On January 30th, the SEC proposed amendments to modernize, simplify, and enhance particular financial disclosure requirements in Regulation S-K. These amendments would eliminate duplicative disclosures and update and enhance Management’s Discussion and Analysis (MD&A) information, which would benefit investors while simplifying compliance efforts for companies. In addition, the SEC announced it is providing guidance on key performance indicators and metrics in MD&A disclosures.
The new amendments are part of a comprehensive evaluation of the SEC’s disclosure requirements, which was recommended in the staff’s Report on Review of Disclosure Requirements in Regulation S-K. Section 108 of the Jumpstart Our Business Startups Act (JOBS Act) mandated the report. Based on its recommendations, the staff evaluated the information that companies are required to disclose, how the information is presented, where it is disclosed, and how the SEC can better leverage technology as part of these efforts. The overall objective is to improve the SEC’s disclosure regime for both investors and companies. The proposed changes were developed by the SEC with consideration of input from comment letters, as well as the SEC staff’s experience with Regulation S-K arising from the Division of Corporate Finance’s disclosure review program and changes that have occurred to the regulatory and business landscape since Regulation S-K’s adoption.
Specifically, the changes would eliminate Item 301 (selected financial data) and Item 302 (supplementary financial data). Item 303 (MD&A disclosure) would be amended. The changes to Item 303 would include:
- Adding a new Item 303(a) (“Objective”), which would state the principal objectives of MD&A
- Replacing Item 303(a)(4) (“Off-balance sheet arrangements”) with a principles-based instruction to prompt registrants to discuss off-balance sheet arrangements in the broader context of MD&A
- Eliminating Item 303(a)(5) (“Tabular disclosure of contractual obligations”) given the overlap with information required in the financial statements and to promote the principles-based nature of MD&A
- Adding a new disclosure requirement to Item 303 (“Critical accounting estimates”) that would clarify and codify existing SEC guidance in this area
- Revising the interim MD&A requirement in Item 303(b) to provide flexibility by allowing companies to compare their most recently completed quarter to either the corresponding quarter of the prior year (which is currently required) or the immediately preceding quarter
Some conforming amendments, including to Forms 20-F and 40-F, are also included in the proposal. In addition, the SEC is providing guidance such that where companies disclose metrics, they should consider whether additional disclosures are necessary. The SEC is providing examples of such disclosures. The guidance also reminds registrants of the requirements in Exchange Act Rules 13a-15 and 15d-15 to maintain disclosure controls and procedures and that companies should consider these requirements when disclosing metrics.
The SEC seeks public comment on these proposed changes. The public comment period will be open for 60 days after publication in the Federal Register. You can submit comments using the form available on the SEC’s website or by e-mailing rule-comments@sec.gov with the proposed rules’ reference number in the subject line. You can also use the Federal Rulemaking Portal to submit comments or send your comments by mail to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090. In all cases, be sure to reference File Number S7-01-20.
Sources:
SEC Proposes Amendments to Modernize and Enhance Financial Disclosures (www.sec.gov)
Management's Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information (www.sec.gov)
Commission Guidance on Management’s Discussion and Analysis of Financial Condition and Results of Operations (www.sec.gov)
