February 10, 2020
Securities Law Alert
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:
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:
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:
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.
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.