On November 19, 2020, the Securities and Exchange Commission (SEC) adopted amendments to Regulation S-K that update and streamline its rules governing Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) disclosure and related requirements to provide selected financial data and quarterly financial information.[1]  The rule changes are part of the SEC’s ongoing effort to modernize its disclosure requirements and are intended to simplify compliance efforts for companies.  For a discussion of other recent changes that modernize the SEC’s disclosure rules, see our previous client alert here.

The amended rules eliminate certain existing disclosure requirements, codify longstanding SEC guidance on MD&A disclosure, and revise the scope of information that must be disclosed.  The amendments will take effect 30 days after publication in the Federal Register, but compliance will not be mandatory until later next year.  While companies may benefit from early adoption of some of the rule changes, they may need a longer period of time to transition fully to the new rules.  This alert describes some of the key changes included in the amendments. 

Selected Financial Data and Quarterly Financial Information

Item 301 of Regulation S-K requires a company to provide selected financial data for each of the last five fiscal years.  This rule was intended to highlight trends in the company’s financial condition and results of operations by presenting selected line items that are also included in the company’s financial statements.  The amendments eliminate Item 301.  The SEC concluded that the information required by Item 301 is no longer necessary because trend information must be included in MD&A disclosures and historical financial data are available in a company’s periodic reports filed on the EDGAR system. 

Item 302 of Regulation S-K requires companies to disclose certain financial data for each full quarter within the two most recent fiscal years and any subsequent interim period.  The amended rules will require companies to provide quarterly information only when there are one or more retrospective changes in the income statement for any quarter within the last two fiscal years and any subsequent interim period, and such changes are material either individually or in the aggregate.  Companies also will be required to provide disclosure explaining the reasons for the changes, as well as summarized financial information related to the income statement and earnings per share reflecting such changes for each affected quarterly period and the fourth quarter in the affected year.  Examples of retrospective changes that could trigger disclosure under the amended rule include correction of an error, disposition of a business that is accounted for as a discontinued operation, or a change in accounting principle. 

Management’s Discussion and Analysis

Item 303 of Regulation S-K requires companies to disclose information relevant to assessing the company’s financial condition, changes in financial condition and results of operations.  Together, these disclosures are intended to provide a narrative explanation of a company’s financial statements that should enable investors to see the company through the eyes of management.  The amendments to Item 303 add a new statement of objectives that applies to all aspects of MD&A disclosure, eliminate certain line item requirements that the SEC considered duplicative or unnecessary, codify prior SEC guidance on disclosure of critical accounting estimates and allow greater flexibility in presenting interim comparative periods. 

Objectives 

New Item 303(a) states the objectives of MD&A, which apply throughout the amended item.  The objectives consolidate historical SEC guidance as well as certain existing instructions to Item 303.  While the new statement of objectives does not represent a significant change to current practice, it does clarify the SEC’s views on the appropriate focus for MD&A disclosure and should ease compliance by providing relevant guidance within the item.   

Consistent with historical SEC guidance and existing provisions in Item 303, the objectives specify that the discussion and analysis must include descriptions and amounts of matters that have had a material impact on reported operations and those that are reasonably likely, based on management’s assessment, to have a material impact on future operations.  The objectives also confirm that MD&A is intended to communicate an understanding of the company from management’s perspective.  Additionally, as currently stated in an instruction to Item 303, the discussion and analysis must be of the financial statements and other statistical data that the company believes will enhance a reader’s understanding of the company’s financial condition, cash flows, changes in financial condition and results of operations. 

Material Changes in Financial Condition and Results of Operations

Amendments to Item 303 specify that when a company’s financial statements reflect material changes in one or more line items, the company must describe the underlying reasons for material changes in quantitative and qualitative terms.  This new requirement generally is consistent with current instructions to Item 303 but adds an explicit requirement for quantitative disclosure.  For some companies, isolating and quantifying the reasons for specific material changes in the financial statements could be difficult, making compliance with this new requirement more challenging.  In such circumstances, the SEC encouraged companies to acknowledge and explain such challenges, to the extent possible.  The SEC further cited separate rules that generally provide that information must be disclosed only to the extent it is known or “reasonably available” to the company,[2] suggesting that there may be some flexibility when the reasons for material changes are interrelated and difficult to isolate.

