SEC Provides Guidance on Performance Metrics in MD&A; Proposes Financial Disclosure Changes
January 31, 2020

The Securities and Exchange Commission, on January 30, 2020, issued guidance to reporting companies about the use of key performance indicators and other metrics, including those that are non-GAAP financial measures, in Management’s Discussion and Analysis (Release 33-10751).  The SEC also proposed to amend Regulation S-K and MD&A, including to delete Reg S-K Items for selected and supplementary financial data and to allow companies flexibility to compare their most recent quarter to their prior quarter instead of to the same quarter from the prior year in MD&A.  Other proposed amendments include a fuller description of the objectives of the MD&A, replacing the off-balance sheet arrangements and contractual obligations table requirements with principles-based disclosure of those subjects, and codifying guidance on critical accounting estimates (Release 33-10750). A few days before, the Division of Corporation Finance issued three CDIs providing guidance on issues arising from the ability to omit discussion in the MD&A of the earliest of the three years covered by the financial statements in a filing (CDIs 110.02-.04).

The most recent MD&A guidance reminds companies to:

  • Consider MD&A requirements when including metrics in their disclosure, including the directive that “[t]he 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.”
  • Include further material information, if any, necessary to make the presentation of the metric, in light of the circumstances under which it is presented, not misleading.
  • Consider whether the metric is a GAAP or non-GAAP financial measure.
  • Consider what additional information is needed to provide adequate context for investors to understand the metric presented, including any estimates or assumptions underlying the metric or its calculation.

The SEC indicates that it would generally expect the following to accompany the metric:

  • A clear definition of the metric and how it is calculated.
  • A statement of the reasons why the metric provides useful information to investors.
  • A statement of how management uses the metric in managing or monitoring the performance of the business.
  • If the presentation or calculation method of the metric changes, any material differences compared to prior periods, the reasons for the changes, the effects of the changes on the information disclosed and any other differences in methodology or results that would reasonably be expected to be relevant to an understanding of the company’s performance or prospects. It also may be necessary to recast prior metrics.

The SEC emphasizes that companies are required to maintain effective disclosure controls and procedures, and these may need to encompass key performance indicators and other metrics that are material to an investment or voting decision.  Thus, a company should consider whether it has effective controls and procedures in place to process information related to the disclosure of those metrics to ensure consistency as well as accuracy.

Practical Takeaways

The SEC guidance is an instructive reminder for companies of what has been good disclosure practices for using performance indicators and metrics in MD&A and other disclosures, including when they are non-GAAP financial measures.  The guidance also is an indication that key performance indicators and metrics that are used by management to manage the business may be material to investors and therefore required to be included in MD&A.  The use of these indicators and metrics in earnings releases, analyst calls and other investor communications may suggest that they are material.  Moreover, the disclosure of performance indicators and metrics in SEC filings in compliance with the guidance can be expected to be a focus of SEC reviews.  Therefore, attention to the guidance and ensuring consistency in disclosures in SEC filings with other disclosures to investors continues to be important.

This is a good opportunity for companies to review their policies and procedures for collection and calculating key performance indicators and metrics, the way in which that information is used, and their disclosure controls and procedures in order to ensure that this information is part of what its disclosure committee or other disclosure review process considers.

Your regular Locke Lord contact and any of the authors would be happy to assist you with this review and to address any questions.

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