Commission Guidance on Management's Discussion and Analysis of Financial Condition and Results of Operations, 10568-10571 [2020-02296]
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10568
Federal Register / Vol. 85, No. 37 / Tuesday, February 25, 2020 / Rules and Regulations
updates a reference in the CFR to reflect
a change that occurs by statute.
Should the Commission receive a
significant adverse comment, the
Commission would withdraw this direct
final rule. Depending on the comments
and other circumstances, the
Commission may then incorporate the
adverse comment into a subsequent
direct final rule or publish a notice of
proposed rulemaking, providing an
opportunity for public comment.
26(c) of the CPSA also provides that
states or political subdivisions of states
may apply to the CPSC for an exemption
from this preemption under certain
circumstances. Section 104(b) of the
CPSIA deems rules issued there under
‘‘consumer product safety rules.’’
Therefore, once a rule issued under
section 104 of the CPSIA takes effect, it
will preempt in accordance with section
26(a) of the CPSA.
G. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA)
generally requires that agencies review
proposed and final rules for their
potential economic impact on small
entities, including small businesses, and
prepare regulatory flexibility analyses. 5
U.S.C. 603 and 604. The RFA applies to
any rule that is subject to notice and
comment procedures under section 553
of the APA. Id. As explained, the
Commission has determined that notice
and comment are not necessary for this
direct final rule. Thus, the RFA does not
apply. We also note the limited nature
of this document, which merely updates
the incorporation by reference to reflect
the mandatory CPSC standard that takes
effect under section 104 of the CPSIA.
K. Effective Date
H. Paperwork Reduction Act
The standard for portable bed rails
contains information-collection
requirements under the Paperwork
Reduction Act of 1995 (44 U.S.C. 3501–
3520). The revisions made no changes to
that section of the standard. Thus, the
revisions will have no effect on the
information-collection requirements
related to the standard.
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I. Environmental Considerations
The Commission’s regulations
provide a categorical exclusion for the
Commission’s rules from any
requirement to prepare an
environmental assessment or an
environmental impact statement where
they ‘‘have little or no potential for
affecting the human environment.’’ 16
CFR 1021.5(c)(2). This rule falls within
the categorical exclusion, so no
environmental assessment or
environmental impact statement is
required.
J. Preemption
Section 26(a) of the CPSA, 15 U.S.C.
2075(a), provides that where a consumer
product safety standard is in effect and
applies to a product, no state or political
subdivision of a state may either
establish or continue in effect a
requirement dealing with the same risk
of injury unless the state requirement is
identical to the federal standard. Section
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Under the procedure set forth in
section 104(b)(4)(B) of the CPSIA, when
a voluntary standard organization
revises a standard upon which a
consumer product safety standard was
based, the revision becomes the CPSC
standard within 180 days of notification
to the Commission, unless the
Commission determines that the
revision does not improve the safety of
the product, or the Commission sets a
later date in the Federal Register. The
Commission has not set a different
effective date. Thus, in accordance with
this provision, this rule takes effect 180
days after we received notification from
ASTM of revision to this standard. As
discussed in the preceding section, this
is a direct final rule. Unless we receive
a significant adverse comment within 30
days, the rule will become effective on
May 20, 2020.
L. The Congressional Review Act
The Congressional Review Act (CRA;
5 U.S.C. 801–808) states that, before a
rule may take effect, the agency issuing
the rule must submit the rule, and
certain related information, to each
House of Congress and the Comptroller
General. 5 U.S.C. 801(a)(1). The
submission must indicate whether the
rule is a ‘‘major rule.’’ The CRA states
that the Office of Information and
Regulatory Affairs (OIRA) determines
whether a rule qualifies as a ‘‘major
rule.’’ Pursuant to the CRA, this rule
does not qualify as a ‘‘major rule,’’ as
defined in 5 U.S.C. 804(2). To comply
with the CRA, the Office of the General
Counsel will submit the required
information to each House of Congress
and the Comptroller General.
List of Subjects in 16 CFR Part 1224
Consumer protection, Imports,
Incorporation by reference, Infants and
children, Law enforcement, Safety,
Toys.
For the reasons stated above, the
Commission amends 16 CFR part 1224
as follows:
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PART 1224—SAFETY STANDARD FOR
PORTABLE BED RAILS
1. Revise the authority citation for part
1224 to read as follows:
■
Authority: Sec. 104, Pub. L. 110–314, 122
Stat. 3016 (15 U.S.C. 2056a); Sec 3, Pub. L.
112–28, 125 Stat. 273.
■
2. Revise § 1224.2 to read as follows:
§ 1224.2
rails.
