[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.

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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\
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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 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

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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

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                 Subject                    Release No.              Date               Fed. Reg. Vol. and page
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                                                  * * * * * * *
Commission Guidance on Management's                   87  January 30, 2020..........  [insert FR citation of
 Discussion and Analysis of Financial                                                  publication].
 Condition and Results of Operations.
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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:

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                 Subject                    Release No.              Date               Fed. Reg. Vol. and page
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                                                  * * * * * * *
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.
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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:

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                 Subject                    Release No.              Date               Fed. Reg. Vol. and page
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                                                  * * * * * * *
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.
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    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


