SEC Seeks to Modernize and Enhance Financial Disclosures

The Securities and Exchange Commission (‘SEC”) has proposed amendments to modernize, simplify and enhance certain financial disclosure requirements mandated by Regulation S-K.

Specifically, the Proposed Amendments would eliminate duplicative disclosures and modernize financial disclosures in order to place more emphasis on providing material information for the benefit of investors and to ease the compliance burdens of reporting companies. SEC Chairman stated that “[t]he proposal and the guidance . . . would improve the quality and accessibility of registrants’ presentation of financial results and performance metrics . . . [and] improved disclosures would allow investors to make better capital allocation decisions, while reducing compliance burdens and costs without in any way adversely affecting investor protection.”

The Proposed Amendments would eliminate Item 301 (Selected Financial Data) and Item 302 (Supplementary Financial Data) of Regulation S-K altogether and would amend Item 303 (Management's Discussion and Analysis (“MD&A”)) of Regulation S-K in the following ways:

• Add a new “Objectives” disclosure requirement which would require registrants to state the principal objectives of MD&A;
• Replace the existing “Off-Balance Sheet Arrangements” disclosure requirement with a principles-based instruction to prompt reporting companies to discuss off-balance sheet arrangements in the broader context of MD&A;
• Eliminate the “Tabular Disclosure of Contractual Obligations” disclosure requirement given the overlap with information required in the financial statements and to promote the principles-based nature of MD&A;
• Add a new “Critical Accounting Estimates” disclosure requirement to clarify and codify existing SEC guidance on critical accounting estimates; and
• Revise the “Interim Period MD&A” disclosure requirement to provide flexibility by allowing registrants the ability to compare their most recently completed quarter to either the corresponding quarter of the prior year (as is currently required) or to the immediately preceding quarter.

Additionally, the SEC released new guidance that, when companies disclose key performance metrics in the MD&A, they should consider whether additional disclosures would be necessary to provide adequate context for an investor to understand the metrics presented, such as definitions, reasons why such metrics are used, statements regarding how management uses the metrics, disclosure of key underlying assumptions and estimates for the metrics. The new guidance also emphasized the need for companies to maintain disclosure controls and procedures, which should be considered when disclosing key performance indicators or metrics derived from the company’s own information.

Interestingly as a side note, the Proposed Amendments also re-raised concerns that the SEC needs to be more proactive in addressing climate change and environmental disclosure issues in the MD&A. The issue of climate change has continued to gain increased attention in the financial industry as demonstrated by the BlackRock, Inc. decision to begin to pressure companies to act on climate change. While Regulation S-K does not currently require disclosures regarding climate change, these types of disclosures could be on the horizon.

The comment period for the proposed amendments will remain open for 60 days following publication in the Federal Register. The proposed amendments in their entirety can be found here. The SEC’s press release can be found here, and the SEC’s guidance on key performance indicators and metrics in Management's Discussion and Analysis can be found here.