14/04/2020

In the US last week, SEC Chairman Jay Clayton issued a really interesting statement encouraging listed companies to release meaningful content in their upcoming earnings calls and analyst updates.  This includes requesting the release of as much forward-looking information as possible - information that is essentially speculative given all the current uncertainties.

It's quite a different approach to what we would expect in Australia.  It's also an example of why there are costs to Australia's very strict continuous disclosure regime, where everything is actionable. 

The Australian regulatory approach during the COVID-19 crisis, which has been extremely pragmatic and sensible, could be crudely summarised as - "compliance with all of our rules at the moment is probably impossible, so we are applying common sense and lowering certain expectations where investor protections aren’t inappropriately harmed.”

The SEC’s request is almost the total opposite – they’re essentially saying (again crudely summarised) – “we (SEC, shareholders, America generally) need as much information as possible right now, even if it's not perfect.  So please let us know what you're thinking, but you can be comfortable you won't be sued for not predicting a highly unpredictable future."

Here's some of the most interesting parts of the SEC statement (emphasis and headings added by me):

What disclosure is needed

Company disclosures should ….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.

…recognizing the challenges inherent in our request, we urge our public companies, in their earnings releases and analyst calls, as well as in subsequent communications to the marketplace, to provide as much information as is practicable regarding their current operating status and their future operating plans under various COVID-19-related mitigation conditions.

Forward looking predictions are hard but important

We recognize that for many companies, providing forward-looking information, particularly detailed information regarding future operating conditions and resource needs, may present difficulties, including because any shift to a forward-looking health and welfare strategy is at most in its incipient stage. As time passes, and our strategies come into greater focus, making and refining theses estimates should become less difficult.

We know from experience in various scenarios that estimates of the type we are requesting are unavoidably based on a mix of assumptions, including assumptions regarding matters beyond the control of the company. For example, in the context of our current challenges, key drivers of future operational status and financial results—most notably, the time frames for current COVID-19 social distancing guidelines and other mitigation-related requirements—are not uniform and are likely to undergo material change. We also recognize that, in light of these forecasting challenges, it may be tempting to resort to generic, or boilerplate, disclosures that do little to inform investors of company-specific status, operational strategies and risks. We encourage companies and their advisers to make all reasonable efforts to convey meaningful information—information that provides investors a level of insight that allows them to see the key operational and financial considerations and challenges the company faces through the eyes of management. In this regard, we encourage companies to consider the broad frameworks of some of the strategies that have been suggested, how following those strategies may affect their operations and whether that analysis would be of material interest to investors.

The next part is really thought-provoking - it talks about the broad, societal co-ordination benefits of information sharing given the completely integrated nature of the health and economic issues arising from COVID-19 and the response:

This request that companies strive to provide, and update and supplement, as much forward-looking information as is practicable is driven by three primary considerations: (1) the information will benefit investors, (2) market digestion of the information will benefit the company, and (3) the broad dissemination and exchange of firm-specific plans for addressing the effects of COVID-19 under various scenarios will substantially contribute to our nation’s collective effort to fight and recover from COVID-19…….The first two points require limited elaboration….The third point is less familiar. Investors are not the only ones who are interested in how companies will adjust their affairs as we pursue our collective fight against COVID-19. As discussed above, broad and extensive coordination across workers, firms, investors and governmental officials will be critical to successfully emerge from this fight. The exchange of forward-looking information is essential to that coordination. As just one of millions of examples, if the owner of an industrial laundry business becomes comfortable that the hotel industry is soon to pursue a credible plan for increasing activity, the laundry business may be less likely to furlough (or may plan to rehire) employees. More broadly, when a company articulates its strategy publicly, it gives investors and the public a heightened level of confidence and understanding. …This type of positive dynamic plays out across our economy in countless ways and further demonstrates the need for, and the power of, a coordinated, dynamic and forward-looking public-private strategy for fighting COVID-19.

You just couldn't reasonably make this request of listed companies under the current law in the country - in Australia, any forward-looking statement is deemed to be misleading unless the person had reasonable grounds. Why this works in the US is the next bit:

Safe Harbours (This is where you can see the costs of our system in Australia)

The SEC’s commitment to investor protection and market integrity is unwavering, and we are laser-focused on identifying bad actors who would seek to use the current uncertainty to prey on our investors…..We further recognize that companies often are cautioned to limit their forward-looking disclosures, and particularly specific estimates, to those required by our rules to limit legal risk in the event the forward-looking estimates prove to be incorrect. In this regard, we encourage companies to avail themselves of the safe-harbors for forward-looking statements. We appreciate that in many cases actual financial and operational results may differ substantially from what would now appear to be reasonable estimates. Given the uncertainty in our current business environment, we would not expect to second guess good faith attempts to provide investors and other market participants appropriately framed forward-looking information.

The Safe-Harbors (sic) he's referring to (in another gross simplification) relate to permissible disclaimers around forward-looking information and requirements for proof that a company knew the information was misleading.

In Australia, there are no formal safe harbours for good faith forward-looking statements that don't play out.  The deeming of forward-looking information as misleading if not based on reasonable grounds underlines that point.  All continuous disclosure regimes around the world exist to promote market integrity, but these types of subtle but important distinctions make a very real difference.  Australia imposes personal liability on directors in ways comparable jurisdictions do not, with “stepping stone” litigation another unique means by which corporate actions are brought home against individuals.  In addition to the bar to liability being lower, we also have some of the heaviest penalties going around.  This all links in with our very open class action regime, with the end result being that significant liability can arise in Australia in a variety of ways through involvement in a breach of continuous disclosure obligations without proof of any really culpable conduct. The current cost of insurance in Australia bears this out.  This baseline strictness overlaid with the COVID-19 pandemic is what prompted the BCA and the AICD to ask for temporary freezes to securities law class actions.

Australian regulators have acted quickly to help, by offering temporary relief from some rules while the world remains so uncertain.  The Treasurer also now has powers to provide relief from compliance with Corporations Act requirements that are currently impracticable.  On continuous disclosure specifically, the ASX said it won't expect companies to "predict the unpredictable" and reiterated the carve-out for information that comprises matters of supposition or is insufficiently definite to warrant disclosure.  

But it would be very hard for Australian regulators to encourage something positive around disclosure in the way the SEC has.  The ASX said the opposite really when it made clear that entities are not expected to make forward-looking announcements in the absence of a clear and reasonable basis for doing so.  Again, the ASX is being extremely pragmatic and helpful, and for companies not to heed this advice would be reckless under Australian law.

It is a unique situation, but I do think it is an example of why there is an opportunity to build greater trust between companies and community in certain cases with less, rather than more, of the prescriptive regulation that has developed recently in Australia.  Responding to every corporate failure with new regulation and higher penalties leads to a greater compliance focus, but is not necessarily best calibrated for real alignment between companies and broader stakeholders.  SEC Chairman Jay Clayton, in drawing a link between continuous disclosure and the national COVID-19 recovery effort, has made the point very strongly that there can be bigger fish to fry in making companies work for society than just ensuring all company information is absolutely error free.

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