Companies preparing
their 2019 Form 10-K are mindful that, under the relatively new revision to Instruction 1 to Item 303(a) of Regulation S-K adopted by
the SEC in March 2019, a registrant may omit from MD&A a discussion of the
earliest of the three years of financials included in the 10-K if such
discussion was included in a prior filing with the SEC. (See our client alert on this here.) On January 24, 2020, the Division of
Corporation Finance issued three new Compliance and Disclosure Interpretations
(C&DIs) (available here) addressing common questions that have
developed regarding Instruction 1 to Item 303(a).
Question 110.03 reiterates
the simple point that a registrant may not omit a discussion of the earliest of
three years from its current MD&A if it believes a discussion of that year
is necessary to an understanding of its financial condition, changes in
financial condition and results of operations.
This is consistent with the adopting release (available here), which stated: “Although a discussion of the earliest year of
the financials could in some circumstances be material, in many cases the
entirety of the discussion of the earliest year that was presented in the
MD&A of a prior filing would not need to be reiterated if, in management’s
view, that discussion is not necessary to understand the financial condition,
changes in financial condition, and results of operations. This is the standard that applies to all of
MD&A, and our amendments do not change that standard.” When determining
whether to omit the earliest year discussion, a registrant should analyze
whether the entirety of the discussion of its financial condition and operating
results from three years ago (e.g., 2017 for the 2019 10-K), either as
previously reported or updated to reflect trends or developments, is necessary
to understand its financial condition, changes in financial condition and
results of operations. If so, that
discussion should be included in the 10-K. If not, a registrant may determine to address
only the most recent two years in MD&A and, if necessary, to comment on any
specific aspects of its third-year financial results needed to understand its
financial condition, changes in financial condition and results of operations, without
repeating the entire MD&A for that year.
Notwithstanding the SEC’s expectation that in many cases the entirety of
the earliest year discussion would not need to be addressed, in our survey of
S&P 500 companies that filed a 10-K between the effective date of the
revised instruction and December 31, 2019, 57% have opted to include the
earliest year’s discussion in the MD&A.
Question 110.02
clarifies that when a registrant omits a discussion of the earliest of three
years and includes the required statement that identifies the location of such
discussion in a prior filing with the SEC, such discussion is not incorporated
by reference into the filing unless the registrant expressly states that the
information is incorporated by reference. According to our survey of S&P 500
companies that filed a 10-K between the effective date of the revised instruction
and December 31, 2019, no registrants chose to expressly incorporate the prior
discussion by reference.
Question 110.04 applies the principles of
Question 110.02 to effective registration statements on file at the time the
10-K is filed. Because the Form 10-K
operates as the Section 10(a)(3) update to the registration statement, once the
10-K is filed without including the MD&A discussion for the earliest year
of financials, the effective registration statement does not include the
MD&A discussion for the earliest year. As such, when filing a new registration
statement or commencing an offering, a registrant should analyze whether the
entirety of the discussion of its financial condition and operating results
from three years ago, either as previously reported or updated to reflect
trends or developments, is necessary to understand its financial condition,
changes in financial condition and results of operations. While in many cases such information will not
be material to a current investment decision, in those cases when such
information (or any other earlier information) is necessary, registrants and
their counsel should discuss how best to incorporate such information into the
offering documents.