Capital Resources – Material Cash Requirements

Prior to the amendments, Item 303(a)(2) required a discussion of the company’s material commitments for capital expenditures as of the end of the last fiscal period, as well as the anticipated source of funds needed to fulfill such commitments.  Under the revised rule, a company must disclose its “material cash requirements” from contractual and other obligations, including capital expenditures, and the anticipated source of funds needed to satisfy such cash requirements.  The “cash requirements” language is consistent with prior SEC guidance, which explained that MD&A requires disclosure, to the extent material, of the existence and timing of “commitments for capital expenditures and other known and reasonably likely cash requirements.”[3]  While many companies already include a broad disclosure about material cash requirements in their liquidity and capital resources discussion, consistent with SEC guidance, this amendment may cause some companies to expand their disclosures.

Table of Contractual Obligations

The amendments to Item 303 eliminate Item 303(a)(5), which required tabular disclosure of a company’s contractual obligations.  The amended requirement to disclose “material cash commitments” in the liquidity and capital resources discussion captures some of the information previously called for in the table of contractual obligations, including the type of obligation and the relevant time period for the related cash requirements.  A new instruction identifies the types of contractual obligations that may be disclosed as material cash requirements, including lease obligations, purchase obligations or other liabilities reflected on the company’s balance sheet.  These categories are similar to the categories currently included in the table of contractual obligations.   However, disclosure of material cash commitments under the amended rule may be more limited than the contractual obligations table because Item 303(a)(5) does not include a materiality qualifier.

Off-Balance Sheet Arrangements

Item 303(a)(4) currently requires MD&A to include a separately captioned section that discusses a company’s off-balance sheet arrangements that have had or are reasonably likely to have an effect on the company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.  The amendments eliminate this requirement and provide a new instruction that takes a more principles-based approach to addressing disclosure of off-balance sheet arrangements.  Instead of a separately captioned section and prescribed disclosure items, the new instruction directs companies to integrate disclosure about material off-balance sheet arrangements within other aspects of MD&A.   Although a separately captioned section is no longer required, the amended rules permit companies to continue presenting disclosure about off-balance sheet arrangements in a separately captioned section if it would facilitate an understanding of the disclosure. 

Critical Accounting Estimates

The amendments to Item 303 codify prior SEC guidance on disclosure of critical accounting estimates[4] by adding an explicit line item to MD&A.  The new provision specifies that companies must provide qualitative and quantitative information necessary to understand the estimation uncertainty and the impact of the estimate on financial condition and results of operations to the extent information is material and reasonably available.  Companies must disclose why each critical accounting estimate is subject to uncertainty and how much each estimate has changed over a relevant period.  Consistent with prior SEC guidance, a company also must disclose sensitivity of the reported amount to the methods, assumptions and estimates underlying its calculation.  A new instruction emphasizes that disclosure of critical accounting estimates must supplement, but not duplicate, the description of accounting policies or other disclosure in the notes to financial statements.  While this instruction mirrors the SEC’s prior guidance, it may require some companies to develop new disclosure for MD&A that is distinct from the disclosure in their notes to financial statements.

Interim Period Discussions

Currently, Item 303(b) requires companies to discuss any material changes in their results of operations for the most recent fiscal year-to-date period presented in the income statement, along with a similar discussion of the corresponding period from the prior fiscal year.  If the company provides an income statement for the most recent fiscal quarter, the discussion must cover material changes with respect to that fiscal quarter and the corresponding fiscal quarter in the prior fiscal year.  The amended item (renumbered Item 303(c)) gives companies the flexibility to compare their most recently completed quarter to either the corresponding quarter of the prior year (as is currently required) or the immediately preceding quarter.  If a company opts for comparing its current quarter to the immediately preceding quarter, it must also provide summary financial information for that immediately preceding quarter or identify the company’s SEC filing where the information is presented.

