SEC relaxes MD&A disclosure requirements

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The Securities and Exchange Commission voted Thursday to amend the disclosure requirements in the Management Discussion and Analysis portion of financial reports to simplify them as part of the SEC’s deregulatory push in the waning days of the current administration.

The SEC said the amendments would enhance the focus of financial disclosures on material information for the benefit of investors, while simplifying compliance efforts for registrants.

"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 outgoing SEC chairman Jay Clayton in a statement. "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."

Clayton announced this week that he would be stepping down from his chairmanship at the end of the year.

Jay Clayton

The amendments to the MD&A aim to adhere to a more “principles-based, registrant-specific approach to disclosure,” according to the SEC, and promise to improve the readability and navigability of financial disclosure documents, reduce repetition and eliminate information that wouldn’t be considered material to many investors. However, the changes threaten to eliminate information that some investors and other stakeholders would consider material. It's among a slew of regulations that the SEC and other federal agencies have been rushing to finalize in the last weeks of the administration.

The amendments to the Regulation S-K disclosures were first proposed in January as part of an ongoing reevaluation of disclosure requirements. The SEC received comment letters in response to the proposal and heard from the SEC staff about their experiences with Regulation S-K arising from the Division of Corporation Finance's disclosure review program and changes in the regulatory and business landscape since the adoption of Regulation S-K.

The changes to Items 301, 302, and 303 of Regulation S-K would put more of a focus on material information by:

  • Eliminating Item 301 (Selected Financial Data);
  • 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 the current Item 303(a)(1) and (2) (amended Item 303(b)(1)) to clarify the disclosure requirements for liquidity and capital resources;
  • Amend current Item 303(a)(3) (amended Item 303(b)(2)) to streamline the 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 describe those obligations in the wider 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 analysis for their own business cycles.

In addition, the SEC 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.

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