June 13, 2021

Volume XI, Number 164


June 11, 2021

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SEC Issues New MD&A Guidance and Proposes to Amend Disclosure Rules Regarding Selected Financial Data, Supplementary Financial Data, and MD&A

Prompted by the evaluation of Regulation S-K — mandated by Section 108 of the Jumpstart Our Business Startups (JOBS) Act — many of the Securities and Exchange Commission’s (SEC) recent proposed and adopted revisions to Regulation S-K and Regulation S-X have focused on modernizing, simplifying, and enhancing disclosure, in accordance with the Fixing America’s Surface Transportation (FAST) Act, in order to facilitate timely disclosure of material information by issuers and investors’ ability to access and analyze such information. In recent proposed and adopted revisions and guidance to Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), the SEC has focused on and promoted a “principles-based” approach to this disclosure, providing issuers with more flexibility in conveying material information in a more tailored way to their investors. This rulemaking activity and guidance is all part of what the SEC refers to as its Disclosure Effectiveness Initiative.

In line with the SEC’s Disclosure Effectiveness Initiative, on January 30, 2020, the SEC issued guidance on the use of key performance indicators and metrics in MD&A. The guidance presents the SEC’s view of the contextual disclosure that should be provided along with such metrics, and reminds companies to have effective disclosure controls and procedures in place with respect to them. The guidance is effective upon publication in the Federal Register and can be found here. It is discussed in further detail below.

Further, the SEC proposed amendments to Regulation S-K that would eliminate Item 301 (five-year selected financial data table), eliminate Item 302(a) (two years of selected quarterly financial data), and amend Item 303 (MD&A), among other revisions, with a stated goal of modernizing, simplifying, and enhancing financial disclosure requirements in an effort to improve disclosure for investors and simplify compliance for registrants. Proposed changes to MD&A include eliminating the specified off-balance sheet arrangements disclosures and table of contractual obligations disclosures in favor of a principles-based approach, and permitting companies to compare their most recently completed quarter with either the corresponding quarter of the prior year (as currently required) or the immediately preceding quarter. To allow for an orderly transition, the SEC proposes a compliance date of 180 days after the effective date of the final rules, if adopted, although companies would be able to begin complying voluntarily upon the effective date. Note that any final rules resulting from this proposal will not impact the 2019 Form 10-Ks of calendar-year companies. The proposed rules will have a 60-day public comment period following publication in the Federal Register. The proposed rule changes can be found here and are discussed in further detail below.

Also on January 30, 2020, SEC Chairman Clayton issued a public statement discussing the SEC’s Disclosure Effectiveness Initiative, other ongoing SEC disclosure initiatives, the evolving coronavirus situation, and the SEC’s environmental and climate-related disclosure efforts. Chairman Clayton’s statement can be found here.

SEC Guidance on the Use of Key Performance Indicators and Metrics in MD&A

In its guidance, the SEC reminds companies that the MD&A rules require disclosure of information necessary for an understanding of the company’s financial condition, changes in financial condition, and results of operations, even if a disclosure topic is not specifically referenced in the rules. In addition, the rules require discussion and analysis of other statistical data that the company believes will enhance a reader’s understanding. Companies must also include any further material information necessary to ensure the presentation of a metric is not misleading.

The SEC states that, to provide context, the SEC would generally expect the following disclosures to accompany such metrics:

  • A clear definition of the metric and how it is calculated

  • Reasons why the metric provides useful information to investors

  • How management uses the metric in managing or monitoring the performance of the business 

Underlying assumptions or estimates must be disclosed if necessary to ensure the metric is not materially misleading. The SEC also discusses disclosures it would generally expect to see if a company changes the method by which it presents a metric, including:

  • The differences in the way the metric is calculated or presented compared with prior periods

  • The reasons for such changes

  • The effects of any such change on the amounts or other information being disclosed and on amounts or other information previously reported

  • Such other differences in methodology and results that would reasonably be expected to be relevant to an understanding of the company’s performance or prospects

Finally, the SEC reminds companies to maintain effective disclosure controls and procedures regarding material key performance indicators or metrics in order to ensure accuracy and consistency.

