COVID-19 Highlights Need to Reset SEC Proposal on MD&A Disclosures

Now is not the time to eliminate important investor information. It is a time to enhance and improve some of the key sections of registrant filings.

The comment period for the Securities and Exchange Commission’s proposed rule, Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information closed this week, and investors weighed in.

In broad strokes, the proposal seeks to reduce the “burden” on preparers of providing information, such as by removing the contractual obligations table and selected financial data and providing flexibility for registrants in the quarters they choose to compare results. The thing is, the burden isn’t being removed, just shifted from preparers to investors, and it is more than a shift — there is a net information loss to investors. Investors, not management, pay for these disclosures, and they want them to remain.

CFA Institute, along with the Council of Institutional Investors, weighed in with a comment letter and noted that removal of such information is a net subtraction for investors. Key items such as contractual obligations are being removed at a time when the COVID-19 epidemic proves they are more valuable than ever. We believe they should be enhanced, not removed. Before finalizing this proposal, we believe, it is essential that the SEC consider how such changes would disadvantage investors in times of market stress such as we are experiencing with the COVID-19 pandemic.

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Contractual Obligations. The proposal would eliminate the requirement to present contractual obligations in a single, complete table, doing so on the theory that the information is already contained in the financial statement footnotes or somewhere else in the document. While that might save a registrant some time, it really just transfers the burden to investors and analysts.

The COVID-19 situation highlights the need for this table as investors need to have at the ready a single disclosure that shows the totality and timing of a company’s contractual obligations. Imagine not having this table amidst the economic and liquidity crisis brought on by the pandemic — investors would be scrambling to compile the information by picking through registrant filings.

We highlight in our comment letter academic research that demonstrates the usefulness of this information in periods of economic stress. Further, the table is a valuable tool for management in assessing its obligations in a single location. As they say, what gets measured and disclosed gets monitored. Rather than eliminating the table, we believe it should be enhanced to include purchase obligations, off-balance-sheet obligations, and other cash requirements.

Selected Financial Data. The proposal also would eliminate the five-year selected financial data, again on the premise that this a burden on preparers and that investors can get the information from other sources. This is not true. If current period financials are modified for accounting changes or reclassifications, such as those related to discontinued operations, no comparable information is available to investors in the information ecosystem. Important information would be lost.

Comparable Quarters. The proposal also allows companies to choose a comparison of current period results to either the prior quarter (sequential) or the prior-year quarter. We don’t believe this flexibility should be allowed because the period chosen is likely to be the one with the most favorable changes.

Skimpy Analysis. Our view is that management discussion and analysis (MD&A) is often woefully short on analysis. Such analysis is essential in the current economic environment. We believe the SEC needs to go further in requiring companies to provide a discussion of the root causes of changes in results. We also believe the SEC should require a tabular presentation of the dollar and percentage changes in line items, as this will likely show that once tabularized, the MD&A includes very little analysis and is simply a rote recitation of increases and decreases in financial statement line items.

Structuring the Data. Hand in hand with tabular presentation is the need for tagging of tabular and textual data in all sections within an MD&A as well as the selected financial data and contractual obligations. The proposal doesn’t include a requirement to tag and structure the data and so doesn’t move forward the electronic consumption of data or reflect how investors consume registrant filings.

In short, CFA believes that now is not the time to eliminate important investor information; rather, it is a time to enhance and improve some of the key sections of registrant filings.