New C&DIs Released for MD&A Presentations

The SEC recently issued three new Compliance & Disclosure Interpretations (the “C&DIs”) that seek to clarify certain rules regarding the presentation of management’s discussion and analysis (the “MD&A”) for historical periods in reports filed pursuant to the Securities Exchange Act of 1934.

Specifically, the rules allow a company to omit a discussion of the earliest of the three years in the MD&A if (i) the company’s prior filings with the SEC already contained the discussion and (ii) the company identifies the location in the prior filing where the omitted discussion may be found. When determining whether to omit, include or incorporate by reference the discussion of the earliest year, a company must still assess the materiality of the discussion.

In short, the new C&DIs provide the following:

• If a company chooses to omit a discussion of the earliest of the three years, the required statement identifying the location of the discussion in a prior filing does not incorporate the prior discussion by reference into the current filing unless the company expressly states that the information is incorporated by reference (Question 110.02);

• A company may not omit the discussion of its earliest of three years if the company believes that the discussion is necessary to an understanding of the company’s financial condition, changes in condition, and results of operations (Question 110.03); and

• If a company has effective registration statements (i.e., Forms S-3 or S-8), then, when a company updates those registration statements through the filing of a 10-K that omits a discussion of the earliest of the three years, the registration statement will not be updated to include the discussion of the earliest of the three years unless the company incorporates the discussion by reference into the 10-K from a prior filing (Question 110.04).

Practical Implementation

Many companies currently find themselves in the throes of annual report and proxy season. As a result of the C&DIs, companies should assess whether a discussion of the earliest of three years in the MD&A is required to be included in their 10-K because it is necessary to an understanding of the company’s financial condition, changes in condition, and results of operations. If it is, then the company should either include it or, at a minimum, incorporate it by reference from a prior filing. Otherwise, companies may omit the discussion altogether as long as they identify the prior filing in which the discussion appears.