Just before the 2003 holiday break, the Securities and Exchange Commission issued a long-awaited interpretive release that provides guidance regarding Management’s Discussion & Analysis of Financial Condition and Results of Operations (“MD&A”), a significant portion of every reporting company’s required disclosure documents.1

In the December 19, 2003, release, the SEC states that its guidance “is intended to elicit more meaningful disclosure in MD&A” in several key areas and generally to promote an MD&A disclosure that is “easier to follow and understand” while being both “informative and transparent.” The release expressly states that it “does not modify existing legal requirements or create new legal requirements,” but rather is intended to provide “interpretive” and “additional” guidance in areas addressed in prior SEC releases.

The release offers general guidance regarding the “overall presentation and focus of MD&A,” with an emphasis on “the discussion and analysis of known trends, demands, commitments, events and uncertainties,” as well as specific guidance on disclosures regarding a corporation’s liquidity and capital resources (including more specific disclosures of cash requirements and uses, contractual commitments, debt instruments, financings and related covenants) and critical accounting estimates and underlying assumptions (and specifically why a company’s estimates or assumptions bear the risk of change).

In its broader discussion of the overall “approach to MD&A,” the Commission expresses its view that MD&A should reflect a discussion and analysis of a company’s business “as seen through the eyes” of its management, with a particular emphasis on quality over quantity of disclosure. Indeed, in encouraging corporate managers to “take a fresh look at MD&A,” the release suggests in various places that “boilerplate” and “duplicative” disclosures be avoided, and that “stale” and “immaterial” disclosures be updated and/or jettisoned in favor of more “executive-level overviews” and “layered” summaries with more headings, organized in such a way that the “most important information is most prominent.” The Commission also urges greater use of tables in presenting relevant financial or other information, including tabular comparisons of results from different periods. The Commission also urges a departure from the traditional disclosure format by noting that “the order of the information need not follow the order presented in Item 303 of Regulation S-K if another order of presentation would better facilitate readers’ understanding.”

The release emphasizes that MD&A should focus on the key indicators of a company’s financial condition and operating performance, with greater attention to materiality, particularly with regard to disclosure of known trends and uncertainties that may be indicative of future results. In its discussion of this point, the Commission notes that since first adopting MD&A disclosure requirements over two decades ago, significant advancements in information technology have led to far greater information becoming available to management at a faster rate, thereby increasing the volume of information that managers need to evaluate for possible disclosure.

The release thus highlights an apparent tension between the stated need for focused and clear disclosure and avoidance of information overload, on the one hand, and the increased need for management to consider greater volumes of information for disclosure, on the other. While the release offers several helpful examples of circumstances where greater, or less, disclosure may be appropriate, it remains to be seen to what extent this latest guidance will significantly alter – much less simplify – the process of preparing future disclosure documents.