Financial Reporting and Regulatory Update

Second Quarter 2020

From the SEC

COVID-19 resources and guidance

Coronavirus response

The SEC is continuing to update its COVID-19 response page, which describes how the SEC is addressing the impact of COVID-19 through maintaining SEC operations continuity; monitoring markets and engaging with market participants; providing guidance and targeted regulatory assistance and relief, enforcement, examinations, and investor education; and extending comment periods for certain pending actions and rules. The page includes links to all of the current resources and guidance available from the SEC.


The SEC Division of Corporation Finance (Corp Fin) COVID-19 frequently asked questions site addresses questions related to its March 25, 2020, COVID-19 order. The FAQs clarify:

  • The disclosure required in the Form 8-K and related delayed filing under the COVID-19 order
  • Whether a registrant can continue to conduct takedowns using an already effective registration statement while relying on the COVID-19 order for a periodic report, including a Form 10-K
  • When a registrant should reassess its eligibility to remain on an effective Form S-3 if it has relied on the COVID-19 order to delay filing a Form 10-K that will serve as a Section 10(a)(3) update
  • Whether a registrant relying on the COVID-19 order to delay a required filing is eligible to file a new Form S-3 registration statement between the original due date of a filing and the extended due date, and whether the staff will accelerate the effectiveness of registration statements that do not contain all required information

Guidance on compliance with extension of conditional reporting deadline relief

On March 31, 2020, staff of Corp Fin released two new compliance and disclosure interpretations, which explain how the staff expects registrants to comply with the order released on March 25, 2020, that provided registrants affected by COVID-19 temporary relief from certain filing and regulatory requirements. The order provides an additional 45 days to make required Exchange Act filings that would have been due between March 1 and July 1, 2020, if a registrant is unable to meet a deadline because of circumstances related to COVID-19.

Statement on importance of high-quality financial reporting

On June 23, 2020, SEC Chief Accountant Sagar Teotia issued a public statement, “Statement on the Continued Importance of High-Quality Financial Reporting for Investors in Light of COVID-19.” The statement reminds stakeholders of the audit committee’s vital role in high-quality financial reporting and, among other observations, highlights various accounting, auditing, and financial reporting issues raised by COVID-19. The statement also outlines the Office of the Chief Accountant’s ongoing engagement with the FASB, the PCAOB, international standard-setters, and other regulators in this dynamic reporting environment.

Additional COVID-19 disclosure guidance

Corp Fin staff continues to monitor how companies are disclosing the effects and risks of COVID-19 on their businesses, financial condition, and results of operations. On June 23, 2020, Corp Fin staff issued Disclosure Guidance Topic 9A, which is intended to supplement Disclosure Guidance Topic 9, issued March 25. Topic 9A provides the staff’s views on three aspects of COVID-related disclosures:

  • Operations, liquidity, and capital resources with respect to business and market disruptions. Companies are encouraged to evaluate whether disclosure of business or market disruptions included in earnings releases should, in light of potential materiality, also be included in management discussion and analysis.
  • Government assistance (for example, the Coronavirus Aid, Relief, and Economic Security Act). Companies receiving federal assistance should consider the short- and long-term impact on their financial condition, results of operations, liquidity, and capital resources as well as the related disclosures and critical accounting estimates and assumptions.
  • Going concern. Where there is substantial doubt about a company’s ability to continue as a going concern or the substantial doubt is alleviated by management’s plans, management should provide appropriate disclosure in the financial statements.

As noted in Topic 9A, disclosures should “enable an investor to understand how management and the Board of Directors are analyzing the current and expected impact of COVID-19 on the company’s operations and financial condition, including liquidity and capital resources.”

Statement on importance of disclosure

On April 8, 2020, SEC Chairman Jay Clayton and Director of Corp Fin William Hinman jointly issued a public statement providing observations addressing the importance of disclosure in this time of uncertainty and requesting actions. The statement includes a call to action “that companies provide as much information as is practicable regarding their current status and plans for addressing the effects of COVID-19.” In addressing this call to action the leaders recognize “that producing forward-looking disclosure can be challenging and believe that taking on that challenge is appropriate,” and that “robust, forward-looking disclosures will benefit investors, companies and, more generally, our fight against COVID-19. Such disclosures will facilitate communication and coordination among the public and private sectors.”

Related to developing robust disclosures as the country’s response to COVID-19 has significantly affected the economy and markets, the statement highlights the following:

“Disclosures should reflect this state of affairs and outlook and, in particular, respond to investor interest in: (1) where the company stands today, operationally and financially, (2) 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 (3) how its operations and financial condition may change as all our efforts to fight COVID-19 progress. Historical information may be relatively less significant.”


Public statements and announcements

Option to delay GAAP provisions

On April 3, 2020, SEC Chief Accountant Sagar Teotia issued a statement noting the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides the option to temporarily defer or suspend the application of two provisions of GAAP and would be in accordance with GAAP. The two provisions of the act are Section 4013, “Temporary Relief From Troubled Debt Restructurings (TDRs),” and Section 4014, “Optional Temporary Relief From Current Expected Credit Losses.”

As such, eligible registrants can elect to take the delay. Registrants must make the election for the first quarter. During the delay, a registrant would continue to use the incurred loss model for the allowance for loan and lease losses (ALLL) for each quarter. The delay ends the earlier of the termination of the national emergency or Dec. 31, 2020.

