The Securities and Exchange Commission voted this week to adopt amendments that will modernize, simplify, and enhance certain financial disclosures, including the Management’s Discussion and Analysis requirement. The changes are intended to enhance the focus of financial disclosures on material information for the benefit of investors, while simplifying compliance efforts for registrants.
The SEC said in a statement that the amendments “reflect the Commission’s long-standing commitment to a principles-based, registrant-specific approach to disclosure. This approach, as applied to Management’s Discussion and Analysis, should yield material information relevant to an assessment of the financial condition and results of operations of the registrant, and allow investors to view the registrant from management’s perspective.” The SEC says the changes are also intended to improve disclosure by enhancing its readability, discouraging repetition, and eliminating information that is not material.
“Today’s rules will improve the quality and accessibility of the disclosure that companies provide their investors, including, importantly giving investors greater insight into the information management uses to monitor and manage the business,” said SEC Chairman Jay Clayton. “The improved approach to these disclosures reflects the broad diversity of issuers in our public markets and will allow investors to make better capital allocation decisions, while reducing compliance burdens and costs and maintaining strong investor protection.”
Highlights of the Changes
The changes to Items 301, 302, and 303 of Regulation S-K sharpen the focus on material information by eliminating Item 301 (Selected Financial Data); and modernizing, simplifying and streamlining Item 302(a) (Supplementary Financial Information) and Item 303 (MD&A).
Specifically, these amendments:
- Revise Item 302(a) to replace the current requirement for quarterly tabular disclosure with a principles-based requirement for material retrospective changes;
- Add a new Item 303(a), Objective, to state the principal objectives of MD&A;
- Amend current Item 303(a)(1) and (2) (amended Item 303(b)(1)) to modernize, enhance and clarify disclosure requirements for liquidity and capital resources;
- Amend current Item 303(a)(3) (amended Item 303(b)(2)) to clarify, modernize and streamline disclosure requirements for results of operations;
- Add a new Item 303(b)(3), Critical accounting estimates, to clarify and codify Commission guidance on critical accounting estimates;
- Replace current Item 303(a)(4), Off-balance sheet arrangements, with an instruction to discuss such obligations in the broader context of MD&A;
- Eliminate current Item 303(a)(5), Tabular disclosure of contractual obligations, in light of the amended disclosure requirements for liquidity and capital resources and certain overlap with information required in the financial statements; and
- Amend current Item 303(b), Interim periods (amended Item 303(c)) to modernize, clarify and streamline the item and allow for flexibility in the comparison of interim periods to help registrants provide a more tailored and meaningful analysis relevant to their business cycles.
In addition, the Commission adopted certain parallel amendments to the financial disclosure requirements applicable to foreign private issuers, including to Forms 20-F and 40-F, as well as other conforming amendments to the Commission’s rules and forms, as appropriate.
“I want to thank the staff in the Division of Corporation Finance and our other divisions and offices for their work on today’s rules and, more generally, for their work to modernize and improve our disclosure system as our markets and economy have evolved,” continued Chairman Clayton. “The dedication of our staff to ensure that our disclosure-based regulatory system remains effective, efficient and mission-oriented is critical to the growth and continued leadership of our public capital markets.” 