On March 24, 2020, the staff of the Division of Corporation Finance, the Division of Investment Management, and the Division of Trading and Markets (together, the “Staff”) published Staff Statement Regarding Rule 302(b) of Regulation S-T in Light of COVID-19 Concerns (the “Signature Guidance”) to address questions it has received regarding the authentication and document retention requirements of Rule 302(b) of Regulation S-T in light of various logistical issues raised by the COVID-19 pandemic.
On March 25, 2020, the SEC’s Division of Corporation Finance (the “Division”) published CF Disclosure Guidance: Topic No. 9 – Coronavirus (COVID-19) (the “Disclosure Guidance”), in which the Division of Corporation Finance provides its views regarding the disclosure obligations that public companies should consider in light of the circumstances presented by the COVID-19 pandemic.
One practical challenge presented by COVID-19 and the related move to remote work environments for company employees and directors has been compliance with the signature requirements of Rule 302(b) of Regulation S-T. The Signature Guidance addresses concerns regarding compliance with Rule 302(b) in light of the health, transportation, and other logistical issues raised by the spread of COVID-19.
Rule 302(b) of Regulation S-T requires that each signatory to documents electronically filed with the SEC under the federal securities laws “manually sign a signature page or other document authenticating, acknowledging or otherwise adopting his or her signature that appears in typed form within the electronic filing.” Rule 302(b) requires such signature before or at the time the electronic filing is made. For evidentiary purposes, electronic filers are required to retain such documents for a period of five years and furnish copies to the SEC or its staff upon request.
In the Signature Guidance, the Staff states its expectation that all persons and entities subject to Regulation S-T will comply with the requirements of Rule 302(b) to the fullest extent practicable based on their particular facts and circumstances. However, the Staff recognizes that some signatories may experience difficulties satisfying the requirements of Rule 302(b) due to circumstances arising from COVID-19 and, in light of those difficulties, will not recommend enforcement action to the SEC with respect to the requirements of Rule 302(b) if:
With respect to the manually signed signature page or other document, the Staff notes by way of example that a signatory who is teleworking may execute a hard copy of the signature page and deliver the signature page upon his or her return to the place of work. The Staff further notes that a signatory also may provide an electronic record, such as a photograph or PDF, of the signed document at the time he or she signs the document.
The Staff reminds issuers and signatories of the presumption within Section 6 of the Securities Act of 1933 that a signature is validly authorized, and its expectation that filers will maintain procedures to ensure that conformed signatures within a filing have been appropriately authorized.
The Signature Guidance provides clarity regarding certain practices that may be implemented while working remotely, particularly for those persons that do not have access to printers and scanners. In particular, the Signature Guidance notes that a signatory may use another “document authenticating, acknowledging or otherwise adopting” a signature that will appear in an electronic document. The use of a signature page is preferable when possible, but not the exclusive means for authorizing a signature. In this regard, we believe that a signatory, for example, could write out and sign a statement providing such authorization, such as the following: “I hereby acknowledge my signature that appears in typed form on the [Issuer]’s Form [10-Q for the period ended March 31, 2020] and consent to its use in such filing.” The signatory then could take a photograph of that signature and send that photograph to the company as due authorization for use of his or her signature, or retain that statement and signature for delivery to the company once he or she returns to a place of work or otherwise has the ability to arrange for delivery of the signature. The issuer should memorialize this process in its policies and procedures for signatures in SEC filings.
The Disclosure Guidance provides the Division’s views regarding disclosure and other federal securities law obligations that public companies should consider with respect to COVID-19 and related business and market disruptions. The Division states that “[c]ompanies should consider the need for COVID-19-related disclosures within the context of the federal securities laws and our principles-based disclosure system.” As with the Division’s other CF Disclosure Guidance Topics, the Disclosure Guidance represents the Division’s views and is not a rule, regulation or statement of the Commission, and has not been approved by the Commission.
The Disclosure Guidance presents examples of disclosure considerations and provides reminders with respect to insider trading and selective disclosure requirements. The Disclosure Guidance notes the potential impacts on earnings estimates and earnings reports preceding SEC periodic reports, acknowledging that COVID-19 will likely make it more difficult for public companies and their auditors to complete the work required to maintain timely filings and encouraging public companies to proactively address financial reporting matters earlier than usual. In this regard, the Disclosure Guidance provides additional guidance regarding the use of non-GAAP financial measures.
