---------------------------------------------------------------------------

b. Final Amendments
    We are adopting amendments to Forms S-1 and F-1 as proposed. To
preserve disclosure of financial information in summary prospectuses,
our amendments replace the requirement for selected financial data in
Forms S-1 and F-1 with summarized financial information under Item 1-
02(bb) of Regulation S-X. We continue to believe the information
required under Rule 1-02(bb) is similar to the information currently
required and is consistent with other types of financial statement
disclosures that should be included when certain significance
thresholds have been met.
4. Business Combinations--Form S-4, Form F-4, and Schedule 14A
a. Proposed Amendments
    The Commission proposed eliminating references to Items 301 and 302
in Form S-4, Form F-4, and Schedule 14A. Where these forms are used in
conjunction with a business combination, pro forma financial statements
for the most recent fiscal year and interim period under Article 11 of
Regulation S-X are required.\366\ Additionally, Item 3(e) and (f) in
both Forms S-4 and F-4 require Item 301 or Item 3.A of Form 20-F
information, respectively, on a pro forma basis. Item 14(b)(9) and (10)
of Schedule 14A generally call for similar pro forma information in the
context of a business combination. A related instruction stipulates
that, for a business combination accounted for as a purchase, financial
information is required for the same periods required by Article 11 of
Regulation S-X. Because these pro forma requirements are effectively
duplicative of the pro forma financial statements required elsewhere by
the form, the Commission proposed deleting them.\367\
---------------------------------------------------------------------------

    \366\ See Item 5 under Part 1 of Forms F-4 and S-4.
    \367\ The Commission also proposed deleting the related
instruction to these items.
---------------------------------------------------------------------------

    Similarly, the Commission proposed eliminating references to Item
301 and Item 3.A of Form 20-F in Item 17(b)(3) of both Form S-4 and
Form F-4. Lastly, the Commission proposed deleting the reference to
Item 302 in Item 17(b)(4) of Form S-4. Because Item 17(b) of Forms S-4
and F-4 applies to non-reporting target companies in a business
combination, this disclosure may not be available elsewhere. In
connection with this, the Commission stated its belief that the
requirement for discussion and analysis of trends in Item 303 would
also be sufficient to address material information related to a target
company in a business combination context.
b. Final Amendments
    We are adopting amendments to Form S-4, Form F-4, and Schedule 14A,
to eliminate the reference to Item 301, as proposed, but will retain
the reference to Item 302 in light of our final amendments, which will
retain that item. As discussed above, our amendments to Item 302(a) are
intended to address discrete areas of disclosure that we believe may be
important to investors. Accordingly, we are retaining current
references to Item 302(a), including in Form S-4 and Schedule 14A.
5. Form S-20
a. Proposed Amendments
    The Commission proposed a conforming change to Form S-20 to remove
references to Item 302 of Regulation S-K.\368\ Form S-20 is used to
register standardized options under the Securities Act and requires
limited information about the clearing agency registrant and the
options being registered. Since the adoption of Rule 238 in 2002, which
exempts from Securities Act Section 5 the registration of offerings of
standardized options that are issued by a registered clearing agency
and traded on a national securities exchange, Form S-20 is rarely
used.\369\
---------------------------------------------------------------------------

    \368\ 17 CFR 239.20. Current references in Form S-20 to Item 302
are references to the item's predecessor, Item 12.
    \369\ See Exemption for Standardized Options From Provisions of
the Securities Act of 1933 and From the Registration Requirements of
the Securities Exchange Act of 1934, Release No. 33-8171 (Dec. 23,
2002) [68 FR 188 (Jan. 2, 2003)] (``New Securities Act Rule 238 does
not make Form S-20 obsolete. We are retaining Form S-20 for use by
an issuer of standardized options that is not a clearing agency
registered under Section 17A of the Exchange Act, such as a foreign
clearing agency, or for use by issuers of standardized options that
do not trade on a registered national securities exchange or on a
registered national securities association.''). Since the effective
date of Rule 238 in 2003, we estimate that approximately one entity
has used Form S-20.

---------------------------------------------------------------------------

b. Final Amendments
    As discussed above, our amendments to Item 302(a) are intended to
address discrete areas of disclosure that we believe may be important
to investors. Accordingly, we are retaining current references to Item
302(a), including in Form S-20.\370\
---------------------------------------------------------------------------

    \370\ We are making a technical amendment to Form S-20 to update
the reference from Item 12, the predecessor to Item 302, to
reference Item 302.
---------------------------------------------------------------------------

F. Compliance Date

    The final rules are effective February 10, 2021. After considering
feedback from commenters,\371\ registrants will be required to apply
the amended rules for their first fiscal year ending on or after August
9, 2021 (the ``mandatory compliance date''). Registrants will be
required to apply the amended rules in a registration statement and
prospectus that on its initial filing date is required to contain
financial statements for a period on or after the mandatory compliance
date.
---------------------------------------------------------------------------

    \371\ See, e.g., letters from RSM; Nareit; SIFMA; CalPERS; E&Y
ABA; Society; CAQ; Chamber. Commenters generally supported a
transition period greater than 180 days. See, e.g., letters from
RSM; Nareit; SIFMA; CalPERS; E&Y ABA; Society. Several of these
commenters stated that registrants may need more time to transition
to certain of the proposed amendments, such as to prepare
disclosures in response to the proposed critical accounting estimate
requirements. See, e.g., letters from RSM; SIFMA; E&Y Society. Some
commenters recommended a longer transition period because of the
COVID-19 pandemic. See letters from Nareit; CalPERS. Other
commenters recommended modifying the compliance date to require
compliance in the first annual report on Form 10-K or Form 20-F that
is due on or after the proposed effective date of 180 days, thereby
allowing registrants a minimum of 180 days and requiring initial
compliance on an annual report. See letters from ABA and Society.
However, a few commenters supported a transition period of 180 days.
See letters from Chamber; CAQ.
---------------------------------------------------------------------------

