SEC proposes amendments to Regulation S-K disclosure requirements

February 10, 2020

Securities Law Alert

Author(s): Richard F. Langan, Jr.

This alert was co-authored by Brianna Thompson.

On January 30, 2020, the Securities and Exchange Commission (SEC) proposed amendments to modernize and enhance certain financial disclosure requirements in Regulation S-K. The proposed amendments are intended to further the commission’s goals of reducing burdens on registrants and enhancing readability without compromising material information available to investors. The commission will carry out this goal by eliminating duplicative or unnecessary provisions and changing disclosure requirements to simplify compliance efforts for registrants. Specifically, the SEC proposed to eliminate:

  • Item 301 – Selected Financial Data;
  • Item 302 – Supplementary Financial Information
  • Item 303(a)(5) – Management’s Discussion and Analysis of Financial Condition and Results of Operation (MD&A) (a tabular disclosure of contractual obligations)

Through the elimination of Selected Financial Data (Item 301), registrants will no longer be required to provide five years of selected financial data. If the proposal to eliminate the five-year Selected Financial Data disclosure requirement is adopted, there remains a possibility that market practice for public and private offerings will militate toward the inclusion of Selected Financial Data in some form, albeit limited to the prospectus summary or limited to a shorter time duration. Registrants also will no longer be required to provide two years of selected quarterly financial data (Item 302) or provide a contractual obligations table (Item 303(a)(5)). While the Item 302 requirement is a longstanding disclosure for quarterly reports on Form 10-Q, the contractual obligations disclosure requirement was adopted originally in response to disclosure concerns arising out of the bursting of the Internet bubble when it was perceived a number of companies might not report adequately disclosed contractual obligations, largely in the nature of future capital expenditure commitments, that did not constitute liabilities for GAAP purposes. The reasoning behind the proposed deletion of Item 303(a)(5) is that such disclosure generally is covered in financial statement footnotes and the general liquidity disclosure in MD&A sections.

The SEC proposed changes to modernize and simplify Item 303 as follows:

  • Add a new Item 303(a), Objective, to state the principal objectives of MD&A.
  • Amend Item 303(a)—Full Fiscal Years (proposed Item 303(b))—and Item 303(b)—Interim Periods (proposed Item 303(c))—to modernize, clarify, and streamline the items.
  • Replace Item 303(a)(4), Off-balance Sheet Arrangements, with an instruction regarding the need to discuss such obligations in the broader context of MD&A.
  • Add a new Item 303(b)(4), Critical Accounting Estimates, to clarify and codify commission guidance on critical accounting estimates.
  • Eliminate current Item 303(c), Safe Harbor, in light of the proposed replacement of Item 303(a)(4), and elimination of Item 303(a)(5).
  • Eliminate Item 303(d), Smaller Reporting Companies, in light of the proposed eliminations of Items 303(a)(3)(iv) and 303(a)(5).

The SEC also provided guidance on January 30, 2020, on key performance indicators and metrics in MD&A, stating that companies should include additional material information to ensure that reported indicators and metrics are not misleading. In this respect, companies should first apply the existing regulatory disclosure framework and then provide adequate context for the investor to understand the metric. The SEC’s guidance is consistent with the approach it generally has taken with regard to Regulation G and the presentation of non-GAAP financial data. The commission would generally expect the following disclosure to accompany a reported metric:

  • A clear definition of the metric and how it is calculated
  • A statement indicating the reasons why the metric provides useful information to investors
  • A statement indicating how management uses the metric in managing or monitoring the performance of the business

Companies should also consider whether there are estimates or assumptions underlying the metric or its calculation and whether disclosure of such items is pertinent for the metric not to be misleading. Furthermore, if a company changes its method of calculating or presenting its metrics from one period to another, the SEC advises that the company should disclose the differences in calculation or presentation, the reasons for the changes, the effects of the changes, and any other differences in methodology that would be reasonably expected to be relevant to understanding the company’s performance or prospects.

Here is the full text of the guidance. The full text of the proposal will be open to public comment for 60 days upon its publication in the Federal Register.

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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