Focus on Business Continuity and Disaster Recovery

The Securities and Exchange Commission seems to be awfully worried about disasters lately.  On August 16, 2013, the SEC joined the Commodity Futures Trading Commission’s Division of Swap Dealers and Intermediary Oversight and the Financial Industry Regulatory Authority in issuing a Staff Advisory on business continuity and disaster recovery planning.  Less than two weeks later, the SEC issued a Risk Alert on investment advisers’ business continuity and disaster recovery planning.  This focus on the business continuity and disaster recovery is prompted by the coming one-year anniversary of Hurricane Sandy, which had a devastating effect on many businesses. 

As the SEC noted in its August 16, 2013 and August 27, 2013 press releases, the Staff Advisory and Risk Alert make observations and suggest effective practices to address:

  • Preparation for widespread disruption
  • Planning for alternative locations
  • Telecommunications services and technology
  • Communication plans
  • Regulatory and compliance considerations
  • Preparedness of key vendors
  • Reviewing and testing

While the Staff Advisory and Risk Alert focused on the financial industry, they do provide a helpful reminder for all businesses to consider how natural disasters and other disruptive events can impact their businesses as well as useful guidance for planning for potential disruptions.  In addition, the Staff Advisory and Risk Alert serve as a reminder for all public companies to consider whether their periodic reports and offering materials provide adequate disclosure, including risk factors, with respect to their exposure to natural disasters and other potential business disruptions.

SEC Provides Further Relief in the Wake of Hurricane Sandy

On November 14, 2012, the Securities and Exchange Commission announced  the issuance of an order providing regulatory relief to publicly traded companies, investment companies, accountants, transfer agents and others affected by Hurricane Sandy.  To address compliance issues caused by the hurricane and its aftermath, the order conditionally exempts affected persons from the requirements of the federal securities laws with respect to:  (i) Exchange Act filing requirements for the period from October 29, 2012 to November 20, 2012 (and imposes a new deadline of November 21, 2012 for missed filings); (ii) proxy and information statement delivery requirements for companies attempting to deliver materials to affected areas; (iii) Investment Company Act requirements for the transmittal to shareholders in affected areas of annual and semi-annual reports during the period of  October 29, 2012 to November 20, 2012; (iv) transfer agent compliance with certain Exchange Act requirements for the period from October 29, 2012 to December 1, 2012; and (v) auditor independence requirements as they relate to reconstruction of previously existing accounting records of clients. 

The Commission has also directed the SEC staff generally to take the position that filings subject to and filed in compliance with the regulatory relief granted by the order be considered timely for the purposes of eligibility to use Form S-3 (and well-known seasoned issuer status, which is based in part on Form S-3 eligibility), and to consider companies making such filings to be current in their Exchange Act reporting requirements for purposes of Form S-3 and Form S-8 eligibility and availability of current public information under the Securities Act Rule 144.  The Commission has also directed the staff to take similar positions with respect to various investment company and investment adviser filing requirements.

Hurricane Sandy and SEC Filings

The SEC has recognized that it may be logistically difficult for some companies to file various SEC reports and other documents within the prescribed deadlines due to the effects of Hurricane Sandy.  The SEC has posted Hurricane Sandy Information stating that some filers may be unable to submit their filings during the weather emergency and that they should do so when they are able.  The SEC will handle requests for filing date adjustments on a case by case basis.

A few SEC filings made this week reflect the effect of Hurricane Sandy ranging from postponing or cancelling quarterly earnings calls to extending the deadline of a tender offer.

In addition, in response to Hurricane Sandy, some companies qualify their guidance in earnings press releases by excluding losses due to the impact of the hurricane if a significant portion of the company’s revenues is derived from the areas affected by Hurricane Sandy.   Some forward-looking statements in earnings press releases reference the impact of Hurricane Sandy as one of the risks and uncertainties which could cause actual results to differ materially from those projected. 

While we are in the midst of the 10-Q season, companies affected by Hurricane Sandy should also evaluate whether they need to include in Form 10-Q a risk factor related to the potential impact of the hurricane on their results of operations and financial position.