Requirements for portable bed
Each portable bed rail as defined in
ASTM F2805–19, Standard Consumer
Safety Specification for Portable Bed
Rails, approved on November 1, 2019,
must comply with all applicable
provisions of ASTM F2805–19. The
Director of the Federal Register
approves the incorporation by reference
listed in this section in accordance with
5 U.S.C. 552(a) and 1 CFR part 51. You
may obtain a copy of this ASTM
standard from ASTM International, 100
Barr Harbor Drive, PO Box C700, West
Conshohocken, PA 19428–2959 USA;
phone: 610–832–9585; www.astm.org.
You may inspect a copy at the Division
of the Secretariat, U.S. Consumer
Product Safety Commission, Room 820,
4330 East West Highway, Bethesda, MD
20814, telephone 301–504–7923, or at
the National Archives and Records
Administration (NARA). For
information on the availability of this
material at NARA, email fedreg.legal@
nara.gov, or go to: www.archives.gov/
federal-register/cfr/ibr-locations.html.
Alberta E. Mills,
Secretary, U.S. Consumer Product Safety
Commission.
[FR Doc. 2020–03106 Filed 2–24–20; 8:45 am]
BILLING CODE 6355–01–P
SECURITIES AND EXCHANGE
COMMISSION
17 CFR Parts 211, 231, and 241
[Release Nos. 33–10751; 34–88094; FR–87]
Commission Guidance on
Management’s Discussion and
Analysis of Financial Condition and
Results of Operations
Securities and Exchange
Commission.
ACTION: Guidance.
AGENCY:
We are providing guidance on
key performance indicators and metrics
in Management’s Discussion and
Analysis of Financial Condition and
Results of Operations (‘‘MD&A’’).
DATES: Effective February 25, 2020.
FOR FURTHER INFORMATION CONTACT:
Questions about specific filings should
SUMMARY:
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Federal Register / Vol. 85, No. 37 / Tuesday, February 25, 2020 / Rules and Regulations
be directed to staff members responsible
for reviewing the documents the
company files with the Commission. For
general questions about this release,
contact Angie Kim, Special Counsel, at
(202) 551–3430, Office of Rulemaking,
Division of Corporation Finance, U.S.
Securities and Exchange Commission,
100 F Street NE, Washington, DC 20549.
SUPPLEMENTARY INFORMATION:
I. Guidance on Key Performance
Indicators and Metrics
We are providing guidance on
disclosure of key performance
indicators and metrics in MD&A (the
‘‘Guidance’’).1 Item 303(a) of Regulation
S–K requires disclosure of information
not specifically referenced in the item
that the company believes is necessary
to an understanding of its financial
condition, changes in financial
condition and results of operations.2
The item also requires discussion and
analysis of other statistical data that in
the company’s judgment enhances a
reader’s understanding of MD&A.3
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1 MD&A is required by Item 303 of Regulation S–
K (Management’s Discussion & Analysis of
Financial Condition and Results of Operations) [17
CFR 229.303], Item 5 of Form 20–F (Operating and
Financial Review and Prospects) [17 CFR 249.220f],
and Item 9 of Form 1–A [17 CFR 239.90].
While this release refers primarily to Item 303 of
Regulation S–K, it also is intended to apply to
MD&A drafted pursuant to Item 5 of Form 20–F and
Item 9 of Form 1–A. The disclosure requirements
for Item 5 of Form 20–F (Operating and Financial
Review and Prospects) are substantively
comparable to the MD&A requirements under Item
303 of Regulation S–K. See International Disclosure
Standards, Release No. 33–7745 (Sept. 28, 1999) [64
FR 53900 (Oct. 5, 1999)], at 53904. The disclosure
requirements for Item 9 of Form 1–A are also
similar to the MD&A requirements under Item 303.
See Amendments for Small and Additional Issues
Exemptions Under the Securities Act (Regulation
A), Release No. 33–9741 (Mar. 25, 2015) [80 FR
21805 (Apr. 20, 2015)], at 21830. Companies,
including foreign private issuers, smaller reporting
companies, and issuers relying on Regulation A,
should consider this guidance based on their
particular facts and circumstances.
2 Item 303(a) of Regulation S–K [17 CFR
229.303(a)]. Concurrent with this Guidance we are
proposing changes to Item 303. See Management’s
Discussion & Analysis, Selected Financial Data, and
Supplementary Financial Information, Release No.
33–10750 (Jan. 30, 2020) (the ‘‘Companion
Proposing Release’’). In the Companion Proposing
Release, we propose adding a new Item 303(a) to
state the purposes of MD&A. Current Item 303(a) is
proposed to be Item 303(b).
3 See, e.g., Instruction 1 to Item 303(a) of
Regulation S–K [17 CFR 229.303(a)]. In the
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When proposing the current MD&A
framework, the Commission noted that
‘‘[f]or each business, there is a limited
set of critical variables which presents
the pulse of the business.’’ 4 The
Commission previously has emphasized
that, when preparing MD&A,
‘‘companies should consider whether
disclosure of all key variables and other
factors that management uses to manage
the business would be material to
investors, and therefore required.’’ 5 The
Commission also previously stated that
companies should identify and address
those key variables and other qualitative
and quantitative factors that are peculiar
to and necessary for an understanding
and evaluation of the individual
company.6 Such information could
constitute key performance indicators
and other metrics.