    Although registrants will not be required to apply the amended
rules until their mandatory compliance date, they may provide
disclosure consistent with the final amendments any time after the
effective date, so long as they provide disclosure responsive to an
amended item in its entirety. For example, upon effectiveness of the
final amendments, a registrant may immediately cease providing
disclosure pursuant to former Item 301, and may voluntarily provide
disclosure pursuant to amended Item 303 before its mandatory compliance
date. In this case, the registrant must provide disclosure pursuant to
each provision of amended Item 303 in its entirety, and must begin
providing such disclosure in any applicable filings going forward.\372\
---------------------------------------------------------------------------

    \372\ To the extent that registrants have questions about
application of the amended rules in advance of their mandatory
compliance date, they should reach out to Commission staff for
additional transition guidance.
---------------------------------------------------------------------------

III. Other Matters

    If any of the provisions of these rules, or the application thereof
to any person or circumstance, is held to be invalid, such invalidity
shall not affect other provisions or application of such provisions to
other persons or circumstances that can be given effect without the
invalid provisions or application.
    Pursuant to the Congressional Review Act,\373\ the Office of
Information and Regulatory Affairs has designated these rules as not a
``major rule,'' as defined by 5 U.S.C. 804(2).
---------------------------------------------------------------------------

    \373\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

IV. Economic Analysis

A. Introduction

    As discussed above, we are adopting amendments to modernize,
simplify, and enhance certain financial disclosure requirements in
Regulation S-K. Specifically, the final amendments will (1) eliminate
Item 301 of Regulation S-K, Selected Financial Data, (2) streamline
Item 302 of Regulation S-K, Supplementary Financial Information; and
(3) amend Item 303 of Regulation S-K, Management's Discussion &
Analysis of Financial Condition and Results of Operations. The
amendments are intended to eliminate duplicative disclosures and
enhance MD&A disclosures for the benefit of investors, while
simplifying compliance efforts for registrants.
    Overall, investors and registrants may benefit from the amendments
to the extent that they help avoid duplicative disclosure and result in
more tailored disclosures that allow investors to better understand the
registrant's business through the eyes of management. We acknowledge
the risk that modernizing and simplifying the approach to MD&A may
result in the loss of certain information to investors. However, we
believe that any loss of information would be limited because the
disclosures eliminated as a result of the amendments are mostly
duplicative. Additionally, under the principles-based approach we are
adopting, registrants will still be required to disclose material
information relevant to an assessment of the financial condition and
results of operations, further mitigating the effects of any potential
loss of information.
    We are mindful of the costs and benefits of the final amendments.
The discussion below addresses the potential economic effects of these
amendments, including the likely benefits and costs, as well as the
likely effects on efficiency, competition, and capital formation.\374\
At the outset, we note that, where possible, we have attempted to
quantify the benefits, costs, and effects on efficiency, competition,
and capital formation expected to result from the final amendments. In
many cases, however, we are unable to quantify the potential economic
effects because we lack information necessary to provide a reasonable
estimate. For example, we are unable to reasonably quantify the costs
to investors of accessing and assessing alternative information
sources, such as the footnotes to financial statements or voluntary
earnings announcements. We are also unable to quantify the potential
information processing cost savings that may arise from the elimination
of disclosures that are duplicative or immaterial. No commenters
provided data or estimates that would allow us to quantify benefits or
costs generated by the amendments. Where we are unable to quantify the
economic effects of the final amendments, we provide a qualitative
assessment of their potential effects.
---------------------------------------------------------------------------

    \374\ Section 2(b) of the Securities Act [15 U.S.C. 77b(b)] and
Section 3(f) of the Exchange Act [17 U.S.C. 78c(f)] require the
Commission, when engaging in rulemaking where it is required to
consider or determine whether an action is necessary or appropriate
in the public interest, to consider, in addition to the protection
of investors, whether the action will promote efficiency,
competition, and capital formation. Further, Section 23(a)(2) of the
Exchange Act [17 U.S.C. 78w(a)(2)] requires the Commission, when
making rules under the Exchange Act, to consider the impact that the
rules would have on competition, and prohibits the Commission from
adopting any rule that would impose a burden on competition not
necessary or appropriate in furtherance of the Exchange Act.
---------------------------------------------------------------------------

    Two commenters expressed their concerns regarding the cost
estimates in the proposal.\375\ One of these commenters stated that we
failed to quantify the negative impact on investors.\376\ Further, one
of these commenters stated that we should empirically study the costs
and benefits of the proposed rule, and cited to specific studies.\377\
We have qualitatively discussed the costs and benefits of the rule
below, including

those to investors.\378\ However, as discussed above, in many cases, we
are unable to accurately quantify the potential economic effects of the
final amendments, and we lack information necessary to undertake
empirical study of the final rule. For example, we are unable to
quantify the costs to investors of the increased flexibility provided
to registrants under the final amendments because we lack the data
(e.g., search or information processing costs) necessary for such
quantification. Commenters did not provide data or estimates on such
costs. We have, however, addressed the additional studies referenced by
these commenters.\379\
---------------------------------------------------------------------------

    \375\ See CalPERS and PRI Letters.
    \376\ See CalPERS Letter.
    \377\ See PRI Letter.
    \378\ See infra Section C.
    \379\ See infra Section IV(C)(1).
---------------------------------------------------------------------------

