United States: SEC Proposes To Amend Financial Disclosure Requirements Of Regulation S-K

On January 30, 2020, the Securities and Exchange Commission (the "SEC") issued a release (the "Release")1 proposing amendments to the financial disclosure requirements of Regulation S-K and certain parallel amendments to applicable foreign private issuers' financial disclosures. Among other things, the SEC is proposing to eliminate Item 301, Selected Financial Data, Item 302, Supplementary Financial Information, and Item 305(a)(5), MD&A, Tabular disclosure of contractual obligations and to amend Item 303, Management's Discussion & Analysis of Financial Condition and Results of Operations. The SEC's goals in adopting the proposed amendments are to continue to revise and eliminate overlapping or unnecessary disclosure requirements and to reduce the burden on registrants, while also enhancing readability to benefit investors.

I. Summary

Key proposed changes to Regulation S-K in the Release include:

• Item 301: Eliminate the requirement that registrants provide 5 years of selected financial data;
• Item 302: Eliminate the requirement that registrants provide 2 years of selected quarterly financial data;
• (New) Item 303(a): Require registrants to state the principal objectives of their MD&A;
• Item 303(a)(2): Require registrants to disclose material cash requirements as of the latest fiscal period, the anticipated source of funds and general purpose of such requirements;
• Item 303(a)(3): Require registrants to disclose known events reasonably likely to cause a material change in the relation between costs and revenues; clarify that a discussion of the reasons underlying material changes in net sales or revenues is required; and eliminate instructions 8 and 9 on inflation and price changes;
• Item 303(a)(4): Replace instructions on off-balance sheet arrangements with new instructions requiring registrants to discuss off-balance sheet arrangements within the context of their MD&A;
• Item 303(a)(5): Eliminate the requirement to provide a contractual obligations table;
• Instruction 4: Clarify the requirement that underlying reasons for material changes in line items be disclosed, even if they offset one another; and
• Item 303(b): Allow registrants to choose whether to compare their most recently completed quarter to the corresponding quarter of the prior year or to the immediately preceding quarter.

Attached to this memorandum as Annex 1 is a copy of the chart included in the Release summarizing the proposed amendments.

II. Background

Section 108 of the Jumpstart Our Business Startups Act ("JOBS Act") required the SEC to review Regulation S-K to comprehensively analyze the current requirements and determine how they should be updated to modernize and simplify the registration process and reduce costs and burdens associated with the requirements for emerging growth companies. In the course of this review, the SEC solicited comments on whether the current registration requirements actually provide the material information investors need to make informed decisions or whether the current rules have become outdated. Based on its review and feedback received, the SEC is proposing the amendments set forth in the Release.

III. Proposed Amendments

In the Release, the SEC is proposing to eliminate Item 301 of Regulation S-K, which requires registrants and reporting entities to furnish, in comparative columnar form, selected financial data for "(a) [e]ach of the last five fiscal years of the registrant . . . and (b) [a]ny additional fiscal years necessary to keep the information from being misleading."2 The SEC stated in the Release that the information required by Item 301 "can be readily accessed and compiled through prior filings on EDGAR" and the "information is tagged using eXtensible Business Reporting Language ("XBRL") data format." Additionally, since Item 303 "specifically calls for disclosure of material trend information" and the SEC has emphasized that registrants should discuss trend information in the Management's Discussion & Analysis section ("MD&A"), the SEC concluded that the information that would be eliminated in Item 301 is largely duplicative.

In the Release, the SEC is proposing to eliminate Item 302, which, in summary, requires registrants to (1) disclose selected quarterly financial data, (2) describe the reasons for any differences when there are variances from previous quarterly results, and (3) "describe the effect of any operations and unusual or infrequently occurring items recognized in each full quarter within the two most recent fiscal years . . . ." (Item 302(a)(3)).3 The SEC concluded that the Item 302 disclosure requirement should be eliminated due to the duplicative nature of the information called for and explained that the information is covered by other requirements.

In an effort to restructure and streamline Item 303, the SEC is proposing to include a new Item 303(a) which requires registrants to state the principal purposes of their MD&A, giving drafters more information as to what information should be presented to investors. The current Instructions 1, 2, and 3 of Item 303(a) would be incorporated in the new Item 303(a) describing that the objectives of the MD&A are to provide disclosures regarding (1) "material information relevant to an evaluation of the financial condition and results of operations of the registrant," (2) financial and statistical data that "will enhance a reader's understanding of the registrant's financial condition" and (3) "material events and uncertainties known to management that would cause reported financial information not to be necessarily indicative of future operating results or of future financial condition."

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Footnotes

1 For the full text of the release, see Securities and Exchange Commission, Management's Discussion and Analysis, Selected Financial Data, and Supplementary Financial Data, SEC Release No. 33-10750, available at https://www.sec.gov/rules/proposed/2020/33-10750.pdf (January 30, 2020) [hereinafter the "Release"]. Unless otherwise specified, quoted statements in this memorandum are taken from the Release.

2 17 C.F.R. § 229.301 (2017).

3 17 C.F.R. § 229.302 (2018).

Originally published Feb 25, 2020.

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