Some companies also disclose nonfinancial and financial metrics when
describing the performance or the status
of their business. Those metrics can
vary significantly from company to
company and industry to industry,
depending on various facts and
circumstances. For example, some of
these metrics relate to external or
macro-economic matters, some are
Companion Proposing Release, we propose
incorporating a portion of the substance of
Instruction 1 into proposed Item 303(a).
4 See Proposed Amendments to Annual Report
Form; Integration of Securities Act Disclosure
Systems, Release No. 33–6176, (Jan. 15, 1980) [45
FR 5972 (Jan. 24, 1980)], at 5979–5980.
5 See Commission Guidance Regarding
Management’s Discussion and Analysis of Financial
Condition and Results of Operation, Release No.
33–8350 (Dec. 19, 2003) [68 FR 75056 (Dec. 29,
2003)], at 75060. Information is material if there is
a substantial likelihood that a reasonable investor
would consider the information important in
deciding how to vote or make an investment
decision. See TSC Industries, Inc. v. Northway, Inc.,
426 U.S. 438 (1976) (‘‘TSC Industries’’) at 449
(further explaining that information is material if
there is a substantial likelihood that disclosure of
the omitted fact would have been viewed by the
reasonable investor as having significantly altered
the ‘‘total mix’’ of information available). The
definitions of ‘‘material’’ in Rule 12b–2 of the
Exchange Act and Rule 405 of the Securities Act,
are consistent with TSC Industries.
6 Id. (quoting Management’s Discussion and
Analysis of Financial Condition and Results of
Operations; Certain Investment Company
Disclosures, Release No. 33–6835 (May 18, 1989)
[54 FR 22427 (May 24, 1989)], which quotes
Management’s Discussion and Analysis of Financial
Condition and Results of Operations, Release No.
33–6349 (Sept. 28, 1981) [not published in the
Federal Register]).
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company or industry specific, and some
are a combination of external and
internal information. Some companies
voluntarily disclose specialized,
company-specific sales metrics, such as
same store sales or revenue per
subscriber. Some companies also
voluntarily disclose environmental
metrics, including metrics regarding the
observed effect of prior events on their
operations.
We remind companies that, when
including metrics in their disclosure,
they should consider existing MD&A
requirements 7 and the need to include
such further material information, if
any, as may be necessary in order to
make the presentation of the metric, in
light of the circumstances under which
it is presented, not misleading.8 In this
regard, a company should first consider
the extent to which an existing
regulatory disclosure framework
applies, such as Generally Accepted
Accounting Standards (‘‘GAAP’’) 9 or,
for ‘‘non-GAAP measures,’’ Regulation
G or Item 10 of Regulation S–K.10 In
addition, the company should consider
what additional information may be
7 See footnotes 2 and 3 above and corresponding
text. The company should provide a narrative that
enables investors to see a company ‘‘through the
eyes of management,’’ so these metrics should not
deviate materially from metrics used to manage
operations or make strategic decisions.
8 See Rule 408(a) [17 CFR 230.408(a)] and Rule
12b–20 [17 CFR 240.12b–20].
9 This would include subsets of line items
presented on the face or in the footnotes to the
financial statements and ratios or statistical
measures calculated using exclusively measures
calculated or disclosed pursuant to GAAP. Here, we
use the term GAAP to refer to the FASB Accounting
Standards Codification or other comprehensive
bases of accounting used in primary financial
statements filed with the Commission.
10 See Regulation G [17 CFR 244.100–244.102].
See also Item 10(e) of Regulation S–K. [17 CFR
229.10(e)]. Item 10(e)(4) of Regulation S–K states
that, for purposes of Item 10(e), non-GAAP financial
measures exclude operating and other statistical
measures; and ratios or statistical measures
calculated using exclusively one or both of (i)
financial measures calculated in accordance with
GAAP, and (ii) operating measures or other
measures that are not non-GAAP financial
measures. The Commission has stated that
operating and other statistical measures such as
unit sales, numbers of employees, numbers of
subscribers, or numbers of advertisers are not nonGAAP financial measures. See Conditions for Use
of Non-GAAP Financial Measures, Release No. 33–
8176 (Jan. 22, 2003) [68 FR 4819 (Jan. 30, 2003)].
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Federal Register / Vol. 85, No. 37 / Tuesday, February 25, 2020 / Rules and Regulations
necessary to provide adequate context
for an investor to understand the metric
presented.11 We would generally
expect, based on the facts and
circumstances, the following disclosures
to accompany the metric:
• 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 company should also consider
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.
