Category Archives: Hot Topic

A New Role at the SEC – ESG Senior Policy Advisor

On February 1, 2021, Satyam Khanna was named Senior Policy Advisor for Climate and ESG in the office of Acting Chair Allison Herren Lee.

As noted in this Press Release, in this new role, Mr. Khanna will “advise the agency on environmental, social, and governance matters and advance related new initiatives across its offices and divisions.”

You can read more about the role and Mr. Khanna’s background in the Press Release.

A New “Dear CFO” Letter – Securities Offerings and Price Volatility

It has been a while since CorpFin issued a “Dear CFO” letter.  These sample comment letters, which historically started with the salutation “Dear CFO,” advise companies about rapidly emerging disclosure and accounting concerns.  On February 8, 2021, with an update in the salutation to “Dear Issuer,” the staff issued this “Sample Letter to Companies Regarding Securities Offerings During Times of Extreme Price Volatility.”

Among the issues the sample letter addresses are:

  • Providing an appropriate description of the volatility of the company’s stock price,
  • Including risk factors addressing price volatility, and
  • Explaining the effects of a potential “short squeeze” on investors.

In these times of volatility and change it will be interesting to see how many “Dear Issuer” letters the SEC promulgates.

As always, your thoughts and comments are welcome!

An Overview of the New MD&A Rule

As we discussed in this post, the SEC’s Final Rule, “Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information,” was published in the Federal Register on January 11, 2021.

The Rule’s transition provisions provide a mandatory transition date but also allow voluntary early compliance.  Both transition provisions are based on the Final Rule’s February 10, 2021 effective date.  The mandatory transition for a company is its first fiscal year that ends after August 9, 2021, which is 210 days after the effective date.  Companies may voluntarily apply the new rule, on an S-K item-by-item basis, in any filing made on or after the effective date of February 10, 2021.

This means a company that files a Form 10-K on or after February 10, 2021, has the option to selectively early implement the changes to each individual S-K item:

  • Selected financial data (S-K Item 301)
  • Quarterly information (S-K Item 302)
  • MD&A (S-K Item 303).

In this post, we reviewed the details and pros and cons of early implementation for selected financial data (S-K Item 301) and quarterly information (S-K Item 302).

Here is an overview of the MD&A changes in S-K Item 303.  In future posts we will explore each change in detail.

The Final Rule:

  • Adds a new Item 303(a), Objective, to make the principal writing objectives in FR 36 and FR 72 part of the core MD&A guidance;
  • Amends Item 303(a)(1) and (2) (amended Item 303(b)(1)) to modernize, enhance and clarify disclosure requirements for liquidity and capital resources, including an emphasis on a company’s ability to generate and obtain adequate amounts of cash and providing more details about future cash requirements;
  • Amends current Item 303(a)(3) (amended Item 303(b)(2)) to clarify, modernize and streamline disclosure requirements for results of operations, including a focus on describing causal factors and underlying reasons in both quantitative and qualitative terms;
  • Adds a new Item 303(b)(3), Critical accounting estimates, to clarify and codify previous Commission guidance in FR 72 on critical accounting estimates;
  • Replaces current Item 303(a)(4), Off-balance sheet arrangements, with a more principles-based requirement to disclose their impact, if material;
  • Eliminates current Item 303(a)(5), Tabular disclosure of contractual obligations., replacing it with a new, more principles-based, liquidity and capital disclosure requirements that include this information to the extent material;
  • Amends current Item 303(b), Interim periods (amended Item 303(c)) to allow for sequential-quarter analysis in Form 10-Q; and
  • Removes old paragraph (a)(3)(iv) about inflation disclosures as this requirement is essentially embedded in the principles-based MD&A requirements.

We will explore the details of these changes in upcoming posts.

As always, your thoughts and comments are welcome!

CorpFin Hot Disclosure Topic – Special Purpose Acquisition Companies

Special Purpose Acquisition Companies, or SPACs, have become a go-to vehicle for raising capital and becoming publicly traded.  This exponential growth has created a multitude of disclosure issues.  The 1933 Securities Act transaction disclosure requirements do not generally apply when a SPAC acquires an operating company.  Disclosure requirements for unique SPAC issues, including the economic stake that sponsors have in the SPAC and the process the SPAC uses to set the subsequent acquisition price, are frequently unclear.

On December 22, 2020, CorpFin issued Disclosure Guidance Topic 11, Special Purpose Acquisition Companies, to present their views about disclosure considerations for SPAC IPO and business combination transactions.