Foreign Private Issuers

The SEC adopted conforming changes to the disclosure requirements in Forms 20-F and 40-F, which apply to foreign private issuers. 

Effective Date and Compliance Date

The amendments will take effect 30 days after publication in the Federal Register.  Companies will be required to apply the amended rules for their first fiscal year ending on or after 210 days after publication in the Federal Register.  The amended rules also will apply to a registration statement that, on its initial filing date, is required to include financial statements for a period ending on or after the mandatory compliance date.  Companies are permitted to apply the amended rules at any time after the effective date, so long as they provide disclosure that is responsive to an amended item in its entirety.   For example, a company may omit Item 301 selected financial data at any time after the effective date but continue to provide disclosure pursuant to existing Item 303 until the mandatory compliance date. 

Takeaways

The amended rules continue the SEC’s efforts to make its disclosure requirements more principles-based by replacing some of the prescriptive items with a more flexible approach.  In addition, eliminating certain disclosure requirements, such as selected financial data and the table of contractual obligations, should ease the costs and burdens of preparing MD&A under the amended rules and encourage companies to focus on material information.  Codification of previous SEC guidance will be more user-friendly and may provide more clarity to companies in preparing these disclosures.  Other changes, such as the explicit focus on quantitative information about the material reasons for changes in the financial statements, are likely to result in new disclosures for many companies and possibly modifications to their disclosure practices and procedures.

We anticipate that many companies will cease providing selected financial data currently required under Item 301 as soon as the rules take effect.  Similarly, we expect early adoption of the changes to Item 302, even for companies that are required to provide the more limited quarterly financial information under the amended rule.  The impact of changes to MD&A disclosure may take more time for companies to evaluate, and some companies may use these amendments as an opportunity to revisit the scope and format of their MD&A disclosures going forward.  Any updated disclosures should be drafted carefully in consultation with outside counsel. 

If you have questions about how these new rules apply to your business, please contact your Proskauer attorney or one of the capital markets attorneys listed on this alert.

_______________

[1] Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information, SEC Release No. 33-10890 (Nov. 19, 2020) (“Adopting Release”).

[2] Id. at note 115, citing Securities Act Rule 409 and Securities Exchange Act Rule 12b-2. 

[3] Adopting Release at 41, citing Commission Guidance Regarding Management’s Discussion and Analysis of Financial Condition and Results of Operation, Release No. 33-8350 (Dec. 19, 2003) (“2003 MD&A Interpretive Release”). 

[4] 2003 MD&A Interpretive Release.

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Photo of Peter Castellon Peter Castellon

Peter represents issuers, underwriters and selling shareholders in connection with offerings of securities, including IPOs, follow-on and secondary offerings, block trades, rights offerings and offerings of convertible and exchangeable bonds.

Peter is active in bar association activities and has served as an officer…

Peter represents issuers, underwriters and selling shareholders in connection with offerings of securities, including IPOs, follow-on and secondary offerings, block trades, rights offerings and offerings of convertible and exchangeable bonds.

Peter is active in bar association activities and has served as an officer of several committees, including the IBA Capital Markets Forum, the International Securities Matters Subcommittee of the ABA Committee on the Federal Regulation of Securities and the ABA International Securities & Capital Markets Committee.

Peter has written several articles on securities law topics, including the following:

  • US Private Placements: When Rule 144A is unavailable, PLC, July, 2015.
  • SAS 72 letters: Seeking comfort, PLC, May, 2013.

  • Another way in, IFLR, March, 2012.

Before joining Proskauer, Peter was Deputy General Counsel for Citi and advised the Equity Capital Markets Division and Investment Banking Division. While at Citi, Peter worked on most of Citi’s ECM transactions in Europe, the Middle East and Africa.