If a company changes the method by
which it calculates or presents the
metric from one period to another or
otherwise, the company should consider
the need to disclose, to the extent
material: (1) The differences in the way
the metric is calculated or presented
compared to prior periods, (2) the
reasons for such changes, (3) the effects
of any such change on the amounts or
other information being disclosed and
on amounts or other information
previously reported, and (4) such other
differences in methodology and results
that would reasonably be expected to be
relevant to an understanding of the
company’s performance or prospects.
Depending on the significance of the
change(s) in methodology and results,
the company should consider whether it
is necessary to recast prior metrics to
conform to the current presentation and
place the current disclosure in an
appropriate context.
Additionally, we remind companies
of the requirement to maintain effective
disclosure controls and procedures.12
Effective controls and procedures are
important when disclosing material key
performance indicators or metrics that
are derived from the company’s own
information. When key performance
indicators and metrics are material to an
investment or voting decision, the
company should consider whether it
has effective controls and procedures in
place to process information related to
the disclosure of such items to ensure
consistency as well as accuracy.13
II. Codification Update
The ‘‘Codification of Financial
Reporting Policies’’ announced in
Financial Reporting Release 1 (April 15,
1982) [47 FR 21028] is updated by
adding new Section 501.16, captioned
‘‘Additional Guidance on Key
Performance Indicators and Metrics’’ to
the Financial Reporting Codification
and under that caption including the
text in Section I of this release.
The Codification is a separate
publication of the Commission. It will
not be published in the Federal Register
or Code of Federal Regulations.
Subject
Release No.
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*
*
*
Commission Guidance on Management’s Discussion and
Analysis of Financial Condition and Results of Operations.
11 Examples of metrics to which this Guidance is
intended to apply include, but are not limited to:
Operating margin; same store sales; sales per square
foot; total customers/subscribers; average revenue
per user; daily/monthly active users/usage; active
customers; net customer additions; total
impressions; number of memberships; traffic
growth; comparable customer transactions increase;
voluntary and/or involuntary employee turnover
rate; percentage breakdown of workforce (e.g.,
active workforce covered under collective
bargaining agreements); total energy consumed; and
data security measures (e.g., number of data
breaches or number of account holders affected by
data breaches).
12 See Rule 13a–15 and Rule 15d–15 [17 CFR
240.13a–15 and 17 CFR 240.15d–15]. Pursuant to
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87
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Pursuant to the Congressional Review
Act,14 the Office of Information and
Regulatory Affairs has designated this
guidance as not a ‘‘major rule,’’ as
defined by 5 U.S.C. 804(2).
List of Subjects in 17 CFR Parts 211,
231, and 241
Securities.
Amendments to the Code of Federal
Regulations
For the reasons set forth above, the
Commission is amending title 17,
chapter II, of the Code of Federal
Regulations as set forth below:
PART 211—INTERPRETATIONS
RELATING TO FINANCIAL REPORTING
MATTERS
1. The authority citation for part 211
continues to read as follows:
■
Authority: 15 U.S.C. 77g, 15 U.S.C.
77s(a),15 U.S.C. 77aa(25) and (26), 15 U.S.C.
78c(b), 17 CFR 78l(b) and 13(b), 17 CFR
78m(b) and 15 U.S.C. 80a–8, 30(e) 15 U.S.C.
80a–29(e), 15 U.S.C. 80a–30, and 15 U.S.C.
80a–37(a).
2. The table in subpart A is amended
by adding an entry for Release No. 87
at the end of the table to read as follows:
■
Subpart A—Financial Reporting
Releases
Date
Fed. Reg. Vol. and page
*
*
*
January 30, 2020 .................... [insert FR citation of publication].
Exchange Act Rules 13a–15 and 15d–15, a
company’s principal executive officer and principal
financial officer must make certifications regarding
the maintenance and effectiveness of disclosure
controls and procedures. These rules define
‘‘disclosure controls and procedures’’ as those
controls and procedures designed to ensure that
information required to be disclosed by the
company in the reports that it files or submits under
the Exchange Act is (1) ‘‘recorded, processed,
summarized and reported, within the time periods
specified in the Commission’s rules and forms,’’
and (2) ‘‘accumulated and communicated to the
company’s management . . . as appropriate to
allow timely decisions regarding required
disclosure.’’
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III. Other Matters
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13 See id. As we have stated before, a company’s
disclosure controls and procedures should not be
limited to disclosure specifically required, but
should also ensure timely collection and evaluation
of ‘‘information potentially subject to [required]
disclosure,’’ ‘‘information that is relevant to an
assessment of the need to disclose developments
and risks that pertain to the [company’s]
businesses,’’ and ‘‘information that must be
evaluated in the context of the disclosure
requirement of Exchange Act Rule 12b–20.’’
Certification of Disclosure in Companies’ Quarterly
and Annual Reports, Release No. 33–8124 (Aug. 28,
2002) [67 FR 57275 (Sept. 9, 2002)].