B. Baseline and Affected Parties

    The current disclosure requirements under Items 301, 302, and 303
of Regulation S-K, and the related requirements under Items 3.A and 5
of Form 20-F, and General Instructions B.(11), (12), and (13) of Form
40-F, together with the current disclosure practices registrants have
adopted to comply with these requirements, form the baseline from which
we estimate the likely economic effects of the final amendments.\380\
The disclosure requirements apply to various filings, including
registration statements, periodic reports, and certain proxy statements
filed with the Commission. Thus, the parties that are likely to be
affected by the amendments include investors and other market
participants that use the information in these filings (such as
financial analysts, investment advisers, and portfolio managers), as
well as registrants subject to the relevant disclosure requirements
discussed above.
---------------------------------------------------------------------------

    \380\ See supra Section I.
---------------------------------------------------------------------------

    One commenter stated that we did not attempt to identify who uses
the disclosures affected by the rule and why.\381\ We continue to
believe that investors, financial analysts, investment advisers, and
portfolio managers use the information in these filings. We believe
that these parties use the information in these filings in connection
with making investment decisions, such as comparing information across
companies, valuing companies, investing in companies, exercising
control of voting securities, etc. Investors affected by the final
amendments may directly hold a variety of types of securities issued by
reporting companies, such as stocks or bonds, or they may indirectly
hold these securities by investing in funds that hold securities issued
by reporting companies. In addition, prospective investors may also be
affected by the rule as they may derive information from those filings
affected by the final amendments. Because the final amendments would
affect current and potential individual and institutional investors,
both large and small investors will be affected.
---------------------------------------------------------------------------

    \381\ See CalPERS Letter.
---------------------------------------------------------------------------

    The final amendments may affect both domestic registrants and
FPIs.\382\ We estimate that during calendar year 2019 there were
approximately 6,987 registrants that filed on domestic forms \383\ and
849 FPIs that filed on F-forms, other than registered investment
companies. Among the registrants that filed on domestic forms,
approximately 30 percent were large accelerated filers, 18.5 percent
were accelerated filers, and 51.5 percent were non-accelerated filers.
In addition, we estimate that approximately 43 percent of these
domestic issuers were SRCs and 21.1 percent were EGCs. The final
amendments will also affect ABS issuers. ABS issuers are required to
file on Forms SF-1 and SF-3 and, as a result, may be subject to the
changes to Regulation AB requirements in this release. We estimate that
during calendar year 2019, there were 24 unique depositors filing at
least one Form SF-1 or Form SF-3.
---------------------------------------------------------------------------

    \382\ The number of domestic registrants and FPIs affected by
the final amendments is estimated as the number of unique companies,
identified by Central Index Key (CIK), that filed a Form 10-K, Form
20-F, and Form 40-F, an amendment thereto, or both a Form 10-Q and a
Form S-1, S-3, or S-4 with the Commission during calendar year 2019.
For purposes of this economic analysis, these estimates do not
include registrants that filed only a Securities Act registration
statement during calendar year 2019, or only a Form 10-Q not
preceded by a Securities Act registration statement, in order to
avoid including entities, such as certain co-registrants of debt
securities, which may not have an independent reporting obligation
and therefore would not be affected by the amendments. We believe
that most registrants that have filed a Securities Act registration
statement or a Form 10-Q not preceded by a Securities Act
registration statement, other than such co-registrants, would be
captured by this estimate. The estimates for the percentages of
SRCs, EGCs, accelerated filers, large accelerated filers, and non-
accelerated filers are based on data obtained by Commission staff
using a computer program that analyzes SEC filings, with
supplemental data from Ives Group Audit Analytics.
    \383\ This number includes fewer than 20 FPIs that filed on
domestic forms in 2019 and approximately 100 BDCs.
---------------------------------------------------------------------------

C. Potential Benefits and Costs of the Amendments

    In this section, we discuss the anticipated economic benefits and
costs of the final amendments. We first analyze the overall economic
effects of the amendments. We then discuss the potential benefits and
costs of specific amendments.
1. Overall Potential Benefits and Costs
    We anticipate the final amendments \384\ will benefit registrants
and investors in several ways. First, by eliminating certain
duplicative disclosure requirements, the amendments could reduce
registrants' disclosure burden and associated compliance costs. Second,
by modernizing and simplifying Item 303 disclosure requirements, the
final amendments may benefit registrants and investors by reducing
disclosure burdens and associated compliance costs. In addition, to the
extent the amendments result in more tailored and informative
disclosure, they could potentially reduce information asymmetry between
registrants and investors, which could enhance the investment decision
process, improve firms' liquidity, and decrease the cost of capital.
Finally, certain of the amendments emphasize a more principles-based
approach to MD&A, which we believe will benefit registrants and
investors by underscoring the flexibility available in presenting
financial results that are more indicative of their business and
accordingly provide investors with better information on which to base
decisions.\385\ A more principles-based

approach, however, could lead to registrants incurring increased costs
associated with assessing materiality.
---------------------------------------------------------------------------

    \384\ See supra Sections II.A. through II.F.
    \385\ A number of academic studies have explored the use of
prescriptive thresholds and materiality criteria. Many of these
papers highlight a preference for principles-based materiality
criteria. See, e.g., Eugene A. Imhoff Jr. and Jacob K. Thomas,
Economic consequences of accounting standards: The lease disclosure
rule change, 10 J. Acct. & Econ. 277 (1988) (providing evidence that
management modifies existing lease agreements to avoid crossing
rules-based criteria for lease capitalization); Cheri L. Reither,
What are the best and the worst accounting standards?, 12 Acct.
Horizons 283 (1998) (documenting that due to the widespread abuse of
bright-lines in rules for lease capitalization, SFAS No. 13 was
voted the least favorite FASB standard by a group of accounting
academics, regulators, and practitioners); Christopher P. Agoglia,
Timothy S. Doupnik, and George T. Tsakumis, Principles-based versus
rules-based accounting standards: The influence of standard
precision and audit committee strength on financial reporting
decisions, 86 The Acct. Rev. 747 (2011) (conducting experiments in
which experienced financial statement preparers are placed in a
lease classification decision context and finding that preparers
applying principles-based accounting are less likely to make
aggressive reporting decisions than preparers applying a more
precise rules-based standard and supporting the notion that a move
toward principles-based accounting could result in better financial
reporting); Usha Rodrigues and Mike Stegemoller, An inconsistency in
SEC disclosure requirements? The case of the ``insignificant''
private target, 13 J. Corp. Fin. 251 (2007) (providing evidence, in
the context of mergers and acquisitions, where rule-based
[disclosure] thresholds deviate from investor preferences). Papers
that highlight a preference for rules-based materiality criteria are
cited below in footnote 391.
---------------------------------------------------------------------------