Disclosure considerations discussed for a SPAC IPO include:

  • Possible conflicts of interest for the SPAC sponsors,
  • Incentives that exist or may arise for sponsors to complete a business combination,
  • Compensation arrangements with underwriters, and
  • How the terms of securities held by sponsors may differ from those of the public shareholders.

Disclosure considerations surrounding SPAC subsequent business combination transactions include:

  • Terms of any additional financing,
  • How the target company was identified and evaluated, and
  • Services and fees related to underwriters.

The Disclosure Guidance Topic provides more details in each of these areas.  Additionally, this is clearly not an all-inclusive list.  It provides the core principles that SPACs should consider as they provide disclosures to investors.

As always, your thoughts and comments are welcome!

PS -If you want to learn more about SPACs on April 20 we will have a new conference:

The SPAC Life Cycle: Business, Legal and Accounting Considerations Forum 2021

Time to Remove Selected Financial Data and Quarterly Information?

As we discussed in this post, on January 11, 2021,  the SEC’s November 19, 2020 Final Rule, “Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information,” was published in the Federal Register.

The Final Rule will be effective on February 10, 2021.  The transition provisions provide a mandatory transition date but also allow voluntary early compliance.  Companies must apply the rule for their first fiscal year that ends after August 9, 2021.  They may voluntarily apply the new rule, on an S-K item-by-item basis, in any filing made on or after the effective date of February 10, 2021.

This means that a company that will file its Form 10-K on or after February 10, 2021, has the option to implement some or all of the changes to MD&A (S-K Item 303), selected financial data (S-K Item 301), and quarterly information (S-K Item 302).

This post explores the relatively simple choices for S-K Item 301 and 302.  In coming posts we will explore the MD&A changes in S-K Item 303.

Selected Financial Data

The change for selected financial data is very simple.

On page 162, the Final Rule removes the selected financial data requirement from Regulation S-K:

  1. Remove and reserve § 229.301.

On page 182, the Final Rule makes a corresponding change to the instructions for Form 10-K:

  1. Amend Form 10-K (referenced in § 249.310) by:
  2. Removing and reserving Item 6 (“Selected Financial Data”) of Part II.

Companies have the option to implement this change and omit Item 6 from a Form 10-K filed on or after February 10, 2021.  This is independent of the period end of the financial statements in the Form 10-K.

The rationale for removing this disclosure is fairly straightforward.  In the Final Rule the SEC states:

The Commission proposed to eliminate Item 301 in part because of advances in technology since the item’s adoption in 1970 that allow for easy access to the information required by this item on the Commission’s Electronic Data Gathering, Analysis, and Retrieval system (“EDGAR”).  The Commission also noted that Item 301 was originally intended to elicit disclosure of material trends and that requiring five years of selected financial data is not necessary to achieve this because of the requirement for discussion and analysis of trends in Item 303.

With this information readily available from several other sources and the existing requirement to disclose material trends in MD&A, this seems a good time to eliminate this disclosure!

Additionally, since Item 6 will no longer exist in Form 10-K after a company’s mandatory transition date, this item will have to be removed after that date.

Quarterly Information

The change for quarterly information on page 162 of the Final Rule is not as simple.  The Final Rule provides the following revised language for S-K Item 302:

            229.302 (Item 302) Supplementary financial information.

(a) Disclosure of material quarterly changes. When there are one or more retrospective changes to the statements of comprehensive income for any of the quarters within the two most recent fiscal years or any subsequent interim period for which financial statements are included or are required to be included by § 210.3-01 through 210.3-20 (Article 3 of Regulation S-X) that individually or in the aggregate are material, provide an explanation of the reasons for such material changes and disclose, for each affected quarterly period and the fourth quarter in the affected year, summarized financial information related to the statements of comprehensive income as specified in Rule 1-02(bb)(ii) of Regulation S-X and earnings per share reflecting such changes.

Again, companies have the option to implement this change and omit the quarterly information from a Form 10-K as long as it has not been materially, retrospectively changed.  As with the change for selected financial data, this applies to Form 10-Ks filed on or after February 10, 2021, and is independent of the period end of the financial statements in the Form 10-K.  Companies may make this change in a Form 10-K for December 31, 2020, as long as the report is filed on or after February 10, 2021.