14 5 U.S.C. 801 et seq.
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Federal Register / Vol. 85, No. 37 / Tuesday, February 25, 2020 / Rules and Regulations
PART 231—INTERPRETATIVE
RELEASES RELATING TO THE
SECURITIES ACT OF 1933 AND
GENERAL RULES AND REGULATIONS
THEREUNDER
10571
Authority: 15 U.S.C. 77a et seq.
4. Part 231 is amended by adding an
entry for Release No. 33–10751 at the
end of the table to read as follows:
■
3. The authority citation for part 231
is added to read as follows:
■
Subject
Release No.
*
*
*
Commission Guidance on Management’s Discussion and
Analysis of Financial Condition and Results of Operations.
PART 241—INTERPRETATIVE
RELEASES RELATING TO THE
SECURITIES EXCHANGE ACT OF 1934
AND GENERAL RULES AND
REGULATIONS THEREUNDER
*
33–10751
Date
Fed. Reg. Vol. and page
*
*
*
January 30, 2020 .................... [insert FR citation of publication].
Authority: 15 U.S.C. 78a et seq.
6. Part 241 is amended by adding an
entry for Release No. 34–88094 at the
end of the table to read as follows:
■
5. The authority citation for part 241
continues to read as follows:
■
Subject
Release No.
*
*
*
Commission Guidance on Management’s Discussion and
Analysis of Financial Condition and Results of Operations.
By the Commission.
Dated: January 30, 2020.
Eduardo A. Aleman,
Deputy Secretary.
*
34–88094
Date
*
*
*
January 30, 2020 .................... [insert FR citation of publication].
The Federal Energy
Regulatory Commission (Commission) is
revising its regulations to incorporate by
reference, with certain enumerated
exceptions, the latest version (Version
003.2) of the Standards for Business
Practices and Communication Protocols
for Public Utilities adopted by the
Wholesale Electric Quadrant (WEQ) of
the North American Energy Standards
Board (NAESB) as mandatory
enforceable requirements. The
Commission is adopting this latest
version instead of WEQ Version 003.1,
which was the subject of an earlier
notice of proposed rulemaking. The
Commission declines to adopt the
proposal to remove the incorporation by
reference of the WEQ–006 Manual Time
Error Correction Business Practice
Standards as adopted by NAESB.
DATES: Effective date: This rule is
effective April 27, 2020.
Compliance dates: Public utilities
must make a compliance filing to
comply with the requirements of this
SUMMARY:
[FR Doc. 2020–02296 Filed 2–24–20; 8:45 am]
BILLING CODE 8011–01–P
DEPARTMENT OF ENERGY
Federal Energy Regulatory
Commission
18 CFR Parts 2 and 38
[Docket No. RM05–5–025; Docket No.
RM05–5–026; Docket No. RM05–5–027;
Order No. 676–I]
Standards for Business Practices and
Communication Protocols for Public
Utilities
Federal Energy Regulatory
Commission, DOE.
ACTION: Final rule.
AGENCY:
Fed. Reg. Vol. and page
final rule through eTariff no later than
May 26, 2020. The Commission will set
an effective date for the proposed tariff
changes in the order(s) on the
compliance filings, but no earlier than
July 27, 2020.
Incorporation by reference: The
incorporation by reference of certain
publications listed in this rule is
approved by the Director of the Federal
Register as of April 27, 2020.
FOR FURTHER INFORMATION CONTACT:
Michael P. Lee (technical issues), Office
of Energy Policy and Innovation,
Federal Energy Regulatory
Commission, 888 First Street NE,
Washington, DC 20426, (202) 502–
6548
Michael A. Chase (legal issues), Office
of the General Counsel, Federal
Energy Regulatory Commission, 888
First Street NE, Washington, DC
20426, (202) 502–6205
SUPPLEMENTARY INFORMATION:
Table of Contents
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Paragraph Nos.
I. Background ................................................................................................................................................................................
II. Discussion ................................................................................................................................................................................
A. Overview ...........................................................................................................................................................................
B. Issues Raised by Commenters ..........................................................................................................................................
1. Treatment of Requests for Redirects .........................................................................................................................
2. Time Error Correction ................................................................................................................................................
3. Other Issues Raised by Commenters .........................................................................................................................
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6.
18.
18.
22.
23.
40.
48.
]]>Agencies
[Federal Register Volume 85, Number 37 (Tuesday, February 25, 2020)]
[Rules and Regulations]
[Pages 10568-10571]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-02296]
=======================================================================
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 211, 231, and 241
[Release Nos. 33-10751; 34-88094; FR-87]
Commission Guidance on Management's Discussion and Analysis of
Financial Condition and Results of Operations
AGENCY: Securities and Exchange Commission.
ACTION: Guidance.
-----------------------------------------------------------------------
SUMMARY: We are providing guidance on key performance indicators and
metrics in Management's Discussion and Analysis of Financial Condition
and Results of Operations (``MD&A'').