Based on consultation with the SEC staff, the following illustrates when the delay ends and how transition occurs:

  • If the national emergency terminates on June 5, 2020, adopt current expected credit loss (CECL) that quarter (June 30, 2020), retrospective to Jan. 1, 2020.
  • If the national emergency terminates on Nov. 1, 2020, adopt CECL that quarter (Dec. 31, 2020), retrospective to Jan. 1, 2020.
  • If the national emergency does not terminate by Dec. 31, 2020, adopt CECL as of Dec. 31, 2020, retrospective to Jan. 1, 2020.

The result is all calendar year registrants will reflect CECL in their 2020 Form 10-K.

Enforcement during COVID-19

On May 12, 2020, Steven Peikin, co-director of the SEC’s Division of Enforcement, presented the keynote address at the Securities Enforcement Forum West 2020. In his address, Peikin discussed COVID-19 enforcement matters and touched on ongoing work not related to COVID-19.

Peikin highlighted that the COVID-19 crisis has resulted in fast-moving and volatile markets and these conditions create increased opportunities for insider trading and market manipulation. He said that the Division of Enforcement is monitoring trading activity around announcements made by issuers in industries specifically impacted by COVID-19 and monitors market activity to identify other suspicious movements. He also noted that communication and transparency are important and that throughout this pandemic, the SEC has made significant efforts to communicate with investors and market participants regarding the market impact of COVID-19 and the numerous steps taken in response. Consistent with this approach, the division has worked to provide visibility and transparency regarding enforcement initiatives to educate market participants and deter potential wrongdoers. Peikin said that he expects more trading suspensions related to COVID-19 and more fraud cases related to potential COVID-19 investment scams.


Rules and guidance

New rules for acquisitions and dispositions of businesses and related pro forma information

On May 21, 2020, the SEC issued a final rule that revises the circumstances that require financial statements and related pro forma information for acquisitions and dispositions of businesses. The rule’s intent is to allow for more meaningful conclusions on when an acquired or disposed business is significant as well as to improve the related disclosure requirements, including for real estate operations and investment companies.

The following table summarizes the most significant changes:

The final rule also revises a number of other rules and forms, including expanding the use of pro forma information in significance tests, conforming significance tests for business dispositions and real estate acquisitions to those for business acquisitions, providing a specifically tailored significant subsidiary test for investment companies, and amending Form N-14 to address fund acquisitions by investment companies and business development companies.

The final rule is effective Jan. 1, 2021; however, voluntary early compliance is permitted.

Temporary amendments to crowdfunding offerings

On May 4, 2020, the SEC issued a temporary final rule to provide conditional relief for established smaller companies affected by COVID-19 that are relying on a Regulation Crowdfunding offering to meet their urgent funding needs. The temporary final rule is intended to expedite the offering process for eligible companies by providing relief from certain rules with respect to the timing of the company’s offering and the financial statement requirements. Companies must meet enhanced eligibility requirements to take advantage of this relief and provide clear and prominent disclosure to investors about their reliance on the relief.

The relief applies to offerings under Regulation Crowdfunding between May 4, 2020, and Aug. 31, 2020.

Good faith determinations of fair value proposal

On April 21, 2020, the SEC published for public comment a new rule that would establish a framework for fund valuation practices. The rule is designed to address valuation practices and the role of the board of directors with respect to the fair value of the investments of a registered investment company or business development company.

The proposed rule would establish requirements for satisfying a board of director’s obligation to determine fair value in good faith for purposes of the Investment Company Act of 1940. The rule would require a fund board to:

  • Assess and manage material risks associated with fair value determinations
  • Select, apply, and test fair value methodologies
  • Oversee and evaluate any pricing services used
  • Adopt and implement policies and procedures
  • Maintain certain records

If the rule is adopted, the SEC would rescind previously issued guidance on the role of the board of directors in determining fair value and the accounting and auditing of fund investments.

Comments are due July 21, 2020.


Staffing updates

On June 17, 2020, the SEC announced that Jennifer S. Leete has been named associate director in the Enforcement Division, where she will lead a team of approximately 50 individuals in investigating a range of securities laws violations. Leete joined the SEC in the Enforcement Division in 1999 and has worked in several roles in the division since that time.

On May 11, 2020, the SEC announced that John Moses has been named the managing executive in the Office of the Chairman. Moses will advise Chairman Jay Clayton on matters relating to agency administration, operations, and management, and he will serve as the chairman’s primary liaison on these matters to all divisions and offices. Previously, Moses was deputy director in the Office of Minority and Women Inclusion at the SEC.

On May 11, 2020, the SEC announced that Peter Uhlmann will move from his role as managing executive in the Office of the Chairman to a new role in the Office of Compliance Inspections and Examinations. Uhlmann will join the Office of Chief Counsel as assistant director for compliance. In this new position, he will oversee internal compliance, ethics, and operational risk management efforts for the SEC’s National Exam Program and its employees.

On April 13, 2020, the SEC announced that Natasha Guinan has been named chief counsel, Office of the Chief Accountant (OCA). In this position, Guinan will provide legal guidance to the chief accountant and the other OCA groups. In addition, she will lead the OCA’s support of the Division of Enforcement on financial reporting and auditing matters.

For more information contact Crowe.