Photo of Michael Choate Michael Choate

Michael Choate is a partner in the Corporate Department and is a member of the Capital Markets Group and both Real Estate Capital Markets and Private Equity Real Estate Groups. Michael’s practice is broad and includes a focus on transactional matters involving both…

Michael Choate is a partner in the Corporate Department and is a member of the Capital Markets Group and both Real Estate Capital Markets and Private Equity Real Estate Groups. Michael’s practice is broad and includes a focus on transactional matters involving both public and private offerings as well as private equity and joint venture transactions along with mergers and acquisitions, corporate governance issues and federal securities compliance matters.

Photo of James Gerkis James Gerkis

James P. Gerkis is a partner in the Corporate Department with extensive experience in sophisticated U.S. and global corporate transactions, including mergers & acquisitions, capital markets, venture capital, media, real estate and restructuring transactions.  He has represented a wide variety of financial institutions…

James P. Gerkis is a partner in the Corporate Department with extensive experience in sophisticated U.S. and global corporate transactions, including mergers & acquisitions, capital markets, venture capital, media, real estate and restructuring transactions.  He has represented a wide variety of financial institutions, Fortune 500 companies and growth companies.  James currently focuses on matters for clients in the technology, media and real estate industries.

Among other clients, James has represented iHeartMedia, Preferred Apartment Communities, Financial Guaranty Insurance Company, Oxford Analytica, Olshan Properties, the Creditors Committee in the chapter 11 cases of Westinghouse Electric Company, Lightstone Group, Neuberger Berman and Suburban Propane Partners.

James received his law degree from Columbia University School of Law in 1983, where he was a Harlan Fiske Stone Scholar and a Teaching Fellow.  He did his undergraduate work at Columbia College, where (having been admitted without finishing high school) he received a BA degree in Political Science in 1980.

James has made presentations at numerous industry and bar association conferences and has authored many articles on different legal topics.

James is the President of the Columbia University Club of New York, is active in other Columbia University alumni affairs and has been chosen to receive a 2018 Columbia University Alumni Medal.

James is on the Board of Directors of HABA-Hellenic American Association for Professionals in Finance.  James received the 2017 Attorney of the Year Award from The Hellenic Lawyers Association.

Photo of Steven L. Lichtenfeld Steven L. Lichtenfeld

Steven L. Lichtenfeld is co-head of our market-leading Real Estate Capital Markets and Real Estate Finance Groups and a founding member of our Private Equity Real Estate Group. He regularly advises real estate funds, REITs, sovereign wealth funds, institutional lenders, specialty lenders, hedge…

Steven L. Lichtenfeld is co-head of our market-leading Real Estate Capital Markets and Real Estate Finance Groups and a founding member of our Private Equity Real Estate Group. He regularly advises real estate funds, REITs, sovereign wealth funds, institutional lenders, specialty lenders, hedge funds, and pension advisors regarding public offerings and private placements of real estate-related debt and equity securities, real estate-related mergers and acquisitions, real estate preferred equity investments and joint ventures, real estate-related senior and mezzanine financings and other corporate, partnership and limited liability company matters.

Steven has been widely recognized as a driving force in the real estate capital markets and finance space during his more than thirty-five year career. He has garnered several prestigious accolades in this area, including receiving a coveted ranking from Chambers USA, which has described him as “a brilliant real estate attorney with experience in many asset classes.” Chambers has also described Steven as “highly analytical and highly strategic” and “encyclopedic in terms of his knowledge” in handling a broad spectrum of public and private debt offerings, M&A, joint venture and other corporate real estate matters. Steven is also recommended for Real Estate and REITs by Legal 500 United States and is consistently recognized as a leading real estate lawyer in Best Lawyers in America and Super Lawyers.