DATES: Effective February 25, 2020.
FOR FURTHER INFORMATION CONTACT: Questions about specific filings
should
[[Page 10569]]
be directed to staff members responsible for reviewing the documents
the company files with the Commission. For general questions about this
release, contact Angie Kim, Special Counsel, at (202) 551-3430, Office
of Rulemaking, Division of Corporation Finance, U.S. Securities and
Exchange Commission, 100 F Street NE, Washington, DC 20549.
SUPPLEMENTARY INFORMATION:
I. Guidance on Key Performance Indicators and Metrics
We are providing guidance on disclosure of key performance
indicators and metrics in MD&A (the ``Guidance'').\1\ Item 303(a) of
Regulation S-K requires disclosure of information not specifically
referenced in the item that the company believes is necessary to an
understanding of its financial condition, changes in financial
condition and results of operations.\2\ The item also requires
discussion and analysis of other statistical data that in the company's
judgment enhances a reader's understanding of MD&A.\3\
---------------------------------------------------------------------------
\1\ MD&A is required by Item 303 of Regulation S-K (Management's
Discussion & Analysis of Financial Condition and Results of
Operations) [17 CFR 229.303], Item 5 of Form 20-F (Operating and
Financial Review and Prospects) [17 CFR 249.220f], and Item 9 of
Form 1-A [17 CFR 239.90].
While this release refers primarily to Item 303 of Regulation S-
K, it also is intended to apply to MD&A drafted pursuant to Item 5
of Form 20-F and Item 9 of Form 1-A. The disclosure requirements for
Item 5 of Form 20-F (Operating and Financial Review and Prospects)
are substantively comparable to the MD&A requirements under Item 303
of Regulation S-K. See International Disclosure Standards, Release
No. 33-7745 (Sept. 28, 1999) [64 FR 53900 (Oct. 5, 1999)], at 53904.
The disclosure requirements for Item 9 of Form 1-A are also similar
to the MD&A requirements under Item 303. See Amendments for Small
and Additional Issues Exemptions Under the Securities Act
(Regulation A), Release No. 33-9741 (Mar. 25, 2015) [80 FR 21805
(Apr. 20, 2015)], at 21830. Companies, including foreign private
issuers, smaller reporting companies, and issuers relying on
Regulation A, should consider this guidance based on their
particular facts and circumstances.
\2\ Item 303(a) of Regulation S-K [17 CFR 229.303(a)].
Concurrent with this Guidance we are proposing changes to Item 303.
See Management's Discussion & Analysis, Selected Financial Data, and
Supplementary Financial Information, Release No. 33-10750 (Jan. 30,
2020) (the ``Companion Proposing Release''). In the Companion
Proposing Release, we propose adding a new Item 303(a) to state the
purposes of MD&A. Current Item 303(a) is proposed to be Item 303(b).
\3\ See, e.g., Instruction 1 to Item 303(a) of Regulation S-K
[17 CFR 229.303(a)]. In the Companion Proposing Release, we propose
incorporating a portion of the substance of Instruction 1 into
proposed Item 303(a).
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When proposing the current MD&A framework, the Commission noted
that ``[f]or each business, there is a limited set of critical
variables which presents the pulse of the business.'' \4\ The
Commission previously has emphasized that, when preparing MD&A,
``companies should consider whether disclosure of all key variables and
other factors that management uses to manage the business would be
material to investors, and therefore required.'' \5\ The Commission
also previously stated that companies should identify and address those
key variables and other qualitative and quantitative factors that are
peculiar to and necessary for an understanding and evaluation of the
individual company.\6\ Such information could constitute key
performance indicators and other metrics.
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\4\ See Proposed Amendments to Annual Report Form; Integration
of Securities Act Disclosure Systems, Release No. 33-6176, (Jan. 15,
1980) [45 FR 5972 (Jan. 24, 1980)], at 5979-5980.
\5\ See Commission Guidance Regarding Management's Discussion
and Analysis of Financial Condition and Results of Operation,
Release No. 33-8350 (Dec. 19, 2003) [68 FR 75056 (Dec. 29, 2003)],
at 75060. Information is material if there is a substantial
likelihood that a reasonable investor would consider the information
important in deciding how to vote or make an investment decision.
See TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976)
(``TSC Industries'') at 449 (further explaining that information is
material if there is a substantial likelihood that disclosure of the
omitted fact would have been viewed by the reasonable investor as
having significantly altered the ``total mix'' of information
available). The definitions of ``material'' in Rule 12b-2 of the
Exchange Act and Rule 405 of the Securities Act, are consistent with
TSC Industries.