    Many commenters agreed that the final amendments would decrease
compliance costs for registrants.\386\ Some commenters, however,
questioned whether the elimination of duplicative disclosure would
result in cost savings, stating that registrants already have the
procedures in place to disclose this information.\387\ However, the
elimination of disclosure requirements, even where the information must
be disclosed elsewhere and registrants already have the disclosure
procedures in place, would lead to certain costs savings to
registrants. For example, registrants will not need to devote time or
resources to preparing or reviewing the duplicative disclosure. The
resulting cost savings may be small, but we do not believe they are
negligible.
---------------------------------------------------------------------------

    \386\ See letters from PWC; Pfizer; Eli Lilly; EEI & AGA; KPMG;
CAQ; FedEx; Nasdaq; Nareit; FEI; SIFMA; IMA; E&Y UnitedHealth;
Medtronic; Chamber; ABA; Society.
    \387\ See letters from NASAA; CalPERS. See also IAC
Recommendation.
---------------------------------------------------------------------------

    We believe the final amendments could provide various benefits to
investors. First, the amendments that clarify and codify existing
guidance, such as the amendments related to critical accounting
estimates and capital resources, could enhance MD&A disclosure. More
robust and informative disclosure on these topics could facilitate
investors' decision making and enhance investor protection. Second, if
the amendments result in enhanced and improved disclosure, they could
allow investors to more efficiently process the disclosure and make
better-informed investment decisions. In particular, investors may
benefit from more tailored disclosures that allow them to better
understand the registrant's business through the eyes of management.
Investors also could benefit from the reduction of duplicative
disclosure, because reducing such duplication may improve the
readability and conciseness of the information provided, help investors
focus on material information, and facilitate more efficient
information processing.\388\
---------------------------------------------------------------------------

    \388\ See Alastair Lawrence, Individual Investors and Financial
Disclosure, 56 J. Acct. & Econ., 130 (2013). Using data on trades
and portfolio positions of 78,000 households, this article shows
that individuals invest more in firms with clear and concise
financial disclosures. This relation is reduced for high frequency
trading, financially literate investors, and speculative individual
investors. The article also shows that individuals' returns increase
with clearer and more concise disclosures, implying such disclosures
reduce individuals' relative information disadvantage. A one
standard deviation increase in disclosure readability and
conciseness corresponds to return increases of 91 and 58 basis
points, respectively. The article acknowledges that, given the
changes in financial disclosure standards and the possible advances
in individual investor sophistication, the extent to which these
findings, which are based on historical data from the 1990s, would
differ from those today is unknown. Recent advances in information
processing technology, such as machine learning for textual
analysis, may also affect the generalizability of these findings.
---------------------------------------------------------------------------

    However, investors could incur certain transition costs under the
final amendments. For example, investors who are used to the current
disclosure format might experience costs when adjusting to the new
format. Several commenters expressed concern that eliminating
duplicative disclosure could result in greater work for investors to
locate this disclosure, with particular burdens on investors who lack
skills to navigate EDGAR effectively, and potential direct and indirect
impacts of having to adjust to operating in this way.\389\ Investors
could incur monetary costs such as database subscriptions, or
opportunity costs such as time spent, if they need to obtain or
reconstruct information through alternative sources. However, any such
costs should decrease over time as investors become more familiar with
the new disclosure format. In a similar vein, some commenters stated
that the elimination of certain disclosure items as a result of the
final amendments would increase the time and costs for investors to
obtain such disclosure through other means.\390\ However, we do not
expect such costs to be significant since registrants would still need
to disclose material information relevant to an assessment of the
financial condition and results of operations.
---------------------------------------------------------------------------

    \389\ See letters from CalPERS; CFA & CII; D. Jamieson; NASAA.
See also IAC Recommendation.
    \390\ See letters from NASAA; CalPERS; CFA & CII; D. Jamieson;
E&Y. See also IAC Recommendation.
---------------------------------------------------------------------------

    There could be certain additional costs associated with the
amendments to the extent that they result in the elimination of
disclosure material to an investment decision if registrants misjudge
what information is material, or if disclosure becomes less comparable
across firms.\391\ The risk of misjudgment may be mitigated by factors
including accounting, financial reporting, and disclosure controls or
procedures,\392\ as well as the antifraud provisions of the securities
laws.\393\ There also may be incentives for registrants to voluntarily
disclose additional information if the benefits of reduced information
asymmetry exceed the disclosure costs. One commenter further cited
academic studies it believes indicate how issuers could respond to the
increased flexibility provided under the final rule, including through
the increased use of boilerplate disclosure.\394\ For example, one
study shows that MD&A disclosure has become longer and its usefulness
(measured by stock market reaction to changes in MD&A) has
declined.\395\ This study, however, acknowledges that its documented
decrease in the usefulness of MD&A disclosure could be due to a host of
factors (e.g., increased corporate interim disclosures, more media
outlets, faster information dissemination, ease of private information
search), and not necessarily the use of more principles-based
disclosure requirements in MD&A. Two of the academic studies cited by
the commenter also purport to provide evidence of increasing use of
boilerplate disclosure in companies' annual reports, and a correlation
between boilerplate disclosure and liquidity as well as analyst
coverage.\396\ However, one of the studies presents evidence that three
specific disclosure requirements that are not part of MD&A--fair value,
internal controls, and risk factors--play a significant role

