. Rather, in order to qualify for the fling relief, the company must satisfy the following conditions:
1. The company is unable to meet a filing deadline due to disruptions caused by the COVID-19 outbreak (i.e. limited ability to interact with critical advisors or employees or visit facilities, travel restrictions);
2. The company provides the SEC with a Form 8-K or Form 6-K by the later of March 16, 2020 or the original filing deadline that:
a. Indicates the company is relying on the SEC Order;
b. Describes the reasons why the filing could not be made on a timely basis;
c. Provides an estimate for when the filing will be made; and,
d. If appropriate, an explanation of the impact the COVID-19 outbreak has had on its business.
3. In circumstances where the company’s inability to meet the original filing deadline relates to the inability of an outside person, other than the company, to provide required input (i.e. a report, opinion, certification) the Form 8-K or Form 6-K must include a statement from the outside person detailing why the outside person is unable to provide the required input before the filing deadline; and,
4. The company must:
a. file the disclosure no later than 45 days from the original due date; and,
b. the disclosure must include a statement that: (i) the company is relying on the SEC Order; and, (ii) includes an explanation of the reasons why the company could not meet the original filing deadline.
Furnishing Proxy Statements
The SEC Order also affords a limited exemption from providing proxy statements and other soliciting materials pursuant to Exchange Act Section 14. This exemption is only available when mail delivery is not possible where: (i) the stockholder’s mailing address is in an area where mail delivery has been suspended due to the COVID-19; and, (ii) the company has made a good faith effort to provide the proxy statement or other soliciting materials to the stockholder.
Disclosure Obligations in light of COVID-19
Given the negative financial and operational ramifications of the COVID-19 outbreak, the SEC has also offered reminders about disclosure obligations.3 The SEC press release announcing the SEC Order (the “Press Release”)4 highlights the following disclosure considerations:
- If it becomes aware of a material COVID-19 related risk, the company should refrain from trading in the company’s stock and prevent company insiders from doing so until such time as investors have been notified about the risk;
- When a company does disclose material information about the effects of COVID-19,it should disseminate the information broadly and not in a selective manner;
- A company that has made a disclosure about the impact of the COVID-19 outbreak, should evaluate the disclosure and update it if new facts make the previous disclosure materially inaccurate; and,
- A company that provides forward looking information such as known trends or uncertainties concerning the COVID-19 outbreak, may utilize the safe harbor in Exchange Act Section 21E for forward looking statements.
The IM Statement
In the IM Statement, the Division of Investment Management (the “Division”) recognized the potential effects of the COVID-19 outbreak. It reiterated and expanded its position expressed in the Division’s letter to the Independent Directors Council in February 2019.5 The Division has indicated that it would not recommend enforcement actions if fund boards do not adhere to in-person voting requirements and do not hold in-person meetings in the event of unforeseen or emergency circumstances affecting some or all of the directors. The IM Statement applies to all approvals and renewals of contracts, plans or arrangements under Section 15(c) or Rules 12b-1 or 15a-4(b)(2), including material changes to such contracts, plans or arrangements, as well as the selection of a fund’s independent public accountant pursuant to Section 32(a) where such accountant is not the same accountant as selected in the immediately preceding fiscal year. In the IM Statement, the Division also encouraged investment advisors and funds to plan and prepare for potential impacts, review continuity plans and valuation procedures and review and assess other policies and procedures. This IM Statement is effective from March 4 through June 15, 2020.
If you have questions about the information provided in this alert, please email us at email@example.com, call Alaric at 888-243-2448, or visit our website, at www.alariccompliance.com.
1 Exemptions from Specified Provisions of the Exchange Act and Certain Rules Thereunder, Exchange Act Release No. 34-8818 (Mar. 4, 2020), https://www.sec.gov/rules/other/2020/34-88318.pdf.
2 IM Staff Statement, Fund Board Meetings and Unforeseen or Emergency Circumstances Related to Coronavirus Disease 2019 (COVID-19) (Mar. 4, 2019), https://www.sec.gov/investment/staff-statement-im-covid-19.
3 SEC Press Release, SEC Provides Conditional Regulatory Relief and Assistance for Companies Affected by the Coronavirus Disease 2019 (COVID-19) (Mar. 4, 2020), https://www.sec.gov/news/press-release/2020-53.
5 Letter from the staff of the Division of Investment Management to Independent Directors Council (Feb. 28, 2019), available at https://www.sec.gov/divisions/investment/noaction/2019/independent-directors-council-022819.