\6\ Id. (quoting Management's Discussion and Analysis of
Financial Condition and Results of Operations; Certain Investment
Company Disclosures, Release No. 33-6835 (May 18, 1989) [54 FR 22427
(May 24, 1989)], which quotes Management's Discussion and Analysis
of Financial Condition and Results of Operations, Release No. 33-
6349 (Sept. 28, 1981) [not published in the Federal Register]).
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Some companies also disclose non-financial and financial metrics
when describing the performance or the status of their business. Those
metrics can vary significantly from company to company and industry to
industry, depending on various facts and circumstances. For example,
some of these metrics relate to external or macro-economic matters,
some are company or industry specific, and some are a combination of
external and internal information. Some companies voluntarily disclose
specialized, company-specific sales metrics, such as same store sales
or revenue per subscriber. Some companies also voluntarily disclose
environmental metrics, including metrics regarding the observed effect
of prior events on their operations.
We remind companies that, when including metrics in their
disclosure, they should consider existing MD&A requirements \7\ and the
need to include such further material information, if any, as may be
necessary in order to make the presentation of the metric, in light of
the circumstances under which it is presented, not misleading.\8\ In
this regard, a company should first consider the extent to which an
existing regulatory disclosure framework applies, such as Generally
Accepted Accounting Standards (``GAAP'') \9\ or, for ``non-GAAP
measures,'' Regulation G or Item 10 of Regulation S-K.\10\ In addition,
the company should consider what additional information may be
[[Page 10570]]
necessary to provide adequate context for an investor to understand the
metric presented.\11\ We would generally expect, based on the facts and
circumstances, the following disclosures to accompany the metric:
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\7\ See footnotes 2 and 3 above and corresponding text. The
company should provide a narrative that enables investors to see a
company ``through the eyes of management,'' so these metrics should
not deviate materially from metrics used to manage operations or
make strategic decisions.
\8\ See Rule 408(a) [17 CFR 230.408(a)] and Rule 12b-20 [17 CFR
240.12b-20].
\9\ This would include subsets of line items presented on the
face or in the footnotes to the financial statements and ratios or
statistical measures calculated using exclusively measures
calculated or disclosed pursuant to GAAP. Here, we use the term GAAP
to refer to the FASB Accounting Standards Codification or other
comprehensive bases of accounting used in primary financial
statements filed with the Commission.
\10\ See Regulation G [17 CFR 244.100-244.102]. See also Item
10(e) of Regulation S-K. [17 CFR 229.10(e)]. Item 10(e)(4) of
Regulation S-K states that, for purposes of Item 10(e), non-GAAP
financial measures exclude operating and other statistical measures;
and ratios or statistical measures calculated using exclusively one
or both of (i) financial measures calculated in accordance with
GAAP, and (ii) operating measures or other measures that are not
non-GAAP financial measures. The Commission has stated that
operating and other statistical measures such as unit sales, numbers
of employees, numbers of subscribers, or numbers of advertisers are
not non-GAAP financial measures. See Conditions for Use of Non-GAAP
Financial Measures, Release No. 33-8176 (Jan. 22, 2003) [68 FR 4819
(Jan. 30, 2003)].
\11\ Examples of metrics to which this Guidance is intended to
apply include, but are not limited to: Operating margin; same store
sales; sales per square foot; total customers/subscribers; average
revenue per user; daily/monthly active users/usage; active
customers; net customer additions; total impressions; number of
memberships; traffic growth; comparable customer transactions
increase; voluntary and/or involuntary employee turnover rate;
percentage breakdown of workforce (e.g., active workforce covered
under collective bargaining agreements); total energy consumed; and
data security measures (e.g., number of data breaches or number of
account holders affected by data breaches).
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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 company should also consider 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.
If a company changes the method by which it calculates or presents
the metric from one period to another or otherwise, the company should
consider the need to disclose, to the extent material: (1) The
differences in the way the metric is calculated or presented compared
to prior periods, (2) the reasons for such changes, (3) the effects of
any such change on the amounts or other information being disclosed and
on amounts or other information previously reported, and (4) such other
differences in methodology and results that would reasonably be
expected to be relevant to an understanding of the company's
performance or prospects. Depending on the significance of the
change(s) in methodology and results, the company should consider
whether it is necessary to recast prior metrics to conform to the
current presentation and place the current disclosure in an appropriate
context.
Additionally, we remind companies of the requirement to maintain
effective disclosure controls and procedures.\12\ Effective controls
and procedures are important when disclosing material key performance
indicators or metrics that are derived from the company's own
information. When key performance indicators and metrics are material
to an investment or voting decision, the company should consider
whether it has effective controls and procedures in place to process
information related to the disclosure of such items to ensure
consistency as well as accuracy.\13\
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\12\ See Rule 13a-15 and Rule 15d-15 [17 CFR 240.13a-15 and 17
CFR 240.15d-15]. Pursuant to Exchange Act Rules 13a-15 and 15d-15, a
company's principal executive officer and principal financial
officer must make certifications regarding the maintenance and
effectiveness of disclosure controls and procedures. These rules
define ``disclosure controls and procedures'' as those controls and
procedures designed to ensure that information required to be
disclosed by the company in the reports that it files or submits
under the Exchange Act is (1) ``recorded, processed, summarized and
reported, within the time periods specified in the Commission's
rules and forms,'' and (2) ``accumulated and communicated to the
company's management . . . as appropriate to allow timely decisions
regarding required disclosure.''