in any increase in boilerplate disclosure.\397\ To the extent that the
increased flexibility of the final amendments may encourage
opportunistic behavior by management of the registrants, this could
result in boilerplate disclosure in some circumstances. However, we
continue to believe that this potential risk may be mitigated by other
factors including accounting disclosure requirements, financial
reporting, and disclosure controls or procedures, as well as the
antifraud provisions of the securities laws. To the extent that the
final amendments will increase the relevancy and materiality of the
information disclosed in the registrants filings, investors would
benefit from the final rule.
---------------------------------------------------------------------------

    \391\ See Mark W. Nelson, Behavioral Evidence on the Effects of
Principles- and Rules-Based Standards, 17 Acct. Horizons 91 (2003);
and Katherine Schipper, Principles-based accounting standards, 17
Acct. Horizons 61 (2003) (noting potential advantages of rules-based
accounting standards, including: Increased comparability among
firms, increased verifiability for auditors, and reduced litigation
for firms). See also Randall Rentfro and Karen Hooks, The effect of
professional judgment on financial reporting comparability, 1 J.
Acct. & Fin. Res. 87 (2004) (finding that comparability in financial
reporting may be reduced under principles-based standards, which
rely more heavily on the exercise of professional judgment, but
comparability may improve as financial statement preparers become
more experienced and hold higher organizational rank); Andrew A.
Acito, Jeffrey J. Burks, and W. Bruce Johnson, The Materiality of
Accounting Errors: Evidence from SEC Comment Letters, 36 Contemp.
Acct. Res. 839, 862 (2019) (studying managers' responses to SEC
inquiries about the materiality of accounting errors and finding
that managers are inconsistent in their application of certain
qualitative considerations and may omit certain qualitative
considerations from their analysis that weigh in favor of an error's
materiality).
    \392\ See, e.g., Exchange Act Rules 13b-2b [17 CFR 240.13b-2b],
13a-15e [17 CFR 240.13a-15e], and 13a-15f [17 CFR 240.13a-15f].
    \393\ See, e.g., Exchange Act Rule 10b-5(b) [17 CFR 240.10b-
5(b)].
    \394\ See PRI Letter.
    \395\ See, e.g. Stephen V. Brown and Jennifer Wu Tucker,
Large[hyphen]Sample Evidence on Firms' Year[hyphen]over[hyphen]Year
MD&A Modifications, 49 J. Acct. Res. 309 (2011)
    \396\ See, e.g. Travis Dyer, Mark H. Lang and Lorien Stice-
Lawrence, The Evolution of 10-K Textual Disclosure: Evidence from
Latent Dirichlet Allocation, J. Acct. & Econ., forthcoming, at Fig.
5, panel B (Mar. 7, 2016); Mark Lang & Lorien Stice-Lawrence, Text
Analysis and International Financial Reporting: Large Sample
Evidence, J. Acct. & Econ., forthcoming, at 17 (Mar. 13, 2014).
    \397\ Travis Dyer, Mark H. Lang and Lorien Stice-Lawrence, The
Evolution of 10-K Textual Disclosure: Evidence from Latent Dirichlet
Allocation, J. Acct. & Econ., forthcoming.
---------------------------------------------------------------------------

    Another commenter suggested that we did not make an effort to
examine the impacts on investors seeking to compare different
issuers.\398\ We acknowledge the more principles-based approach
resulting from certain final amendments may lead to decreased
comparability among different registrants. However, to the extent that
such an approach will result in the disclosure of important information
for each issuer, we believe that it will be beneficial to investors
despite the potential decrease in comparability. With respect to costs
related to comparability of information provided by a single issuer
over time, to the extent that investors may incur costs in comparing
such information, we expect such costs to be limited to the initial
adjustment period for investors, and to decline over time as investors
become more familiar with the amended disclosures. The potential loss
of comparability within the same registrant over time, for example,
from the elimination of selected historical financial data, should be
minimal as investors in most instances can pull that data from
previously filed financial statements via XBRL.
---------------------------------------------------------------------------

    \398\ See letter from CalPERS.
---------------------------------------------------------------------------

    The final amendments likely would affect individual registrants and
investors differently. For example, any compliance cost reduction might
be more beneficial to smaller registrants that are financially
constrained. Similarly, although eliminating information that is not
material should benefit all investors, retail investors could benefit
more as they are less likely to have the time and resources to devote
to reviewing and evaluating disclosure. On the other hand, retail
investors could also incur additional costs as a result of the
amendments because they may need to obtain information from alternative
sources, which could involve monetary costs, such as database
subscriptions, or opportunity costs, such as time spent searching for
alternative sources. These costs may be higher for retail investors
than for institutional investors. One commenter broadly stated that we
did not attempt to examine the impacts on investment decisions across
different asset classes.\399\ We believe that investors, whether
shareholders, bondholders, or holders of other securities, use
information derived from registrants' filings to make informed
investment decisions. We do not anticipate different effects of the
final amendments on investors of different asset classes.
---------------------------------------------------------------------------

    \399\ See CalPERS Letter.
---------------------------------------------------------------------------

