November 20, 2020

SEC Amends MD&A and Financial Disclosure Rules!

Yesterday, the SEC continued this year’s rulemaking spree by adopting amendments to enhance and simplify the financial disclosure provisions of Regulation S-K. The amendments are significant – they eliminate the requirement for Selected Financial Data, streamline the requirement to disclose Supplementary Financial Information, and amend MD&A requirements.  Here’s the 196-page adopting release – a tabular summary of the changes begins on page 8. 

As noted in the SEC’s press release, the amendments reflect the Commission’s preference for a principles-based approach to disclosure. Here’s an excerpt:

The changes to Items 301, 302, and 303 of Regulation S-K sharpen the focus on material information by:

– Eliminating Item 301 (Selected Financial Data); and

– 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 current Item 303(a)(1) and (2) (amended Item 303(b)(1)) to modernize, enhance and clarify disclosure requirements for liquidity and capital resources;
  • Amend current Item 303(a)(3) (amended Item 303(b)(2)) to clarify, modernize and streamline 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 discuss such obligations in the broader 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 and meaningful analysis relevant to their business cycles.

In addition, the Commission 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.

The amendments will be effective 30 days after publication in the Federal Register.  Once effective, early application of the amended rules is permitted so long as companies provide disclosure responsive to an amended item in its entirety.  Compliance with the amended rules won’t be required until a company’s first fiscal year ending on or after the date that is 210 days after publication in the Federal Register – for calendar-year companies, that will mean mandatory compliance will begin with their Form 10-K for the 2021 fiscal year that’s filed in 2022. For registration statements, companies will be required to apply the amended rules if the registration statement on its initial filing date is required to contain financial statements for a period on or after the mandatory compliance date.

With all the recent SEC rulemaking, you’d be forgiven if you forgot that the SEC just proposed these amendments back in January – and at the time, that Commissioner Allison Herren Lee issued a dissenting statement criticizing the proposal for not addressing climate risk disclosures. The final amendments also don’t address climate risk disclosures. Commissioner Lee issued a joint statement with Commissioner Caroline Crenshaw in which they voice two concerns: first, that the amendments eliminate the contractual obligations table and second, the principles-based disclosure requirements don’t address climate risk.

The last sentence of Commissioner Lee and Crenshaw’s statement says they’re ready to start working on standardized ESG disclosure: ‘There’s no time to waste in setting to ourselves to this task, and we look forward to rolling up our sleeves to establish requirements for standard, comparable, and reliable climate, human capital, and other ESG disclosures.’

Key Performance Metrics: SEC Enforcement Goes After Execs for Misleading Disclosure

Late last week, the SEC announced that it charged two former Wells Fargo executives for their roles in the allegedly misleading “cross-sell metric” that the bank had used to measure its financial success and that got it in so much hot water back in the mid-2000s. The SEC’s order for John Stumpf, the company’s former CEO, says that he agreed to pay $2.5 million to settle the charges without admitting or denying the allegations. The SEC’s complaint against Carrie Tolstedt, who headed up the company’s core Community Bank, alleges that she committed fraud. Among other things, the SEC’s complaint seeks to ban Tolstedt from serving as a public company officer or director and force her to pay fines.

The SEC says that the cross-sell metrics were inflated by unauthorized accounts and that the executives knew or were reckless in not knowing that the disclosures about those metrics were materially false and misleading. The SEC’s press release says that both former executives signed misleading certifications in 2015 and 2016, which is a violation under SOX, something not frequently enforced by the SEC. Here’s an excerpt from the SEC’s press release:

‘If executives speak about a key performance metric to promote their business, they must do so fully and accurately,’ said Stephanie Avakian, Director of the SEC’s Division of Enforcement. ‘The Commission will continue to hold responsible not only the senior executives who make false and misleading statements but also those who certify to the accuracy of misleading statements despite warnings to the contrary.’

November-December Issue: Deal Lawyers Print Newsletter

The November-December Issue of the Deal Lawyers print newsletter was just posted – & also sent to the printer (try a no-risk trial). It includes articles on:

– Duty of Loyalty Issues for Designated Directors and the Boards of Portfolio Companies

– Conflicted CEO Tilts Company Sale in PE Firm’s Favor

– SBA Announces New Guidance on Consent Requirements for PPP Borrower Changes of Ownership

– Court Rejects Challenge to M&A Transaction Despite Activist Pressure

– Do Reps and Warranties Policies Actually Pay Claims?

Remember that – as a “thank you” to those that subscribe to both & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of – 4th from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.

And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.

– Lynn Jokela