In swift response to the widespread destruction and disorder caused by Hurricane Harvey and Irma, the Securities and Exchange Commission (SEC) is offering both regulatory relief and enforcement warnings.
In terms of relief, the SEC is emphasizing its openness to requests for extension of customary filing deadlines faced by public companies and other reporting entities and individuals. In its September 13 release, the SEC stressed the breadth of its flexibility:
“The SEC Divisions and Offices that oversee companies, accountants, investment advisers, mutual funds, brokerage firms, transfer agents, and other regulated entities and investment professionals will … evaluate the possibility of granting relief from filing deadlines and other regulatory requirements for those affected by the storms.”
This offer of flexibility may prove very helpful in light of the approaching month-end and quarter-end on September 30.
The SEC’s openness to such requests contrasts sharply with the staff’s usual position, which is highly resistant to waivers of deadlines and/or scope-of-disclosure requirements. In view of the staff’s traditional skepticism toward such requests, those seeking a hurricane-related reporting extension would be well-advised to confirm and summarize in writing the specific circumstances making timely, regular disclosures a practical impossibility, before contacting the staff to request relief.
The SEC’s September 13 release isn’t all about relief for hurricane victims: punishment of violators is also promised. For instance, the SEC release states:
“The Division of Enforcement will be vigilant for Hurricane Harvey and Irma-related securities scams and will vigorously prosecute those who attempt to defraud victims of the storms.”
More generally, the SEC encourages reports of potentially fraudulent schemes meriting government investigation.
In confirmation of the SEC’s promised vigilance, on September 22, the SEC suspended trading in the securities of a small company based in Addison, Texas, named Grupo Resilient International Inc. (formerly known as Paradise Ridge Hydrocarbons, Inc.) The SEC’s order questioned the accuracy and completeness of various statements recently made by that company concerning its involvement in Hurricane Harvey disaster relief.
The SEC referenced announcements concerning the company’s addition of a “FEMA approved contractor” to its board, as well as the company’s preparations to deploy workers and mobile broadband trailers in support of Houston relief efforts. The staff also indicated there were questions about some of the company’s previous press releases.
According to the SEC’s September 22 order, the trading suspension is scheduled to lift on October 6, 2017. As a practical business matter, a two-week trading suspension can impose a heavy penalty on any publicly traded registrant.
Although larger, more well-established reporting companies might be inclined to dismiss the Grupo/Paradise suspension as an incident limited to companies trading over-the-counter (in the “pink sheets”), those responsible for ongoing disclosures by larger registrants should bear in mind that the SEC may have tasked specific staff to review hurricane-related disclosures through the Fall, including in quarterly Form 10-Q reports typically due in early November, or even through annual reports due from most reporting companies in the first quarter of 2018.
Accordingly, any specific statements relating to the hurricanes or their economic effects deserve close attention, and the usual scope of disclosures made in sections such as “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be checked for their completeness regarding such matters as risk exposure (whether to natural catastrophe generally, or via narrower avenues such as shortages of necessary materials or services, product liability or liability for service interruption), as well as adequacy of insurance coverage and other risk mitigation strategies.
This update is for informational purposes only and should not be considered legal advice. Each situation is different, could change any time, and should be analyzed by an attorney.