November 30, 2020 –
SEC Amends Rules on MD&A and Other Financial Disclosures

Despite the imminent departures of SEC Chair Jay Clayton and Corp Fin Director Bill Hinman, the SEC continues to crank out new rules at a steady pace. On November 19, 2020, the SEC adopted amendments to “modernize, simplify, and enhance” financial disclosures, including those in Management’s Discussion and Analysis.  As has been the case with many of the rulemaking initiatives during Clayton’s tenure, the new rules take a principles-based approach, and “are… intended to improve disclosure by enhancing its readability, discouraging repetition and eliminating information that is not material.”

The amendments, which closely track the proposals announced in January 2020, will, when effective:

• Eliminate Item 301 (Selected Financial Data); and
• Simplify Item 302(a) (Supplementary Financial Information) and Item 303 (MD&A) by:
  • Revising Item 302(a) to replace the current requirement for quarterly tabular disclosure with a principles-based requirement for material retrospective changes;
  • Adding a new Item 303(a), objective, to state the principal objectives of MD&A;
  • Amending current Item 303(a)(1) and (2) (amended Item 303(b)(1)) to modernize, enhance and clarify disclosure requirements for liquidity and capital resources;
  • Amending current Item 303(a)(3) (amended Item 303(b)(2)) to clarify, modernize and streamline disclosure requirements for results of operations;
  • Adding a new Item 303(b)(3), critical accounting estimates, to clarify and codify SEC guidance on critical accounting estimates;
  • Replacing current Item 303(a)(4), off-balance sheet arrangements, with an instruction to discuss such obligations in the broader context of MD&A;
  • Eliminating 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
  • Amending current Item 303(b), interim periods (amended Item 303(c)) to allow for flexibility in the comparison of interim periods to help provide a more tailored and meaningful analysis relevant to a company’s business cycles.

The amendments will be effective 30 days after publication the Federal Register, with mandatory compliance beginning with the first fiscal year ending on or after the date that is 210 days following such publication.  Early compliance is permitted, but only if a company responds to an amended item in its entirety.

A more detailed discussion of the amendments will appear in a future posting on The Securities Edge, Gunster’s securities and corporate governance blog. 

Until then, please direct any questions or observations to Gunster securities law and corporate governance practice leader Bob Lamm.

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This publication is for general information only. It is not legal advice, and legal counsel should be contacted before any action is taken that might be influenced by this publication.