A frequent question in our SEC Reporting Skills Workshop is “What the heck is going on with the performance graph required by S-K Item 201(e)?” This question stems from a bit of history about the performance graph, an obscure instruction, and the distinction between furnished and filed documents.
(Spoiler alert: The graph is not required in Form 10-K and can be furnished in the annual report to shareholders.)
S-K 201(e) requires a five-year line graph comparing the annual percentage change in the registrant’s cumulative total shareholder return on a class of common stock with the cumulative total return of a broad equity market index and a published industry, line-of-business or peer index. You can read all the details of the requirement here.
Here is an example of the graph from Coca Cola’s 2019 Form 10-K.
Where to place the graph turns out to be a murky question. Originally, this graph was a required proxy disclosure. Several years ago, when the SEC expanded the proxy executive compensation disclosures, they proposed to remove the graph. Several commenters on the proposal asked the SEC to retain the requirement, stating that it provided valuable information. The SEC did not want to include the graph in the proxy for a variety of reasons. As a compromise, the Final Rule added the graph to S-K Item 201. What the Final Rule did not do was require the graph in Form 10-K.
This is where the filed versus furnished question arises. Historically, the graph was not filed information. It was simply furnished in the proxy. If the SEC had required the graph in Form 10-K it would have become filed information and subject to the 1934 Act’s liability provisions for filed information. To keep this from happening, the SEC added the following instruction to S-K Item 201(e):
- The information required by paragraph (e) of this Item need not be provided in any filings other than an annual report to security holders required by Exchange Act Rule 14a-3 (17 CFR 240.14a-3) or Exchange Act Rule 14c-3 (17 CFR 240.14c-3) that precedes or accompanies a registrant’s proxy or information statement relating to an annual meeting of security holders at which directors are to be elected (or special meeting or written consents in lieu of such meeting). Such information will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
Unfortunately, this instruction was kind of hidden after an instruction for smaller reporting companies.
The bottom line is that the graph does not have to be in Form 10-K and does not have to be filed information. It can be included in the annual report to shareholders, which is furnished, not filed. Companies that put the graph in the part of the annual report to shareholders that is not included in Form 10-K do not subject the disclosure to the 1934 Act’s liability provisions.
This annual report from Cracker Barrel Old Country Store provides an example of how the graph can be placed in the “wrap” pages of a “10-K wrap” annual report to shareholders. This means the graph is not included in the filed Form 10-K. You will find the graph on the back cover of the Cracker Barrel Old Country Store annual report to shareholders.
Lastly, to further illustrate the confusion about this graph, here is an SEC comment letter and company response about the placement of the graph.
The SEC Comment Letter
Re: Monro Muffler Brake, Inc.
Form 10-K for the Fiscal Year Ended March 28, 2015
Dear Ms. D’Amico:
We have limited our review of your filing to the financial statements and related disclosures and have the following comments. In some of our comments, we may ask you to provide us with information so we may better understand your disclosure.
Please respond to these comments within ten business days by providing the requested information or advise us as soon as possible when you will respond. If you do not believe our comments apply to your facts and circumstances, please tell us why in your response.
After reviewing your response to these comments, we may have additional comments.
Form 10-K for the Fiscal Year Ended March 28, 2015
Item 5. Market for the Company’s Common Equity and Related Stockholder Matters, page 16
- Please tell us your consideration for including the performance graph as required by Item 201(e) of Regulation S-K.
The Company’s Response
Item 5. Market for the Company’s Common Equity and Related Stockholder Matters
- Please tell us your consideration for including the performance graph as required by Item 201(e) of Regulation S-K.
Response: It is our understanding that the performance graph is required to be included in the Company’s annual report to stockholders, but not in its Form 10-K. This understanding is based on Instruction 7 to Item 201(e) of Regulation S-K, which states that “the information required by paragraph (e) of Item 201 need not be provided in any filings other than an annual report to security holders required by Exchange Act Rule 14a-3 or Exchange Act Rule 14c-3 that precedes or accompanies a registrant’s proxy or information statement relating to an annual meeting of security holders at which directors are to be elected (or special meeting or written consents in lieu of such meeting).” Further the staff of the Division of Corporation Finance has indicated in Regulation S-K Compliance and Disclosure Interpretations Question 106.10 that the performance graph is not required to be included under Item 5 of Form 10-K and need only be provided in the issuer’s annual report to stockholders.
The performance graph as required by Item 201(e) of Regulation S-K is included in the Company’s 2015 Annual Report under the Financial Highlights section on page 5.
SEC Response
Dear Ms. D’Amico
We have completed our review of your filing. We remind you that our comments or changes to disclosure in response to our comments do not foreclose the Commission from taking any action with respect to the company or the filing and the company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States. We urge all persons who are responsible for the accuracy and adequacy of the disclosure in the filing to be certain that the filing includes the information the Securities Exchange Act of 1934 and all applicable rules require.
As always, your thoughts and comments are welcome!