Proposed Amendments to Regulation S-K

Deletion of Items 301 and 302 of Regulation S-K

Deletion of Item 301, “Selected Financial Data”

The SEC has proposed to delete Item 301 of Regulation S-K, “Selected Financial Data,” meaning registrants would no longer be required to provide five years of selected financial data. The SEC’s objective with this proposed deletion is to modernize and simplify disclosure requirements. The SEC notes that discussion and analysis of trends should be covered in MD&A, in accordance with guidance issued by the SEC. However, to the extent registrants believe tabular disclosure of the relevant information is beneficial to understanding its disclosures in MD&A, the registrants may continue to include a tabular presentation of such information. Generally, this presentation of such information is less useful to investors since it is more readily available online via EDGAR and with required XBRL tagging.

Deletion of Item 302, “Supplementary Financial Data”

The SEC has proposed to delete Item 302 of Regulation S-K, “Supplementary Financial Data,” meaning registrants would no longer be required to provide two years of selected quarterly financial data. The SEC notes, however, that existing disclosure requirements would still require registrants to discuss material fourth-quarter results, as applicable. The objective of the proposal to delete this provision is to reduce repetition and focus disclosure on material information, in addition to modernizing the disclosure requirement. In addition to this information being more readily available as noted above, the SEC notes in the release that the MD&A should already cover any unusual events, known trends, and uncertainties that have had or are reasonably expected to have an impact on the company, in accordance with applicable rules and guidance; therefore, the original purpose behind Item 302 of Regulation S-K is no longer applicable.

Proposed Revisions to Item 303 of Regulation S-K, “Management’s Discussion and Analysis”

A summary of these revisions is included below, and a table generally outlining the proposed changes in the structure of Item 303 can be found in the release.

Addition of “Objective” Disclosure

The SEC has proposed the addition of a new Item 303(a), which would require registrants to state the principal objectives of the MD&A. The new Item 303(a) would incorporate portions of the existing instructions into this item. Additionally, this proposed addition would codify previous guidance that registrants should include a narrative allowing investors to see the registrant’s business “through the eyes of management.” The SEC’s objective with this proposed addition is to simplify, streamline, and enhance the purpose of MD&A and to emphasize the materiality of the disclosure.

Revisions to Current Item 303(a)(2)

The SEC has proposed revisions to Item 303(a)(2) to specify that registrants should include a broad disclosure of material cash requirements, including commitments for capital expenditures as of the latest fiscal period, the anticipated source of funds needed to satisfy such cash requirements, and the purpose of such requirements. The purpose of this proposed revision is to specifically require identification and disclosure of material cash requirements in addition to capital expenditures.

Revisions to Current Item 303(a)(3)

The SEC has proposed revisions to Item 303(a)(3)(ii) that would require registrants to disclose known events that are reasonably likely to cause a material change in the relationship between costs and revenues. The purpose of such revision is to clarify the existing requirement by stating that the disclosure threshold is “reasonably likely to cause.”

An additional proposed change to Item 303(a)(3)(iii) would clarify that a results-of-operations discussion of both increases and decreases in net sales or revenues is required. This proposed revision would codify previous SEC guidance by requiring “material changes” in net sales or revenues instead of only “material increases.” Additionally, the proposed revisions to Item 303(a)(iii) would require registrants to provide the reasons for underlying material changes from period to period in one or more line items in its statement of comprehensive income.

The SEC has also proposed to delete Item 303(a)(3)(iv), which currently requires discussion of the impact of inflation and price changes on the registrant’s net sales and revenues and income from continuing operations. The SEC noted in the release that this requirement was originally adopted during a period of rapid domestic inflation when there was heightened concern about disclosure of the effects of inflation and changing prices. Further, the SEC explained that this requirement may now give this topic undue attention. Registrants, however, would still be required to discuss the impact of inflation and price changes if they are part of a known trend or uncertainty that has had, or the registrant reasonably expects will have, a material impact on the registrant’s net sales and revenues or income from continuing operations. The purpose of this deletion is to encourage registrants to focus on material information that is tailored to a registrant’s businesses, facts, and circumstances.

Replacement of Current Item 303(a)(4), “Off-Balance Sheet Arrangements”

The SEC has proposed to replace current Item 303(a)(4), “Off-balance Sheet Arrangements,” with a new instruction to Item 303 that would require and emphasize to registrants the importance of discussing these obligations cohesively in the broader context of MD&A disclosure. The objective is to achieve more effective disclosure of this information.

