On January 30, 2020, the Securities and Exchange Commission (“SEC”) released newly proposed amendments to modernize, simplify, and enhance certain financial disclosure requirements in Regulation S-K by reducing duplicative disclosures and enhancing Management’s Discussion & Analysis of Financial Condition and Results of Operation (“MD&A”) disclosures. Comments on the proposed amendments are due 60 days after publication in the Federal Register.
The focus of the proposed amendments is on Item 303 (the MD&A section of an issuer’s periodic report) where the company’s management and executives analyze the company’s performance, provide commentary on financial statements, and disclose other information that gives investors insight on the company’s fundamentals and performance. MD&A is a vital part of a periodic report because it enables management to explain its thinking and beliefs while discussing parts of a company’s performance that might not be readily apparent from financial statements alone.
With respect to Item 303, the SEC has proposed to:
Introduce a new Item 303(a) to state the purpose of MD&A and codify prior guidelines.
Re-caption current Item 303(a) as Item 303(b), add a new example of other subdivisions of a registrant’s business, and add a portion of Instruction 4 requiring a description of the causes of material changes from year-to-year in line items of the financial statements to the extent necessary to understand the business as a whole, while clarifying that the discussion must occur even if there are offsetting material changes.
Amend current Item 303(a)(2) to specify that material cash commitments, including but not limited to capital expenditures, should be disclosed broadly.
Amend Item 303(a)(3)(ii) by changing “will cause” to “reasonably likely to cause.”
Amend Item 303(a)(3)(iii) by changing “material increases” to “material changes.”
Eliminate Item 303(a)(3)(iv) and current Instructions 8 and 9 to Item 303(a).
Replace Item 303(a)(4) with a new Instruction to Item 303(b) shifting to a more principles-based approach.
Eliminate Item 303(a)(5).
Amend proposed Item 303(b) to explicitly require disclosure of critical accounting estimates.
Amend Item 303(b) (to be renumbered as proposed Item 303(c)) to permit registrants to compare their most recently completed quarter to either the corresponding quarter of the prior year or to the immediately preceding quarter and delete Instructions 2, 3, 5, 6,7, and 8 to current paragraph (b).
Amend Item 303(b)(2) (proposed Item 303(c)(2)) by breaking it into two subsections.
Eliminate Items 303(c) and 303(d).
The SEC has also proposed eliminating Items 301 and 302 as the SEC believes these items largely repeat information that can be found in prior EDGAR filings.
Additionally, the SEC has proposed the following to conform the current disclosure regime with its proposed amendments:
Amend Items 2.03 and 2.04 of Form 8-K to include the definition of “off-balance sheet arrangements” that is currently in Item 303(a)(4).
Eliminate language requiring registrants subject to Rule 3-03(b) of Regulation S-X that elect to provide a statement of comprehensive income for the twelve-month period ended as of the date of the most recent interim balance sheet to discuss material changes in that twelve-month period with respect to the preceding fiscal year, rather than the corresponding preceding period.
Introduce corresponding amendments that would apply to Foreign Private Issuers that provide disclosures required by Form 20-F or 40-F, and amendments to Instruction 11 to Item 303 of Regulation S-K that would apply to Foreign Private Issues filing on domestic forms.
Introduce conforming amendments to Item 914 of Regulation S-K, Items 1112, 1114, and 1115 of Regulation AB, Summary Prospectus Forms in Forms S-1 and F-1, Forms S-4 and F-4 and Schedule 14A, and Form S-20. Such amendments predominately delete references to Items the proposed amendments eliminate.
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About James M. Wilson, Jr.
James M. Wilson, Jr. is a Partner in Faruqi & Faruqi, LLP's New York office and Chair of the firm's Shareholder Merger Litigation Practice Group.