2. Benefits and Costs of Specific Amendments
    We expect the final amendments to result in costs and benefits to
registrants and investors, and we discuss those costs and benefits item
by item in this section. The changes to each item would impact the
compliance burden for registrants in filing forms that require
disclosures that are responsive to such items. Overall, we expect the
net effect of the amendments on a registrant's compliance burden to be
limited. As explained in this section, we expect certain aspects of the
proposed amendments to increase compliance burdens, and others to
decrease the burdens. The quantitative estimates of changes in those
burdens for purposes of the Paperwork Reduction Act of 1995 (``PRA'')
\400\ are further discussed in Section V below. For purposes of the
PRA, we estimate that the effect of the amendments would vary for
different forms. However, taken together, the amendments are likely to
result in a net decrease in burden hours for all forms, ranging from
0.1 to 5.9 burden hours per form.\401\ Similarly, we believe the final
amendments will not have significant economic effect on investors
overall. Investors would benefit from the increased relevance and
materiality of the disclosure resulting from the amendments, but in the
meantime, investors may incur some costs to adapt to the new form of
disclosure.
---------------------------------------------------------------------------

    \400\ 44 U.S.C. 3501 et seq.
    \401\ See infra Section V.B.
---------------------------------------------------------------------------

a. Selected Financial Data (Item 301)
    Current Item 301 requires certain registrants \402\ to furnish
selected financial data in comparative tabular form for each of the
registrant's last five fiscal years and any additional fiscal years
necessary to keep the information from being misleading.\403\ The
purpose of this disclosure is to supply in a convenient and readable
format selected financial data that highlights certain significant
trends in the registrant's financial conditions and results of
operations. For certain registrants, information disclosed under Item
301 has also been disclosed in historical financial data and related
XBRL data submissions that can be accessed through prior filings on
EDGAR. Several commenters noted that much information disclosed under
Item 301 is readily available in such prior filings.\404\
---------------------------------------------------------------------------

    \402\ As discussed supra in Section II.A, SRCs are not required
to provide Item 301 information and an EGC that is providing the
information called for by Item 301 in a Securities Act registration
statement need not present selected financial data for any period
prior to the earliest audited financial statements presented in
connection with the EGC's IPO of its common equity securities. In
addition, an EGC that is providing the information called for by
Item 301 in a registration statement, periodic report, or other
report filed under the Exchange Act need not present selected
financial data for any period prior to the earliest audited
financial statements presented in connection with its first
registration statement that became effective under the Exchange Act
or Securities Act. See Item 301(c) of Regulation S-K; Item 301(d)(1)
of Regulation S-K.
    \403\ See supra Section II.A.
    \404\ See letters from FEI; Eli Lilly; UnitedHealth.
---------------------------------------------------------------------------

    The current disclosure requirement under Item 301 can result in
duplicative disclosure, and it can be costly for registrants to provide
such disclosures under certain circumstances.\405\ For example,
providing disclosure of the earliest two years often creates challenges
for registrants when such information has not been previously
provided.\406\ Therefore, eliminating this requirement may facilitate
capital raising activity and increase efficiency for non-EGC issuers
contemplating an IPO. Overall, we expect the elimination of Item 301
will benefit registrants by eliminating duplicative disclosures and
reducing compliance costs. We also note that the benefit associated
with eliminating the costs of providing Item 301 disclosure may be
offset by the costs associated with making materiality determinations
under a principles-based disclosure framework. In general, we do not
expect the elimination of Item 301 will affect the cost of capital
given that the eliminated disclosures are largely

duplicative. To the extent that there is information loss under certain
circumstances, such as in the case of non-EGC IPOs, these registrants
could potentially experience an increase in the cost of capital as a
result of reduced disclosure. However, if the increase in the cost of
capital were significant, registrants would likely voluntarily provide
the disclosures.
---------------------------------------------------------------------------

    \405\ See letters from FEI; Eli Lilly; UnitedHealth; and [EEI &
AGA]
    \406\ See supra Section II.A. See also Proposing Release at
Section II.A.
---------------------------------------------------------------------------

    To the extent the final amendments result in the elimination of
disclosure that is not material, investors may benefit. In particular,
if the readability and conciseness of the information provided
improves,\407\ investors may be able to process information more
effectively by focusing on the material information. Also, the other
amendments we are making to Item 303, as well as our reiteration of
prior Commission MD&A guidance, may permit or encourage registrants to
present more tailored information, which also may benefit investors by
allowing them to better understand the registrant's business.
---------------------------------------------------------------------------

    \407\ See supra footnote 388.
---------------------------------------------------------------------------

    Investors may incur costs to the extent the amendments result in a
loss of information.\408\ While we do not anticipate significant
information loss from the elimination of Item 301, we recognize that
selected financial data for the two earliest years would no longer be
disclosed in non-EGC IPOs. However, the purpose of the item is to
highlight certain significant trends in the registrant's financial
condition and results of operations, and we expect that any material
trend information that would have been disclosed pursuant to Item 301
would be disclosed under Item 303.\409\ We also recognize investors may
incur certain other costs that, for example, result from the inability
to view the information required by Item 301 in one place.\410\ In
particular, investors would incur search costs if they have to spend
more time to retrieve the information from prior filings and to the
extent investors are used to the current format and rely on the
compiled comparable data, they may incur costs to adjust to new
disclosure formats. One commenter expressed concern that our analysis
fails to quantify the costs to investors.\411\ We do not, however,
believe that it is feasible to accurately measure and quantify these
costs because we lack information necessary to provide a reasonable
estimate. For example, we are unable to quantify search costs and costs
of adjustment to the new disclosure format because they would differ
among different investors (e.g., retail investors or institutional
investors) and investors of different degrees of sophistication. In
addition, one commenter stated that the loss of this information may
ease pressure on registrants to explain results, and therefore weaken
management discipline, which could harm long-term investors.\412\ We
believe, however, that pressure on registrants to explain results will
remain as a result of Item 303 disclosure requirements, among other
factors.
---------------------------------------------------------------------------

