New SEC C&DIs Clarify Aspects of Omitting Discussion of Third Year of Financials from the MD&A

On January 24, 2020, the SEC’s Division of Corporation Finance released three new compliance and disclosure interpretations (“C&DIs”)¹  related to revised Instruction 1 to Item 303(a) of Regulation S-K (“Instruction 1”), arising out of last year’s Fast Act rule changes, which permits a registrant to omit discussion of the earliest of the three-year period presented in their financial statements from the MD&A if such discussion is already included in the registrant's prior filings, as long as the registrant identifies the location of the discussion in the prior filing.²

The C&DIs make clear that:

• No Automatic Incorporation by Reference: If a registrant providing financial statements covering three years chooses to omit a discussion of the earliest of three years in reliance on revised Instruction 1, the required statement merely identifying the location of such discussion in a prior filing does not automatically incorporate such disclosure into the current filing. Instead, a registrant must expressly state that such information is incorporated by reference into the current filing if it wishes to do so. (Question 110.02)
• Cannot Omit Discussion of Third Year if Material: A registrant may not omit a discussion of the earliest of three years if it believes discussion of that year is “necessary.” As discussed in our prior alerts, the SEC now expressly clarified that registrants must evaluate whether any of the discussion of the third earliest year remains material and should therefore still be included in the MD&A.³ (Question 110.03)
• Must Specifically Incorporate by Reference Discussion of Third Year in an Effective Registration Statement That is Updated by a New Form 10-K: If a registrant has an effective registration statement incorporating by reference a prior Form 10-K and then files a new Form 10-K, the new Form 10-K establishes a new effective date for the registration statement, as of which the registration statement incorporates only the most recently filed Form 10-K. If that new Form 10-K omits discussion of the earliest of three years (pursuant to revised Instruction 1), then the registration statement will not incorporate that discussion (from the earlier Form 10-K) unless, as indicated in Question 110.02, the information is expressly incorporated by reference (Question 110.04). This guidance effectively works together with the other two C&DIs and clarifies that, once the registrant determines that the omitted discussion of the earliest of the three years is not material and therefore could be excluded from the MD&A, it would also not be incorporated by reference into an effective registration statement automatically. Such initial materiality determination should also serve as sufficient basis not to incorporate the omitted information into an effective registration statements expressly.

Nevertheless, those companies that decide against reliance on the revised Instruction 1 (which permits the omission of the discussion of the earliest of the three years from the MD&A) will avoid having to make a future determination as to whether such information must still be incorporated into the effective registration statement. In light of the new guidance, we expect many companies will give careful consideration to incorporation by reference of discussion of the earliest of the three years so as to explicitly incorporate it in their registration statements. By expressly incorporating the omitted information by reference into the latest annual report as part of the statement identifying the location of the omitted information (as permitted under Question 112.02), companies would effectively incorporate the omitted information by reference into any effective registration statement that incorporates the latest annual report without restating that information in the latest annual report or including a separate incorporation by reference statement into the registration statement. Whatever approach they adopt, companies should pay attention to these C&DIs as they navigate the newly effective disclosure requirements in the upcoming reporting season.

^{1 Available here.
2 For more information, see our prior alert, “SEC Adopts Amendments to Modernize and Simplify Disclosure Requirements.”
3 For more information, see our prior alert, “Key Considerations for the 2020 Annual Reporting and Proxy Season.”} 

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