On January 30, 2020, the United States Securities and Exchange Commission (the SEC) proposed amendments (the Proposed Amendments) to Item 303 of Regulation S-K, Management’s Discussion & Analysis of Financial Condition and Results of Operations (the MD&A). The Proposed Amendments arose in response to the SEC’s November 2016 Report on Review of Disclosure Requirements in Regulation S-K, which prompted a comprehensive evaluation of the SEC’s disclosure requirements (the Disclosure Effectiveness Initiative). The purpose of the Disclosure Effectiveness Initiative is to improve the SEC disclosure regime for investors and SEC reporting companies. The Proposed Amendments follow two other recently adopted sets of rule amendments that were also part of the broader Disclosure Effectiveness Initiative. According to the SEC, the purpose of these Proposed Amendments is to reduce duplicative disclosure, enhance MD&A disclosure for the benefit of investors and simplify compliance efforts for registrants (including business development companies (BDCs)).
The Proposed Amendments would both eliminate and amend certain MD&A requirements. The chart below summarizes the specific changes contemplated by the Proposed Amendments:
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Current
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Proposed Rule Change
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| Item 303(a), Full Fiscal Year |
Item 303(a), Objective – The new Item 303(a) will clarify the objectives of the MD&A section and streamline the 14 corresponding instructions. |
| Item 303(a), Full Fiscal Year |
Item 303(b), Full Fiscal Year – Streamline current Item 303(a) by eliminating unnecessary cross-references to industry guides in Instructions 13 and 14. |
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Item 303(a)(2), Capital Resources
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Item 303(b)(2), Capital Resources – Amend the current requirement to specifically require a discussion of material cash requirements. |
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Item 303(a)(2)(ii), Results of Operations
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Item 303(b)(2)(ii), Results of Operations – Clarify the requirements of this Item by using the disclosure threshold of “reasonably likely.” The Item will now require that registrants only disclose known events that are reasonably likely to cause a material change in the relationship between costs and revenues (e.g., future costs of labor or materials). |
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Item 303(a)(3)(iii), Results of Operations
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Item 303(b)(3)(iii), Results of Operations – Clarify that a discussion of the reasons underlying material changes in new sales or revenue is required (which will codify existing SEC guidance). |
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Item 303(a)(3)(iv), Results of Operations, Instructions 8 and 9 (Inflation and Price Changes)
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Eliminate Item 303(a)(3)(iv) and Instructions 8 and 9 – Note that registrants are still required to discuss inflation and price change matters if they are part of a known trend or uncertainty that has had, or the registrant reasonably expects to have, a material favorable or unfavorable impact on net sales, revenue or income from continuing operations. |
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Item 303(a)(4), Off-balance sheet arrangements
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Eliminate current Item 303(a)(4) and replace with new Instruction to Item 303 – Require registrants to consider and integrate disclosure of off-balance sheet arrangements within the broader context of their MD&A. |
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Item 303(a)(5), Contractual Obligations
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Eliminate Item 303(a)(5) – Registrants would no longer be required to provide a contractual obligations table. |
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Item 303(b), Interim Periods
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Item 303(c), Interim Periods – Registrants would be permitted to choose whether to compare their most recently completed quarter to either the corresponding quarter of the prior year or to the immediately preceding quarter. |
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Instruction 4 (Material changes in Line Items)
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Incorporate a portion of Instruction 4 into proposed Item 303(b) and clarify, where there are material changes in line items (including where material changes within a line item offset each other), disclosure of the underlying reasons for these material changes in quantitative and qualitative terms is required. |
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Critical Accounting Estimates
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Item 303(b)(4), Critical Accounting Estimates – Codify the requirement to disclose critical accounting estimates (CAEs). Previously, the requirement to disclose CAEs derived from the SEC’s 2003 MD&A guidance.
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The Proposed Amendments would be applicable to BDC disclosure as SEC public reporting companies. BDCs should consider if and how these Proposed Amendments would impact their MD&A disclosure.
Comments on the Proposed Amendments are due April 28, 2020, which is 60 days after publication in the Federal Register. If the Proposed Amendments are adopted, the SEC has also proposed a compliance date of 180 days after the effectiveness of any final rule. The SEC believes that the transition period would allow companies sufficient time to come into compliance with the amended reporting requirements. However, the SEC is also seeking comment on whether the proposed transition period is appropriate.
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1 The FAST Act Modernization and Simplification of Regulation S-K, Release No. 33-10618 (March 20, 2019); Disclosure Update and Simplification, Release No. 33-10532 (August 17, 2018).
2 For further information, please see the following Eversheds Sutherland legal alerts. Not so FAST – SEC Passes Rules to Implement FAST Act Provisions (March 29, 2019), available at https://us.eversheds-sutherland.com/NewsCommentary/Legal-Alerts/219529/Legal-Alert-Not-so-FAST-SEC-passes-rules-to-implement-FAST-Act-provisions; The SEC Prunes its Disclosure Rules and Forms, but Will the Changes Bear Fruit for Registered Investment Companies and BDCs (September 5, 2018), available at https://us.eversheds-sutherland.com/NewsCommentary/Legal-Alerts/214019/Legal-Alert-The-SEC-prunes-its-disclosure-rules-and-forms-but-will-the-changes-bear-fruit-for-registered-investment-companies-and-BDCs; Omnibus Highway Bill Contains a Grab Bag of December Surprises for Public Companies and Companies Aspiring to Go Public (January 11, 2016), https://us.eversheds-sutherland.com/NewsCommentary/Legal-Alerts/182436/Legal-Alert-Omnibus-Highway-Bill-Contains-a-Grab-Bag-of-December-Surprises-for-Public-Companies-and-Companies-Aspiring-to-Go-Public.
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