The rationale for this change is discussed in the Final Rule:

We continue to believe that requiring quarterly financial data when there have not been one or more retrospective changes that are material, either individually or in the aggregate, would duplicate disclosures provided elsewhere, such as in Forms 10-Q or, in the case of fourth quarter results, can be derived from annual results disclosed in the Form 10-K. Our amendments eliminate these duplicative disclosures. We do, however, agree with commenters that timely disclosure of the effects of material retrospective changes may be important to investors, and lack of such disclosure could impact the ability to derive fourth quarter information when there have been such changes.

Again, this seems like the right time to implement this change.

More about the changes to MD&A in coming posts, and as always, your thoughts and comments are welcome!

Beginning of Year Learning Opportunities

As we begin 2021 and dive into year-end reporting, here are SECI’s upcoming SEC Reporting Essentials Workshops to keep you up to date with important reporting developments:

January 14, 2021 – SEC 101 Reporting Essentials for Lawyers Workshop 2021

January 21, 2021 – Form 8-K SEC Reporting Essentials Workshop 2021

February 4, 2021 – SEC 101 Reporting Essentials for Financial Professionals Workshop 2021

February 11, 2021 – Form 10-K SEC Reporting Essentials Workshop 2021

February 18, 2021 – MD&A SEC Reporting Essentials Workshop 2021

February 25, 2021 – Form 10-Q, Form 8-K and Proxy Disclosures SEC Reporting Essentials Workshop 2021

Our SEC Reporting Essentials is a series of new, interactive, virtual Workshops designed to fit into your busy work schedules.  The SEC Reporting Essentials Workshops are half-day programs starting at 1 p.m. EST.  You can choose a foundational course – “SEC 101 Essentials for Lawyers” or “SEC 101 Essentials for Financial Reporting Professionals” – and select from our additional add-on courses.   For more about our SEC Reporting Essentials and other upcoming programs, visit us at

As always, your thoughts and comments are welcome!

MD&A, Selected Financial Data, and Quarterly Information Final Rule Published in Federal Register

On January 11, 2021, the SEC’s Disclosure Modernization Final Rule, “Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information,” was published in the Federal Register.

The rule will be effective on February 10, 2021.  The rule provides for a mandatory compliance date 210 days after the publication date.  This mandatory compliance date is August 9, 2021.

This means that a company must apply the new rule for its fiscal year that ends after August 9, 2021.

The rule’s transition provisions provide for voluntary implementation earlier than a company’s mandatory compliance date.  This early implementation may be on an S-K item-by-item basis.  The Compliance Date section on page 104 of the Final Rule states that registrants:

“may provide disclosure consistent with the final amendments any time after the effective date, so long as they provide disclosure responsive to an amended item in its entirety. For example, upon effectiveness of the final amendments, a registrant may immediately cease providing disclosure pursuant to former Item 301, and may voluntarily provide disclosure pursuant to amended Item 303 before its mandatory compliance date. In this case, the registrant must provide disclosure pursuant to each provision of amended Item 303 in its entirety, and must begin providing such disclosure in any applicable filings going forward.”

We will dive into the details of each of the provisions in upcoming posts.

As always, your thoughts and comments are welcome!

COVID-19 Disclosure Considerations as We Approach Year-End

As we work on reporting for year-end 2020 (and how many of us are happy we are finally there?), we are presenting a series of posts about SEC comments that focus on areas that may require additional attention in our reporting for year-end.  This comment is about the impact of the pandemic and the potential need to make known-trend disclosures:

On your first quarter earnings call, you indicate that you currently anticipate second
quarter revenue to be down as much as 50% to 60% with approximately 80% of your global business having been closed since April 1, 2020. Revise your future periodic filings to disclose known trends and uncertainties related to COVID-19. For example, disclose how you expect COVID-19 to impact your future operating results and near-and-long term financial condition and how that compares to the current period. See Item 303 of Regulation S-K, SEC Release No. 33-8350, and CF Disclosure Guidance Topic No. 9.

You can read the comment and the company’s response here.

As always, your thoughts and comments are welcome!

We Are Living In a Principles-Based World

Principles-based disclosure guidance is a major theme in current SEC rulemaking.  Recent changes to Regulation S-K business, risk factor and MD&A disclosures rarely prescribe specific disclosures and frequently require materiality judgments.  For example, the business description disclosures in the new S-K Item 101 include this overall requirement:

When describing each segment, only information material to an understanding of the businesstaken as a whole is required. Disclosure may include, but should not be limited to, the information specified in paragraphs (c)(1)(i) through (v) of this section.