Deletion of Current Item 303(a)(5), “Tabular Disclosure of Contractual Obligations”

The SEC has proposed to delete Item 303(a)(5), meaning registrants would no longer be required to provide a contractual obligations table. The purpose of deleting this requirement is to promote the principles-based approach to MD&A and to reduce redundancy.

Addition of Requirement to Disclose Critical Accounting Estimates

The SEC has proposed to add an explicit requirement to disclose critical accounting estimates. While this information is not currently specifically required under Item 303, prior guidance has provided that registrants should consider the materiality of accounting estimates and judgments. Further, the SEC is proposing an instruction to clarify that this disclosure should not duplicate the disclosure provided in the registrant’s financial statements; rather, this disclosure should supplement and enhance such disclosure. The purpose of this revision is to facilitate and improve disclosure and to eliminate duplicative disclosure.

Revisions to Current Item 303(b), Interim Period Discussion

The SEC has proposed a revision to incorporate a portion of current Instruction 4 to Item 303(a) into Item 303(b) in order to clarify that a narrative discussion in quantitative and qualitative terms of the underlying reasons for material changes in one or more line items from period to period is required. The proposed revisions also clarify that registrants should discuss such material changes, even when such changes are offset. The purpose of this proposed revision is to clarify disclosure requirements, enhance analysis, and encourage a more nuanced discussion of the underlying reasons for material changes.

The SEC has also proposed a revision that would permit registrants to compare their most recently completed quarter to either the corresponding quarter of the prior year or to the immediately preceding quarter. The purpose of such proposed revision is to allow for flexibility in disclosure.

The SEC has proposed various additional revisions to language in Item 303(b) to simplify and streamline this Item.

Deletion of Current Item 303(c), Safe Harbor

In order to conform to the proposed elimination of Items 303(a)(4) and (5), the SEC has proposed to eliminate Item 303(c), which included safe harbor language specifically and exclusively for Items 303(a)(4) and (5). The SEC noted that forward-looking information included in off-balance sheet arrangement disclosure provided in the MD&A would be covered by existing safe harbors.

Deletion of Current Item 303(d), Smaller Reporting Companies

Due to the proposed elimination of Items 303(a)(3)(iv) and (a)(5), the SEC is proposing to eliminate Item 303(d), which specifically and exclusively references these requirements with respect to smaller reporting companies and therefore would no longer be necessary. 

Application of Changes to Foreign Private Issuers

The SEC has also proposed corresponding amendments applicable to foreign private issuers that are required to provide disclosure in accordance with Form 20-F or Form 40-F. Detailed discussion regarding such amendments is available in the release.

© 2021 Jones Walker LLPNational Law Review, Volume X, Number 42



About this Author

Alexandra Clark Layfield Corporate Attorney Jones Walker Law Firm

Alexandra Layfield joined Jones Walker's Corporate & Securities Practice Group in 2008. Ms. Layfield's practice is exclusively transactional, concentrating principally on the areas of securities law, mergers and acquisitions, general corporate law and corporate governance matters. Alexandra Layfield is a partner in the Corporate Practice Group.

At Jones Walker, she leads the firm’s corporate, securities and executive compensation team. Alex serves as outside corporate and securities counsel for public companies, including acting as boardroom...

Dionne M. Rousseau, Jones Walker, acquisitions transactions lawyer, public private companies attorney

Dionne Rousseau has served as the lead outside corporate and securities counsel for 12 public companies, and as boardroom lawyer for three of those companies. She has more than 25 years of experience handling corporate finance and mergers and acquisitions transactions for public and private companies. Representative transactions handled as lead counsel include two $1-billion at-the-market common stock offerings for a Fortune 500® Company; a $1-billion debt refinancing, including $300 million in senior subordinated notes and a $200-million debt tender offer...

Kaitlyn Daniel McGowan Associate Corporate Practice Group

Kaitlyn Daniel McGowan is an associate in the Corporate Practice Group.

While in law school, Kaitlyn externed for Judge John W. deGravelles of the US District Court for the Middle District of Louisiana and served as a research assistant. She also served as a production editor for the LSU Journal of Energy Law and Resources.