Hot off the press! As anticipated, the SEC today issued: (i) proposed rules to update, simplify and enhance the MD&A and other Reg. S-K financial disclosure requirements, and (ii) MD&A guidance on disclosure of key performance indicators (KPIs) and other metrics in the MD&A. The proposed rules would eliminate Item 301 (selected financial data) and Item 302 (supplementary financial data), and amend Item 303 (MD&A).
According to the SEC's Fact Sheet, the proposed MD&A amendments include:
- Adding a new Item 303(a), Objective, to state the principal objectives of MD&A
- Replacing Item 303(a)(4), Off-balance sheet arrangements, with a principles-based instruction to prompt registrants to discuss off-balance sheet arrangements in the broader context of MD&A
- Eliminating Item 303(a)(5), Tabular disclosure of contractual obligations given the overlap with information required in the financial statements, and to promote the principles-based nature of MD&A
- Adding a new disclosure requirement to Item 303, Critical accounting estimates, to clarify and codify existing Commission guidance in this area
- Revising the interim MD&A requirement in Item 303(b) to provide flexibility by allowing companies to compare their most recently completed quarter to either the corresponding quarter of the prior year (as is currently required) or to the immediately preceding quarter
The MD&A guidance identifies factors companies should consider when they include KPIs and other metrics (financial or non-financial) in their MD&A disclosure, and suggests that the following disclosures would generally be expected to accompany each metric:
- A clear definition of the metric and how it is calculated
- A statement indicating the reasons why the metric provides useful information to investors
- A statement indicating how management uses the metric in managing or monitoring the performance of the business
Companies are also advised to consider disclosure of any associated assumptions or estimates that would be necessary to ensure that the metric is not materially misleading, and fairly robust information about changes in methodology concerning a metric from one period to another. The guidance also reminds companies to maintain effective disclosure controls & procedures relating to disclosure of KPIs and other metrics to ensure consistent and accurate disclosure.
Notably, SEC Chair Clayton's statement announcing the MD&A proposal and guidance focused primarily on the increasing focus on environmental and climate-related disclosure. Among other things, his remarks recapped key aspects, implications, and benefits of our unique principles- and materiality-based disclosure scheme; reminded market participants of the existing Commission guidance on climate change disclosure and the staff's continuing compliance reviews; and discussed the Commission and staff's ongoing diligence and engagement with companies, investors, regulators and others on environmental and climate-related disclosure issues. Chair Clayton also noted that he asked the staff to "monitor and, to the extent necessary or appropriate, provide guidance and other assistance to issuers and other market participants regarding disclosures related to the current and potential effects of the coronavirus."
Comments on the proposed MD&A rules are due 60 days after publication in the Federal Register. See SEC Commissioner Peirce's supporting statement and this dissenting statement from Commissioner Lee. Stay tuned for more commentary and analysis in next week's Society Alert. We will be posting memos and other resources real-time on our Disclosure Reform page.