Photo of Matthew O'Loughlin Matthew O'Loughlin

Matthew O’Loughlin is a partner in the Corporate Department and is a member of the Mergers & Acquisitions Group. Matthew counsels clients on corporate, strategic and transactional matters, representing public and private companies, entrepreneurs, high-net worth families, investors, private equity groups and investment…

Matthew O’Loughlin is a partner in the Corporate Department and is a member of the Mergers & Acquisitions Group. Matthew counsels clients on corporate, strategic and transactional matters, representing public and private companies, entrepreneurs, high-net worth families, investors, private equity groups and investment banks. He acts as outside corporate counsel, advises boards of directors and assists companies with their day-to-day legal needs. This includes public and private securities offerings, mergers and acquisitions, joint ventures, and other strategic and complex transactions and liquidity events. He also advises clients on SEC reporting matters and corporate governance.

Matthew’s clients are principally in the life science/healthcare, food and beverage, health and wellness, consumer products, technology and entertainment industries. He also has particular experience in cross border transactions.

Photo of Ben Orlanski Ben Orlanski

Ben Orlanski is a partner in the Corporate Department and is a member of the Mergers & Acquisitions Group and the Capital Markets Group. Ben focuses on major corporate transactions and strategically solving critical business challenges. He has significant experience in securities and…

Ben Orlanski is a partner in the Corporate Department and is a member of the Mergers & Acquisitions Group and the Capital Markets Group. Ben focuses on major corporate transactions and strategically solving critical business challenges. He has significant experience in securities and public company representation; mergers and acquisitions; capital markets transactions; special committee, board of directors and general corporate representation; and corporate governance. His experience covers a wide range of industry sectors, including software-as-a-service, REITs, digital media, specialty manufacturing and consumer products.

Capital Formation and Securities

Ben has significant experience in managing, structuring and executing sophisticated securities and capital raising transactions. His approach reflects understanding of market operation, well-designed capital structure and the practical realities of the capital raising process. He represents public companies and investors in public offerings, registered direct transactions, self-tenders, warrant exchanges/flush transactions, recapitalizations, defensive strategies and secondary offerings. He also advises clients on corporate finance transactions for private businesses, ranging from venture capital and private placements to public offerings and debt restructurings.

Mergers and Acquisitions

Ben has completed scores of transactions representing buyers, sellers, investment bankers and financiers through all phases of the M&A process. He is actively involved in planning, structuring, negotiating and documenting strategic merger and acquisition transactions as well as dispositions of sophisticated enterprises.

General Counsel, Public Reporting and Strategic Advice

Ben acts as outside general counsel for numerous public and private companies, applying a business-like approach to produce practical legal solutions to both day-to-day and exceptional legal challenges. In representing his public clients, Ben has successfully guided the public reporting process for clients facing accounting and SEC challenges, proxy contests, cash flow issues, litigation, shareholder activism and strategic alternatives. He frequently advises on issues related to compliance with insider trading laws and major compliance challenges. He also represents boards of directors and special committees of public companies in special situations, including “interested” transactions, investigations, executive succession planning and sensitive corporate governance issues.

Photo of Antonio N. Piccirillo Antonio N. Piccirillo

Antonio N. Piccirillo is the head of the São Paulo office and a member of the Latin America Practice Group.

Antonio’s practice focuses principally on transactional and finance matters in Latin America. He has extensive experience in bank finance, securities law and corporate…

Antonio N. Piccirillo is the head of the São Paulo office and a member of the Latin America Practice Group.

Antonio’s practice focuses principally on transactional and finance matters in Latin America. He has extensive experience in bank finance, securities law and corporate governance (including Sarbanes-Oxley compliance), capital markets, project finance, debt restructurings (including tender offers, consent solicitations and exchange offers), securitizations and mergers & acquisitions.

While serving on the Fordham International Law Journal, Antonio authored “The Metamorphosis: Expected Changes in The Brazilian Debt-for-Nature Swap Process and Policy Implications,” and co-authored “A Citation Manual for European Community Materials.” In 2008, he authored a chapter titled, “Bridging the Gap – Recent SEC Initiatives to Ease Burdens on Foreign Private Issuers,” in International Business Transactions with Brazil.