\13\ See id. As we have stated before, a company's disclosure
controls and procedures should not be limited to disclosure
specifically required, but should also ensure timely collection and
evaluation of ``information potentially subject to [required]
disclosure,'' ``information that is relevant to an assessment of the
need to disclose developments and risks that pertain to the
[company's] businesses,'' and ``information that must be evaluated
in the context of the disclosure requirement of Exchange Act Rule
12b-20.'' Certification of Disclosure in Companies' Quarterly and
Annual Reports, Release No. 33-8124 (Aug. 28, 2002) [67 FR 57275
(Sept. 9, 2002)].
\14\ 5 U.S.C. 801 et seq.
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II. Codification Update
The ``Codification of Financial Reporting Policies'' announced in
Financial Reporting Release 1 (April 15, 1982) [47 FR 21028] is updated
by adding new Section 501.16, captioned ``Additional Guidance on Key
Performance Indicators and Metrics'' to the Financial Reporting
Codification and under that caption including the text in Section I of
this release.
The Codification is a separate publication of the Commission. It
will not be published in the Federal Register or Code of Federal
Regulations.
III. Other Matters
Pursuant to the Congressional Review Act,\14\ the Office of
Information and Regulatory Affairs has designated this guidance as not
a ``major rule,'' as defined by 5 U.S.C. 804(2).
List of Subjects in 17 CFR Parts 211, 231, and 241
Securities.
Amendments to the Code of Federal Regulations
For the reasons set forth above, the Commission is amending title
17, chapter II, of the Code of Federal Regulations as set forth below:
PART 211--INTERPRETATIONS RELATING TO FINANCIAL REPORTING MATTERS
0
1. The authority citation for part 211 continues to read as follows:
Authority: 15 U.S.C. 77g, 15 U.S.C. 77s(a),15 U.S.C. 77aa(25)
and (26), 15 U.S.C. 78c(b), 17 CFR 78l(b) and 13(b), 17 CFR 78m(b)
and 15 U.S.C. 80a-8, 30(e) 15 U.S.C. 80a-29(e), 15 U.S.C. 80a-30,
and 15 U.S.C. 80a-37(a).
0
2. The table in subpart A is amended by adding an entry for Release No.
87 at the end of the table to read as follows:
Subpart A--Financial Reporting Releases
----------------------------------------------------------------------------------------------------------------
Subject Release No. Date Fed. Reg. Vol. and page
----------------------------------------------------------------------------------------------------------------
* * * * * * *
Commission Guidance on Management's 87 January 30, 2020.......... [insert FR citation of
Discussion and Analysis of Financial publication].
Condition and Results of Operations.
----------------------------------------------------------------------------------------------------------------
[[Page 10571]]
PART 231--INTERPRETATIVE RELEASES RELATING TO THE SECURITIES ACT OF
1933 AND GENERAL RULES AND REGULATIONS THEREUNDER
0
3. The authority citation for part 231 is added to read as follows:
Authority: 15 U.S.C. 77a et seq.
0
4. Part 231 is amended by adding an entry for Release No. 33-10751 at
the end of the table to read as follows:
----------------------------------------------------------------------------------------------------------------
Subject Release No. Date Fed. Reg. Vol. and page
----------------------------------------------------------------------------------------------------------------
* * * * * * *
Commission Guidance on Management's 33-10751 January 30, 2020.......... [insert FR citation of
Discussion and Analysis of Financial publication].
Condition and Results of Operations.
----------------------------------------------------------------------------------------------------------------
PART 241--INTERPRETATIVE RELEASES RELATING TO THE SECURITIES
EXCHANGE ACT OF 1934 AND GENERAL RULES AND REGULATIONS THEREUNDER
0
5. The authority citation for part 241 continues to read as follows:
Authority: 15 U.S.C. 78a et seq.
0
6. Part 241 is amended by adding an entry for Release No. 34-88094 at
the end of the table to read as follows:
----------------------------------------------------------------------------------------------------------------
Subject Release No. Date Fed. Reg. Vol. and page
----------------------------------------------------------------------------------------------------------------
* * * * * * *
Commission Guidance on Management's 34-88094 January 30, 2020.......... [insert FR citation of
Discussion and Analysis of Financial publication].
Condition and Results of Operations.
----------------------------------------------------------------------------------------------------------------
By the Commission.
Dated: January 30, 2020.
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2020-02296 Filed 2-24-20; 8:45 am]
BILLING CODE 8011-01-P
