Covid-19 SEC Guidance for Public Companies: Great Questions to Also Ask Asset Managers

3/27/20 9:27 AM

The SEC's Division of Corporation Finance has just issued CF Disclosure Guidance: Topic No. 9. This "guidance provides the Division of Corporation Finance’s current views regarding disclosure and other securities law obligations that companies should consider with respect to the coronavirus disease 2019 (COVID-19) and related business and market disruptions." While related to public companies, the questions are great - and certainly helpful to inform due diligence questions when thinking about asset managers.

We have extracted and condensed the SEC's guidance below.

"The impact of COVID-19 on companies is evolving rapidly and its future effects are uncertain.  The Division is monitoring how companies are reporting the effects and risks of COVID-19 on their businesses, financial condition, and results of operations.  

The Division encourages timely reporting while recognizing that it may be difficult to assess or predict with precision the broad effects of COVID-19 on industries or individual companies.  We also recognize that the actual impact will depend on many factors beyond a company’s control and knowledge.  Nevertheless, the effects COVID-19 has had on a company, what management expects its future impact will be, how management is responding to evolving events, and how it is planning for COVID-19-related uncertainties can be material to investment decisions.

(Couldn't agree more! Then - the SEC has the following questions:)

  • How has COVID-19 impacted your financial condition and results of operations?  In light of changing trends and the overall economic outlook, how do you expect COVID-19 to impact your future operating results and near-and-long-term financial condition?  Do you expect that COVID-19 will impact future operations differently than how it affected the current period?
  • How has COVID-19 impacted your capital and financial resources, including your overall liquidity position and outlook?  Has your cost of or access to capital and funding sources, such as revolving credit facilities or other sources changed, or is it reasonably likely to change?  Have your sources or uses of cash otherwise been materially impacted?  Is there a material uncertainty about your ongoing ability to meet the covenants of your credit agreements?  If a material liquidity deficiency has been identified, what course of action has the company taken or proposed to take to remedy the deficiency?  Consider the requirement to disclose known trends and uncertainties as it relates to your ability to service your debt or other financial obligations, access the debt markets, including commercial paper or other short-term financing arrangements, maturity mismatches between borrowing sources and the assets funded by those sources, changes in terms requested by counterparties, changes in the valuation of collateral, and counterparty or customer risk. Do you expect to disclose or incur any material COVID-19-related contingencies?
  • How do you expect COVID-19 to affect assets on your balance sheet and your ability to timely account for those assets?  For example, will there be significant changes in judgments in determining the fair-value of assets measured in accordance with U.S GAAP or IFRS?
  • Do you anticipate any material impairments (e.g., with respect to goodwill, intangible assets, long-lived assets, right of use assets, investment securities), increases in allowances for credit losses, restructuring charges, other expenses, or changes in accounting judgments that have had or are reasonably likely to have a material impact on your financial statements?
  • Have COVID-19-related circumstances such as remote work arrangements adversely affected your ability to maintain operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures?  If so, what changes in your controls have occurred during the current period that materially affect or are reasonably likely to materially affect your internal control over financial reporting?  What challenges do you anticipate in your ability to maintain these systems and controls?
  • Have you experienced challenges in implementing your business continuity plans or do you foresee requiring material expenditures to do so?  Do you face any material resource constraints in implementing these plans?
  • Will your operations be materially impacted by any constraints or other impacts on your human capital resources and productivity?
  • Are travel restrictions and border closures expected to have a material impact on your ability to operate and achieve your business goals?

Castle Hall Diligence.

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