Photo of Louis Rambo Louis Rambo

Louis Rambo is a partner in the Corporate Department and a member of the Capital Markets Group. He focuses his practice on counseling public companies and their boards of directors on corporate governance, capital markets transactions, mergers and acquisitions, securities regulation, disclosure and…

Louis Rambo is a partner in the Corporate Department and a member of the Capital Markets Group. He focuses his practice on counseling public companies and their boards of directors on corporate governance, capital markets transactions, mergers and acquisitions, securities regulation, disclosure and shareholder activism. Prior to joining the Firm, Louis served as an attorney in the Division of Corporation Finance with the Securities and Exchange Commission.

Photo of Fabio Yamada Fabio Yamada

Fábio Yamada is a partner in the Latin America Practice Group. His practice focuses mainly on advisory, transactional and finance matters in Latin America. Fábio advises private equity and other alternative asset fund managers on a broad range of issues, including fund formations…

Fábio Yamada is a partner in the Latin America Practice Group. His practice focuses mainly on advisory, transactional and finance matters in Latin America. Fábio advises private equity and other alternative asset fund managers on a broad range of issues, including fund formations, co-investments and ongoing fund administrative matters. Fábio also advises institutional investors in investments in private investment funds and buy-side secondary transactions. Fábio has extensive experience in capital markets, banking, securitization and debt restructuring transactions. He also has represented acquirers and sellers in merger and acquisition transactions.

Fábio is actively involved in the private equity community in Brazil and frequently collaborates on projects with the Brazilian Private Equity and Venture Capital Association (ABVCAP) and its members.

Prior to joining Proskauer, Fábio worked as an international lawyer at Mayer, Brown, Rowe & Maw LLP. While in Brazil, he worked at the law firm of Machado, Meyer, Sendacz e Opice Advogados and at the legal departments of BankBoston (currently Itaú Unibanco), WestLB and NorChem (currently J.P. Morgan). In addition, Fábio was an invited member of the Legal Committee of the Brazilian Association of International Banks.

Photo of Frank Zarb Frank Zarb

Frank Zarb is a partner in our Corporate Department and a member of the Capital Markets Group, where he concentrates his practice on equity finance and a wide range of regulatory matters under U.S. federal securities laws.

He counsels public and private companies…

Frank Zarb is a partner in our Corporate Department and a member of the Capital Markets Group, where he concentrates his practice on equity finance and a wide range of regulatory matters under U.S. federal securities laws.

He counsels public and private companies, hedge funds and family offices, and market intermediaries and other financial institutions on a wide range of transactional and securities regulatory compliance matters including:

  • Equity investments and dispositions in public and private companies
  • Public company registration, disclosures and preparation of periodic reports
  • Tender offers, equity lines, proxy contests, SPACs, and other highly regulated transactions
  • Regulation M, Regulation SHO, Forms 13F and 13H, insider trading and other trading issues
  • Corporate governance and stock exchange listing standards
  • Federal and state proxy requirements as well as shareholder proposals and communications
  • Regulation of financial intermediaries, including trading of public and private equity, and complex and novel trading structures
  • Advocating with the SEC on behalf of a market intermediary related to back-office processing matters.

Frank’s practice is both domestic and international, beginning with his experience in senior positions with the Securities and Exchange Commission. As a member of the staff of the SEC’s Office of International Corporate Finance, Frank advised U.S. companies seeking to do business in the EU, Asia and the Middle East, as well as companies from those regions doing business in the U.S., or otherwise seeking to comply with the U.S. securities laws.  In the Office of Chief Counsel, he focused on federal proxy rules, and supervised a team of staff members that provided guidance in the course of proxy season.

Prior to joining the Firm, Frank was deputy general counsel/chief securities counsel for Bristol Myers Squibb Co. in a new position required by the SEC. Prior to joining Bristol-Myers, Frank was a corporate partner with Morgan, Lewis & Brockius.

Social Responsibility

Frank is a Trustee of the Gerald R. Ford Presidential Foundation, and he provides significant pro bono assistance to non-profit social service institutions in the Washington, D.C. area.