December 2, 2020Client Alert

SEC Adopts Amendments to Modernize and Simplify Regulation S-K

On November 19, 2020, the Securities and Exchange Commission adopted amendments to Regulation S-K. The Amendments, originally proposed in January 2020, are designed to “modernize, simplify and enhance” certain financial disclosure requirements, reflecting a “principles-based” approach to disclosure. According to SEC Chairman Clayton, the amendments will “improve the quality and accessibility” of disclosure while “reducing compliance burdens and costs.” The SEC also made conforming amendments and amended financial disclosure requirements for foreign private issuers.

Item 301 – Selected Financial Data. Item 301 is eliminated – registrants no longer need to furnish selected financial data in comparative tabular form for the last five fiscal years.

Item 302 – Supplementary Financial Information. Item 302(a) replaces the need to disclose selected quarterly financial data of specified operating results with the requirement to explain the reasons for material retrospective changes pertaining to income statements in the last two fiscal years.

Item 303 – Management’s Discussion & Analysis of Financial Condition and Results of Operations

Item 303(a) Objective

New Item 303(a) states the objectives of MD&A and requires disclosure of material information about financial conditions, results of operations, events and uncertainties, and cash flows.

Item 303(b) – Management Discussion & Analysis

Item 303(b)(1): registrants must describe in quantitative and qualitative terms the “underlying reasons” (rather than “causes”) for material changes in line items and analyze their ability to meet their obligations and short/long-term plans for cash. Registrants must also identify likely changes to liquidity and describe cash requirements, capital resources, and material changes in the mix and relative cost of resources.

Item 303(b)(2)(ii): registrants must describe trends or uncertainties “reasonably likely to have” a material favorable or unfavorable impact on net sales, revenues, or income, and to disclose events that are “reasonably likely to cause” a material change in the relationship between costs and revenues.

Item 303(b)(2)(iii): registrants must provide narrative discussion of material increases and material decreases in net sales or revenues.

Item 303(b)(3): registrants must disclose information regarding critical accounting estimates and provide quantitative and qualitative information necessary to understand any estimate’s uncertainty and impact on the registrant’s financial condition or results of operations.

Instruction 8 replaces and amends current Item 303(a)(4). It requires discussion of off-balance sheet arrangements in the broader context of MD&A and need not be in a separately captioned section.

Current Item 303(a)(3)(iv) is eliminated – registrants do not need to discuss inflation and changing prices.

Item 303(c) – Interim Periods

Amended Item 303(c) permits registrants to compare their most recently completed quarter to either the corresponding quarter of the prior year or the immediately preceding quarter. A registrant changing its elected comparison in a subsequent Form 10-Q must explain the reason for the change and present both comparisons in the filing where the change is announced.

Effective Date and Compliance Date

The amendments will become effective 30 days after publication in the Federal Register. The compliance date is the first fiscal year ending on or after the date that is 210 days after publication in the Federal Register. As such, for calendar-year companies, mandatory compliance will begin with their Form 10-K for the 2021 fiscal year filed in 2022. The amended rules will also apply if a company’s registration statement on its initial filing date is required to contain financial statements for a period on or after the mandatory compliance date. Registrants may comply with the amendments any time after the effective date but must comply with all the disclosure requirements of the item in its entirety.

The Commission’s “principles-based” approach to its amended disclosure requirements provides an opportunity for registrants to simplify their compliance efforts and reduce their burdens and costs under Regulation S-K. The Securities & Capital Markets team at Michael Best has experts who can assist registrants with forthcoming disclosures and advise them on complying with Securities laws more broadly. Please do not hesitate to contact a member of our team for additional information.

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