This Disclosure Guidance provides the Division’s current views regarding the following fundamental concepts that must be considered in light of COVID-19 and related business and market disruptions:
Based on these principles, the Division expressed its view that disclosure regarding the effects and risks related to COVID-19 may be necessary in the following areas of a public company’s disclosures:
The Division explains that a company’s assessment of the risks and effects of COVID-19, and the related risks to a company’s business operations, will be a facts and circumstances analysis that will continue to evolve and that the resulting disclosures (including any response by the company and management) should be tailored to a company’s situation. In connection with the assessment of appropriate disclosures related to the effects of COVID-19, the Division set forth the following non-exhaustive list of illustrative “questions to consider with respect to their present and future operations”:
The Division encourages companies considering these questions to provide investors and market participants with tailored disclosure of material information concerning the impact of COVID-19 and to “proactively revise and update disclosures as facts and circumstances change.” Consistent with its long-standing statements regarding public company disclosures, the Division further encourages companies to “provide disclosures that allow investors to evaluate the current and expected impact of COVID-19 through the eyes of management.”
As the disclosures addressing the matters described in the Disclosure Guidance will likely involve forward looking information that may be based on assumptions and expectations regarding future events, the Division reminds companies to provide that disclosure in a manner that allows them to avail themselves of the safe harbors in Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”) for this information.
The Disclosure Guidance provides important reminders regarding the need for companies and related persons to consider the application of the federal securities laws to their market activities, including the sale or purchase of securities. The Division provides examples of how trading matters may need to be considered, as well as the potential for selective disclosure of material nonpublic information:
The Disclosure Guidance notes the potential impacts on earnings estimates and earnings reports preceding Exchange Act periodic reports, acknowledging that COVID-19 may present novel or complex issues – such as the impact of COVID-19 on its assets, including impairment of goodwill or other assets – that may make it more difficult for companies and their auditors to complete the work required to maintain timely filings. To address these concerns, the Disclosure Guidance encourages companies to proactively address financial reporting matters earlier than usual.
In connection with earnings releases, the Disclosure Guidance discusses the use of non-GAAP financial measures. The Disclosure Guidance notes that, if a company presents a non-GAAP financial measure that adjusts for or explains the impact of COVID-19 on the company’s financial results, it would be appropriate to explain why management finds the measure useful and how it helps investors assess the impact of COVID-19 on the company’s financial position and results of operations.
The Disclosure Guidance also addresses the requirement to reconcile a non-GAAP financial measure to the appropriate GAAP financial measure. In this regard, the Disclosure Guidance notes that there may be instances where a GAAP financial measure is not available at the time of the earnings release because the measure may be impacted by COVID-19-related adjustments that may require additional information and analysis to complete. In these situations, the Division indicates that it would not object to companies reconciling a non-GAAP financial measure to preliminary GAAP results that either include provisional amount(s) based on a reasonable estimate, or a range of reasonably estimable GAAP results.
The Disclosure Guidance provides guidance regarding the application of the Division’s position regarding disclosure of earnings before interest, taxes, depreciation and amortization (referred to as “EBITDA”). In this situation, a company could reconcile that measure to either its GAAP earnings, a reasonable estimate of its GAAP earnings that includes a provisional amount, or its reasonable estimate of a range of GAAP earnings, where the provisional amount or range reflects a reasonable estimate of COVID-19-related charges not yet finalized, such as impairment charges.
The Disclosure Guidance states, however, that in filings where GAAP financial statements are required, companies should reconcile to GAAP results and not include provisional amounts or a range of estimated results. Further, if a company presents non-GAAP financial measures that are reconciled to provisional amount(s) or an estimated range of GAAP financial measures in reliance on the above position, the Disclosure Guidance states that the company should limit the measures in its presentation to those non-GAAP financial measures it is using to report financial results to the Board of Directors.
The Signature Guidance and Disclosure Guidance provide a helpful framework for public companies to apply when preparing their upcoming SEC filings and investor communications. For a detailed discussion of the disclosure and trading considerations faced by public companies during the COVID-19 crisis, please see our client alert: What Public Companies Need to Know Now About Disclosures Concerning COVID-19.
 Staff Statement Regarding Rule 302(b) of Regulation S-T in Light of COVID-19 Concerns (March 24, 2020), available at: https://www.sec.gov/corpfin/announcement/staff-statement-regarding-rule-302b-regulation-s-t-light-covid-19-concerns.
 CF Disclosure Guidance: Topic No. 9 – Coronavirus (COVID-19) (March 25, 2020), available at: https://www.sec.gov/corpfin/announcement/cf-disclosure-guidance-topic-coronavirus-covid-19.