February 5, 2020Client Alert

Disclosure Update: SEC Guidance and Proposed Rule Changes for Management’s Discussion and Analysis

On January 30, 2020, the U.S. Securities and Exchange Commission (SEC) provided guidance on using key performance indicators and metrics in Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and issued proposed rules that would make significant changes to MD&A and related disclosure. MD&A is included in both offering prospectuses and required periodic (annual and quarterly) reports.

The guidance was focused on the use of metrics other than traditional accounting measurements to describe the performance or status of a business, such as operating margin, same-store sales, total energy consumed, or data security measures. When such metrics are used, the SEC will generally expect the following disclosures to be included:

  • a clear definition of the metric and how it is calculated;
  • a statement of why the metric provides useful information to investors; and
  • a statement of how management uses the metric in managing or monitoring the performance of the business.

If these metrics are changed, the SEC emphasized that issuers must consider the need to disclose the change, the reasons for making the change, and the effect the change has on the information reported. Under certain circumstances, it may be necessary to recast prior metrics into the new presentation.

The proposed rule changes represent another step in the SEC’s efforts to eliminate duplicative requirements, simplify required disclosure, and move toward a more principles-based approach. The proposed changes would:

  • eliminate the current requirements to provide five years of selected financial data (Rule 301 of Regulation S-K), two years of quarterly supplementary financial information (Rule 302), and the table of contractual obligations (Rule 303(a)(5));
  • explicitly require disclosure of critical accounting estimates; and
  • permit issuers to compare their most recently completed quarter to either the corresponding quarter of the prior year (the current requirement) or to the immediately preceding quarter.

While the SEC guidance will be effective immediately upon its publication in the Federal Register, the proposed rule changes are subject to a 60-day comment period and will require adoption of final rules by the SEC. Contact the securities and capital markets professionals at Michael Best for assistance with your MD&A disclosure or with submitting comments to the SEC on the proposed rules.

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