These kinds of judgments are never simple.  The old business description guidance had more prescriptive rules.  One such rule was a requirement to disclose the name of a customer who accounted for over 10% of consolidated revenues.  This was a more objective and simpler disclosure decision.  Now we must use judgment to decide if a customer relationship is material information to an investor rather than relying on this kind of “bright-line.”

The new human capital resources disclosure in S-K Item 101 demonstrates the complexity in principles-based disclosure requirements.  First, the provision above – “only information material to an understanding of the business taken as a whole is required” applies to this disclosure.   Second, it requires us to make some very subjective judgments:

(ii) A description of the registrant’s human capital resources, including the number of persons employed by the registrant, and any human capital measures or objectives that the registrant focuses on in managing the business (such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the development, attraction and retention of personnel).

It would be much simpler if the rule provided a list of areas such as retention practices, training programs and compensation plans.  Instead, we must first determine what management focuses on in the realm of human capital resources and then determine what information is material and hence required to be disclosed.  This will be much more time consuming and challenging!

It is reasonable to ask why the SEC is moving from objective, rule-based, disclosures to a more principles-based regimen.  On November 18, 2020, CorpFin Division Director William Hinman addressed this issue in a speech at the eighteenth annual PLI Directors’ Institute on Corporate Governance titled “The Regulation of Corporation Finance – A Principles-Based Approach.”  His perspective about the importance of principles-based requirements is clear:

“However, I believe that our principles-based requirements, which articulate an objective and allow companies to satisfy the objective by providing disclosure appropriately tailored to their facts and circumstances, in most cases are the ones that provide investors with the most meaningful information.  These requirements can be highly effective in eliciting disclosure about complex and evolving areas like climate change, Brexit, cybersecurity and the LIBOR transition.”

Later in this speech he says:

“There are many different approaches that companies can take when preparing disclosure.  I encourage an approach that does not begin with the question “What must I disclose?”  Rather, for the good corporate citizen, the question is better framed as “What should I disclose?”  Companies should disclose the information that investors and the markets will find useful and important, regardless of whether there is some technical argument that compliance with specific disclosure requirements can be met with less illuminating disclosure.”

Yes, these principles-based requirements present more challenges than prescriptive, rules-based requirements.  But the message here is clear.  With this movement to a more principles-based disclosure regimen, we must carefully address these judgments and make them with investors in mind.

As always, your thoughts and comments are welcome.

Just in Time for Year-End — A COVID-19 Disclosure Enforcement Action

In its first COVID-19 disclosure enforcement case, on December 4, 2020, the SEC announced a settled administrative proceeding against The Cheesecake Factory, Inc.

Underlying the case is a March 23, 2020 Item 7.01 Form 8-K.  In this Form 8-K, The Cheesecake Factory withdrew its financial guidance for 2020.  The accompanying five-paragraph press release included this incremental disclosure:

“All of the Company’s restaurants have transitioned to an off-premise operating model as required by state and local officials. The Cheesecake Factory restaurants have a long-standing business in the off-premise channel, with historical sales volumes approaching the size of many stand-alone restaurants, which is enabling the Company’s restaurants to operate sustainably at present under this model.”

Before the March 23 Form 8-K was furnished, The Cheesecake Factory initiated efforts to conserve and raise cash.  On March 18, 2020, as part of its efforts to reduce cash outflows, the company sent letters to its landlords informing them that it would not pay April 2020 restaurant rents.  In its capital raising efforts, again before the March 23 Form 8-K was filed, the company disclosed to potential private equity investors and lenders that it was losing $6 million in cash each week and estimated its cash and other sources of liquidity would last approximately 16 weeks.

The SEC’s Order found that neither of these facts was disclosed to the public on a timely basis.  Two days after the March 23, 2020 Form 8-K, the letters to landlords were reported in the press.  On March 25, 2020, two days after the newspaper articles, the company furnished a Form 8-K disclosing that it was not planning to pay April rent and was engaged in discussions with its landlords.  Later, on  April 20, 2020, the company announced a $200 million subscription agreement with a private investor for the sale of convertible preferred stock.

The message in this case is clear ­— be forthright and complete as you discuss the impact of COVID-19 on your business this year-end. To support this process, the enforcement Press Release includes a link to this April 8, 2020 Statement by Chairman Clayton and CorpFin Director Hinman about the importance of disclosure in this period of disruption and uncertainty.

As always, your thoughts and comments are welcome!