    \408\ See letter from NASAA.
    \409\ Commission guidance has also emphasized the importance of
trend disclosure in MD&A. See, e.g., 2003 MD&A Interpretive Release.
    \410\ See letters from CFA & CII and CalPERS.
    \411\ See CalPERS letter.
    \412\ See letter from NASAA.
---------------------------------------------------------------------------

    Elimination of Item 301 will also affect the financial information
disclosure by ABS issuers. As discussed above, Items 1112, 1114, and
1115 of Regulation AB require disclosure of financial information
required by Item 301 or Item 3.A of Form 20-F about certain significant
obligors of pool assets, credit enhancement providers, and derivatives
counterparties. By eliminating Item 301 and Item 3.A of Form 20-F for
corporate issuers, this financial information about these third parties
to an ABS transaction, including any trend information comparable to
information required by Item 303 or Item 5 of Form 20-F, may not
otherwise be available. To mitigate this potential information loss,
the final amendments will replace in Regulation AB those requirements
to disclose selected financial data under Item 301 or Item 3.A of Form
20-F with requirements to disclose summarized financial information, as
defined by Rule 1-02(bb) of Regulation S-X, for each of the last three
fiscal years (or the life of the relevant entity or group of entities,
if less).
    Since the changes related to ABS issuers are intended to conform to
the other changes related to selected financial data and MD&A, our
analysis of the costs and benefits for registrants and their investors
under the amendments to Item 301 and Item 3.A of Form 20-F can be
carried over to ABS issuers. In addition, while this amendment would
generally result in the presentation of fewer periods, we do not expect
this amendment to have a significant effect on ABS issuers and their
investors. The presentation of the earlier years will cover periods
beyond those presented for the underlying pool assets. ABS investors
mainly rely on the information relating to the underlying pool assets.
b. Supplementary Financial Information (Item 302(a))
    Under current Item 302(a), certain registrants are required to
disclose quarterly financial data of specified operating results and
variances in these results from amounts previously reported on a Form
10-Q.\413\ Such registrants must provide quarterly information for each
full quarter within the two most recent fiscal years and any subsequent
period for which financial statements are included or required by
Article 3 of Regulation S-X. Item 302(a) also requires disclosure
related to effects of any discontinued operations and unusual or
infrequently occurring items. As discussed above, we are amending Item
302(a) to only require disclosure where there are one or more
retrospective changes to the statements of comprehensive income for any
of the quarters within the two most recent fiscal years and any
subsequent interim period for which financial statements are included
or are required to be included by Article 3 of Regulation S-X that,
individually or in the aggregate, are material. In such cases, the
disclosure must provide an explanation of the reasons for such material
changes, and include, for each affected quarterly period and the fourth
quarter in the affected year, summarized financial information related
to the statements of comprehensive income and earnings per share
reflecting such changes.
---------------------------------------------------------------------------

    \413\ As discussed in Section II.B.1, SRCs, FPIs, issuers
conducting an IPO, and registrants that have a class of securities
registered under Section 15(d) of the Exchange Act are not subject
to Item 302(a).
---------------------------------------------------------------------------

    Since the information required under the current item, other than
fourth quarter data and the effect of a retrospective change in the
earliest of the two years,\414\ typically can be found in prior
quarterly filings through EDGAR, the prescriptive requirements under
current Item 302(a) typically result in duplicative disclosures. By
eliminating these duplicative disclosures and reducing the associated
compliance costs, the final amendments would benefit registrants. We do
not expect the elimination of these duplicative disclosures to affect
registrants negatively. While a decrease in disclosure could
potentially increase the company's cost of capital in general, the
final amendments should elicit information regarding material
retrospective changes that should mitigate this risk. Additionally, a
registrant can always choose to disclose the information required under
the current item in its filings or through

other channels. For example, as some commenters indicated, separate
fourth quarter information is often disclosed in earnings releases.
---------------------------------------------------------------------------

    \414\ See supra footnote 47 and corresponding text.
---------------------------------------------------------------------------

    Investors could benefit to the extent that the final amendments
result in less duplicative disclosure and less disclosure of immaterial
information. The final amendments may result in improved readability
and conciseness of the information provided, helping investors focus on
material information and facilitating more efficient information
processing by investors. The amendments will also allow registrants to
present financial information that is more reflective of their own
industry and firm operating cycles, which could allow investors to
better understand their business.
    We anticipate information loss from the elimination of fourth
quarter financial information currently required under Item 302(a),
other than where there has been a material retrospective change during
the year that would require disclosure of fourth quarter information.
It is generally expected that fourth quarter financial data could be
calculated from annual report and cumulative third quarter data.
Nonetheless, calculating or otherwise obtaining fourth quarter data may
be costly for investors. While such costs might be minimal for
institutional investors, which have both resources and sophistication
to obtain the needed financial information, for retail investors, the
search costs might be substantially larger, which could involve
monetary costs such as database subscriptions, or opportunity costs
such as time spent searching for alternative sources and cross-
referencing. Additionally, investors could make mistakes in deriving
the fourth quarter financial information. To the extent that there is a
lack of accurate fourth quarter information which cannot be obtained
through alternative means, investors' decision making could be
affected.\415\
---------------------------------------------------------------------------

    \415\ See letter from NASAA.
---------------------------------------------------------------------------

