On Jan. 20, 2021, newly inaugurated President Biden signed several Executive Orders (EOs), one of which directly addressed rules by Executive Branch departments and agencies that were in various stages of being established. On Jan. 11, 2021, the Federal Register published the Security and Exchange Commission's (SEC) Final Rules "Management's Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information" thus establishing an effective date for those rules of Feb. 10, 2021. That effective date is now in question under the EO.
As the Final Rules have been published in the Federal Register but are not yet effective, the relevant part of the order states (emphasis added), as per Item 3:
With respect to rules that have been published in the Federal Register, or rules that have been issued in any manner, but have not taken effect, consider postponing the rules' effective dates for 60 days from the date of this memorandum, consistent with applicable law and subject to the exceptions described in paragraph 1, for the purpose of reviewing any questions of fact, law, and policy the rules may raise. For rules postponed in this manner, during the 60-day period, where appropriate and consistent with applicable law, consider opening a 30-day comment period to allow interested parties to provide comments about issues of fact, law, and policy raised by those rules, and consider pending petitions for reconsideration involving such rules. As appropriate and consistent with applicable law, and where necessary to continue to review these questions of fact, law, and policy, consider further delaying, or publishing for notice and comment proposed rules further delaying, such rules beyond the 60-day period. Following the 60-day delay in effective date:
- for those rules that raise no substantial questions of fact, law, or policy, no further action needs to be taken; and
- for those rules that raise substantial questions of fact, law, or policy, agencies should notify the OMB Director and take further appropriate action in consultation with the OMB Director.
A 60-day delay would clearly push the effective date of the Final Rules almost to the end of March as it stands currently.
Currently it is not clear whether or not the SEC is subject to the EO based on previous interpretations and similar actions taken in the past with a change in administrations.
If applicable, it is not a forgone conclusion the effective date of the Final Rules would be deferred as affected agencies are asked to "consider" a postponement. Therefore, until the applicability of the EO is clearly established, or the SEC publicly states its intended actions, companies that anticipated adopting any of the amended rules (see highlights below) should closely monitor the SEC's response and how that interacts with the expected or required filing dates for the 2020 Form 10-K.
The Commission now comprises two Democratic Commissioners (including the Acting Chair) and two Republican Commissioners (all four appointed by President Trump). Allison Herren Lee was named Acting Chair on Jan. 21, 2020 and was one of the two Commissioners that voted against issuing the rule on Nov. 19, 2020. The Final Rule passed under then-Chair Jay Clayton on a three-to-two vote, with the two Democratic Commissioners (including now-Chair Lee) having voted against the Final Rule. In a joint statement, both dissenting Commissioners stated their objection because the Final Rule "eliminate[d] certain disclosures and the tabular presentation of contractual information that currently provide[d] investors with critical insight into supply chain and risk management" and "fail[ed] completely to address climate risk, similar to other recent modernization rulemakings that have failed to deal adequately with this and other critical factors that impact an issuer's long-term sustainability, such as human capital management."
As a reminder, the Final Rules amend guidance in Regulation S-K related to Items 301 – Selected Financial Data, 302 – Supplementary Financial Information and 303 – Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A). The more significant highlights of the amendments are to:
- Completely eliminate the tabular presentation of selected financial data, sometimes referred to as "the five-year table."
- Replace the required quarterly financial data (typically presented in an unaudited footnote) with a disclosure when there are one or more retrospective changes to the statements of comprehensive income (which start with net income) within the two most recent years, and convert or clarify many disclosure items within MD&A to a more principles-based framework, including:
- Replacing the required caption for and specific disclosure of off-balance sheet arrangements with principles-based guidance.
- Replacing the required contractual obligations table with principles-based disclosure guidance.
- Codifying the SEC's previous guidance for the disclosure of critical accounting estimates into a Regulation S-K requirement.
For additional information, see the text of the Executive Order or reach out to us at firstname.lastname@example.org.