As part of a broader effort to modernize, simplify and enhance securities regulation, the U.S. Securities and Exchange Commission (SEC) has adopted several changes to Regulation S-K, Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information. The changes will affect existing SEC filers, registration statements, and also Special Purpose Acquisition Companies (SPACs) upon completion of an acquisition.
The amendments, which make changes to Items 301 (Selected Financial Data), 302 (Supplementary Financial Information), and 303 (Management’s Discussion and Analysis), are intended to eliminate duplicative disclosures and enhance management analysis for the benefit of investors, while simplifying compliance efforts for registrants. (Further details can be found in the SEC’s press release and final rule.)
The SEC first proposed these amendments on Jan. 30, 2020, as part of an ongoing evaluation of disclosure requirements intended to reduce the costs and burdens on registrants while continuing to provide material information to investors. The amendments reflect the SEC’s consideration of comment letters received in response to the proposal, as well as its staff’s experience with Regulation S-K over time and changes in the regulatory and business landscape since the adoption of the regulation, which was last revisited more than 30 years ago.
Among the changes are the elimination of specific financial data required under Item 301 and the replacement of a quarterly disclosure table under Item 302(a) with a principles-based discussion of material retrospective changes. According to the final rule, tabular data had become redundant due to the widespread availability of that information via the commission’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.
The most significant amendments fall under Item 303, Management’s Discussion and Analysis (MD&A). Those include:
- A new statement 303(a) outlining management’s principal disclosure objectives
- Enhanced and clarified liquidity and capital resource disclosures, including a discussion of contractual obligations – 303(b)(1)
- Clearer, streamlined discussion of results of operations – 303(b)(2)
- A new Item 303(b)(3) clarifying critical accounting estimates
- Consolidation of Item 303(a)(4), off-balance sheet arrangements, into the broader context of MD&A
- Elimination of Item 303(a)(5), table of contractual obligations
- Flexibility in the comparison of interim periods to allow for more meaningful analysis
The SEC also adopted parallel amendments updating financial disclosure forms affected by the changes: Forms 20-F and 40-F, including Item 3.A of Form 20-F (Selected Financial Data), Item 5 of Form 20-F (Operating and Financial Review and Prospects), General Instruction B.(11) of Form 40-F (Off-Balance Sheet Arrangements), and General Instruction B.(12) of Form 40-F (Tabular Disclosure of Contractual Obligations).
SEC Chairman Jay Clayton noted that the revised approach to disclosures reflects the broad diversity of issuers in the public markets and will allow investors to “make better capital allocation decisions, while reducing compliance burdens and costs and maintaining strong investor protection.” The amendments will become effective 30 days after publication in the Federal Register, and registrants will be required to apply the amended rules for their first fiscal year ending on or after the mandatory compliance date, which is the date that is 210 days after publication of the amendments in the Federal Register.
Accordingly, for calendar year registrants, the rules are expected to apply to annual reports for the year ending December 31, 2021.
In addition, for companies looking to file an initial public offering (IPO), registrants will be required to apply the amendments in a registration statement and prospectus that on its initial filing date is required to contain financial statements for a period on or after the mandatory compliance date, as noted above. Further, at any time prior to the mandatory compliance date, registrants may voluntarily elect to provide disclosure consistent with the final amendments at any time after the effective date, so long as they provide disclosure responsive to an amended item in its entirety.
As noted above, the SEC first proposed these amendments early this year, continuing the dynamic evaluation of various MD&A disclosure rules primarily intended to continue to provide material information to investors while also streamlining the reporting burdens on preparers. These amendments reflect the SEC’s consideration of the specific proposal comment letters, as well as the staff’s experience with the reporting rules over time and changes in the business landscape since the adoption of the formal SEC reporting rules, which were last revisited more than three decades ago.
Our Point of View
SEC issuers and preparers, along with those charged with a company’s financial reporting governance, should applaud the changes, which focus on modernization and simplicity. But they also should be mindful of the compliance timelines and use their available time wisely to adequately prepare for these disclosure changes and the possible resultant changes to existing policies, processes, systems and data. The investor community should remain confident that the SEC rules continually focus on improved financial reporting compliance as well as providing material, timely and relevant information to investors. Pre-IPO companies should be mindful of these pending MD&A changes and the timeline for compliance as they prepare for their initial registration statement or merger with an existing public SPAC. These changes are yet another item to put on their IPO readiness checklist.