Legal Alert: SEC Proposes Some Significant Changes to Regulation S-K and Provides Guidance on Disclosure of Key Performance Indicators in MD&A

Proposed Amendments to Regulation S-K

On January 30^th, the SEC proposed more amendments to the disclosure requirements of Regulation S-K. Like other proposed and final amendments to Regulation S-K issued over the past two years, the recent proposal intends to modernize, simplify and enhance the SEC’s framework for disclosures outside the financial statements. The proposed amendments would:

• Streamline the disclosure instructions to management’s discussion and analysis (MD&A) (S-K Item 303) and clarify the overall objective of MD&A;
• Eliminate the requirements to disclose selected financial data (S-K Item 301) and supplementary financial data (S-K Item 302);
• Amend certain other longstanding prescriptive disclosure requirements within MD&A (e.g., disclosure of contractual obligations in a tabular format would no longer be required (S-K Item 303(a)(5));
• Clarify the existing guidance for the disclosure of critical accounting estimates and incorporate it into Regulation S-K;
• Clarify the disclosure requirements regarding the results of operations by codifying other guidance within Regulation S-K (e.g., the discussion of the reasons underlying material changes is required); and
• Promote a principles-based approach to certain disclosures within MD&A.

Appendix A includes some of the significant proposed amendments compared to the current requirements. The proposal is subject to a 60-day public comment period after its publication in the Federal Register.  

Interpretive Guidance on Key Performance Indicators and Metrics in MD&A

The SEC also released guidance on the disclosure of key performance indicators and metrics in MD&A that is effective upon its publication in the Federal Register. The guidance provides considerations and disclosures that are expected to accompany non-financial and financial metrics used to describe the performance or status of the business.

Based on a registrant’s facts and circumstances, the SEC expects the following disclosures to accompany disclosures of key performance indicators and metrics:

• A clear definition of the metric and how it is calculated;
• A statement indicating the reasons why the metric provides useful information to investors; and
• A statement indicating how management uses the metric in managing or monitoring the performance of the business.

The guidance includes additional disclosure considerations for companies that change the method by which they calculate or present a metric from one period to another (e.g., differences in the metrics between periods, reasons for the changes, etc.).

Registrants should also consider:

• The extent to which an existing regulatory framework applies, such as GAAP or, for non-GAAP measures, Regulation G or Item 10 of Regulation S-K;
• Whether there are estimates or assumptions underlying the metric or its calculation, and whether disclosure of such items is necessary for the metric not to be materially misleading; and
• Additional information that may be necessary to provide adequate context for an investor to understand the metric presented.

Companies preparing their annual reports should evaluate key performance indicators presented and accompanying disclosure, including whether MD&A covers the material metrics highlighted in their earnings releases and other investor presentations. The guidance reminds registrants of the importance to maintain effective disclosure controls and procedures when disclosing material key performance indicators or metrics that are derived from the company’s own information.