Last week, the U.S. Securities and Exchange Commission's (SEC's) Division of Corporation Finance issued three new Compliance & Disclosure Interpretations (C&DIs) relating to disclosure of management's discussion and analysis of financial condition and results of operations (MD&A) and, in particular, Instruction 1 of Item 303(a) of Regulation S-K.
As discussed in our previous Client Alert, in March 2019, the SEC adopted new rules to modernize and simplify the disclosure requirements in Regulation S-K, including, among others, amendments to Instruction 1 to Item 303(a) of Regulation S-K. Prior to the adoption of the amendments, Instruction 1 to Item 303(a) provided that the MD&A should generally cover the three-year period covered by the financial statements included in the filing.
Although Instruction 1 to Item 303(a) is not limited to Form 10-Ks, the release of the three new C&DIs serves as a useful reminder for those companies currently preparing their Form 10-Ks for 2019. As amended, Instruction 1 now provides, among other things, that, for companies providing financial statements covering three years in a filing, discussion about the earliest of the three years may be omitted if the company previously included such discussion in a prior filing on EDGAR that required disclosure in compliance with Item 303 of Regulation S-K. The company must, however, identify the location in the previous filing of where the omitted discussion may be found. When determining whether to omit the earliest year, a company must still assess the materiality of the discussion.
The new C&DIs offer some further guidance on this amended Instruction 1 to Item 303(a).
- Question 110.02 confirms that the statement identifying the location in a previous filing of where the omitted disclosure may be found does not automatically incorporate such disclosure by reference into the current filing unless the company expressly states that the information is incorporated by reference.
- Question 110.03 confirms that a company may not omit discussion of the earliest of the three years if the company believes that discussion to be necessary to an understanding of its financial condition, changes in financial condition, and results of operations. This C&DI is consistent with the commentary in the adopting release.1 If, following an assessment of the importance of the information from the earliest of the three years, a company determines that such discussion is required by Item 303(a), then the company must include such discussion in the current filing or expressly incorporate by reference such discussion from a previous filing.
- Question 110.04 addresses the impact of Instruction 1 to Item 303(a) for purposes of incorporation by reference in an effective registration statement. For example, if a company has an effective registration statement and files its Form 10-K for the fiscal year ended December 31, 2019 (2019 Form 10-K), then the 2019 Form 10-K will operate as a Section 10(a)(3) update to the registration statement. If that 2019 Form 10-K omits a discussion of the company's results for the fiscal year ended December 31, 2017 (2017 discussion), in reliance on Instruction 1 to Item 303(a), then the C&DI confirms that the 2017 discussion will not be incorporated by reference in the registration statement because the 2019 Form 10-K establishes a new effective date for the registration statement. As of the new effective date, the registration statement incorporates by reference only the 2019 Form 10-K, which does not contain the 2017 discussion, unless, as indicated in Question 110.02, the 2017 discussion is expressly incorporated by reference.
What to do now?
When preparing your Form 10-K, consider the materiality of the discussion of the earliest of the three years in your MD&A. If this information is necessary to an understanding of the company's financial condition, changes in financial conditions, and results of operations, then it should be included in the MD&A or expressly incorporated by reference therein. Otherwise, companies may omit this discussion so long as they clearly identify the location in the previous filing (which need not be a Form 10-K) of where the omitted discussion may be found.
For more information on rules relating to Form 10-Ks, the new C&DIs, or any related matter, please contact any member of Wilson Sonsini's public company representation practice.
[1] See FAST Act Modernization and Simplification of Regulation S-K, 84 Fed. Reg. 63 (April 2, 2019), pg. 12679 located at: https://www.govinfo.gov/content/pkg/FR-2019-04-02/pdf/2019-05695.pdf (last accessed on January 27, 2020).