How to manage late SEC filings

May 09, 2017
<p>Communications strategies for SEC Rule 12b-25 and non-timely 10K and 10Q filings</p>

Strategic planning and communications around late filings of an annual 10K or quarterly 10Q is critical for a company to manage the negative fallout. Companies must act quickly to reassure investors and other stakeholders when required to file an SEC Form 12b-25 Notification of Late Filing, which gives the company a short extension to file its SEC statements.

For a 10Q an additional five-day grace period is granted and for a 10K a 15-day extension is allowed. If a company doesn’t meet these extension deadlines, the SEC and the firm’s respective stock exchange require additional actions for the company to stay listed and avoid penalties.   

Research indicates that accounting and internal issues are the top reasons for delayed filings and that about six out of 10 late filers are able to finalize and release financials within two weeks. While considered timely if they report within the extensions mentioned above, companies may find these situations raise fundamental concerns about their health and the competence and credibility of their management team and financial results, which require decisive steps to reassure stakeholders and the markets.

Issuers should expect immediate and significant stock price drops, ongoing volatility and the need for special communications strategies and programs for their stakeholders.

Having advised dozens of companies in this situation, ICR investigated the most common Rule 12b-25 late-filing scenarios and has identified a series of best practices to help mitigate the impact of delayed filings: 

  • Speed counts – A company’s ability to correct, clearly communicate the issue and solution, and file financials within the allowed extension window minimizes negative press coverage regarding the delayed filing  
  • Non-material matters – We found the ability to characterize any accounting changes as ‘non-cash in nature’ or ‘would have little impact on the company’s financial performance’ or ‘would not affect compliance with the terms of credit agreements’ helps dampen negative press and allows faster recovery of stock price in the markets

  • Ongoing communication is essential – Companies that communicate extensively through an investigation and cite collaboration with their exchange to resolve the matter create a better reaction from the market and stakeholders. Longer investigations are helped by a comprehensive, ongoing communications plan focused on vision, key growth initiatives and advantage in the marketplace, and employees must be assured the company is working quickly to resolve the issues. Managers need a prepared Q&A to address concerns in team meetings and in daily staff interactions  
  • Third-party endorsements add credibility – In some cases, auditing firms are included in the company communications regarding the late filing. While this may not be possible in all situations, the ability to include and reference credible third parties provides a vote of confidence that can be very reassuring to investors and others
  • Preliminary earnings may lessen the sting – We found several companies releasing preliminary earnings, despite issuing Form 12b-25 Notification of Late Filing. Many of these companies met the extended filing deadline, but some did not. The ability to release preliminary results shores up investor confidence: even where the company was not able to file within the extension, releasing preliminary results provided an update of vital information as some companies entered longer investigation periods
  • Clarity and transparency rules – Be detailed and clear in the explanation of what the audit committee identified and corrected in its investigation. The more uncertainty about how the accounting errors will impact previously stated numbers results in a more volatile stock market reaction. After long-term investigations, we found several instances where the investigating committee released full reports of its findings and recommendations
  • Buckle your seat belt – Missing the extended filing period and entering long investigations that result in restated earnings and financial statements usually involve a loss of revenue, sparking more negative press and stock declines. Companies should engage a crisis communications team with an understanding of these issues to help them prepare for the consequences, including C-suite turnover, shareholder activism, credit agreement issues and securities litigation.

In conclusion, many companies have been required to file Form 12b-25, but they can mitigate negative press and market reaction through speed, assurance and resolution, all of which should be part of an advanced communications planning process that anticipates scenarios like this and assembles the vital ingredients to determine the best strategy before those scenarios occur.

Companies that wait until just before the filing deadline to plan their communications to stakeholders can foster an even more chaotic situation, which will prevent the best outcome. 

Scott Tangney is managing director at ICR

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