    However, such potential loss of information will be mitigated by
the fact that the final amendments will require disclosure of fourth
quarter financial information where there has been a material
retrospective change during the fiscal year. Also, the potential
information loss from the amendments to Item 302(a) might be mitigated
under MD&A's principles-based framework. We believe that fourth quarter
data may not be material to all registrants or in every fiscal year.
For example, for investors in companies with long operating cycles,
fourth quarter data might not be as incrementally important as annual
data. However, to the extent that there are material trends or events
in the fourth quarter or throughout the fiscal year, registrants would
be required to address those matters in their MD&A.
c. Item 303(a) Restructuring and Streamlining
    The final rules include multiple changes that are intended to
clarify and streamline the requirements of Item 303. For example, we
are adopting a new Item 303(a) to provide a succinct and clear
description of the purpose of MD&A. As discussed above, emphasizing the
purpose of MD&A at the outset of the item is intended to provide
clarity and focus to registrants as they consider what information to
discuss and analyze, which could encourage management to disclose those
factors that are most specific and relevant to a registrant's business.
Other changes include restructuring and streamlining language in Item
303 and the related instructions.
    We anticipate that the amendments will provide registrants with
more clarity on disclosure requirements. When there is confusion
related to disclosure requirements, registrants may either over-
disclose and incur additional compliance costs, or under-disclose and
face increased litigation risk. To the extent that the final amendments
reduce registrants' confusion, registrants could potentially benefit
from reduced compliance costs and litigation risk. More informative
disclosure could potentially benefit both registrants and investors by
reducing information asymmetry in the market. Reduced information
asymmetry could help investors make more informed investment decisions,
which may benefit registrants in their capital raising. For
registrants, reduced information asymmetry could also potentially
improve firm liquidity and reduce cost of capital.
d. Capital Resources (Item 303(b)(1)(ii)))
    Current Item 303(a)(2), which requires a registrant to discuss its
material commitments for capital expenditures as of the end of the
latest fiscal period, does not define the term ``capital resources.''
The lack of specificity was intended to provide management flexibility
for a meaningful discussion when this disclosure requirement was
adopted in 1980. Nonetheless, the Commission has previously provided
guidance to clarify this requirement.\416\ Further, while the required
disclosure of material commitments of capital expenditures historically
relates to physical assets, such as buildings and equipment, this
requirement may not fully reflect market developments. While capital
expenditures remain important in many industries, certain expenditures
that are not necessarily capital investments may be increasingly
important to companies. For example, expenditures for human resources
or intellectual property may be essential for companies in certain
industries. The amendments to current Item 303(a)(2) (new Item
303(b)(1)(ii)) are intended to encompass these types of expenditures.
The amendments will also explicitly require, consistent with the
Commission's 2003 MD&A Interpretive Release that registrants broadly
disclose material cash commitments, including but not limited to
capital expenditures. We believe the final amendments will modernize
the requirement and make the disclosure more reflective of current and
future industry outlays.
---------------------------------------------------------------------------

    \416\ See 2003 MD&A Interpretive Release.
---------------------------------------------------------------------------

    We believe that the final amendments could benefit registrants by
providing additional clarity on the term ``capital resources'' and
reducing confusion, thereby eliciting appropriate disclosure from
registrants and potentially decreasing litigation risk. Capital
expenditures vary across industries. While firms in traditional
industries rely more on physical assets, firms in other industries such
as the technology sector may invest more heavily in intellectual
property and human capital. By specifying only capital expenditures,
the rule may not be clear about what information should be provided. As
a result, registrants may over-disclose and incur additional compliance
costs, or under-disclose and face increased litigation risk. Further,
we expect that registrants will benefit from decreased compliance costs
to the extent that the amendments reduce the need to consult existing
Commission guidance to process and understand the disclosure
requirements. As many registrants may already be following relevant
Commission guidance, this effect is not expected to be significant.
    The amendments should also benefit investors through improved
disclosure. As discussed above, lack of clarity might lead to under- or
over-disclosure by registrants. For example, disclosure focusing only
on capital expenditures rather than on material cash commitments more
generally might lead to under-disclosure for less capital intensive
industries. As a result, investors might not receive adequate or
consistent information to make informed investment decisions. By
providing clarity on the requirement,

the amendments may facilitate more informative disclosure.
    The amendments might increase the disclosure burden for some
registrants by prompting disclosure of material investments in non-
physical assets that registrants might not otherwise be disclosing.
However, we do not anticipate a significant increase in compliance
costs. As discussed above, some registrants already include disclosure
beyond capital expenditures, which the Commission's MD&A guidance has
encouraged.\417\ Also, better disclosure may eventually benefit
registrants, because it could reduce information asymmetry between
management and investors, reduce the cost of capital, and thereby
improve firms' liquidity and their access to capital markets.\418\
---------------------------------------------------------------------------

    \417\ See supra Section II.C.2 and 2003 MD&A Interpretive
Release.
    \418\ See Douglas W. Diamond and Robert E. Verrecchia,
Disclosure, Liquidity, and the Cost of Capital, 46 J. Fin. 1325
(1991) (finding that revealing public information to reduce
information asymmetry can reduce a firm's cost of capital through
increased liquidity). See also Christian Leuz and Robert E.
Verrecchia, The Economic Consequences of Increased Disclosure, 38 J.
Acct. Res. 91 (2000) (providing empirical evidence that increased
disclosure leads to lower information asymmetry component of the
cost of capital in a sample of German firms); Christian Leuz and
Peter D. Wysocki, The Economics of Disclosure and Financial
Reporting Regulation: Evidence and Suggestions for Future Research,
54 J. Acct. Res. 525 (2016) (providing a comprehensive survey of the
literature on the economic effect of disclosure). Studies that
provide both theoretical and empirical evidence on the link between
information asymmetry and cost of capital include Thomas E. Copeland
and Dan Galai, Information Effects on the Bid[hyphen]Ask Spread, 38
J. Fin. 1457 (1983) (proposing a theory of information effects on
the bid-ask spread); David Easley and Maureen O'Hara, Price, Trade
Size, and Information in Securities Markets, 19 J. Fin. Econ. 69
(1987) (using a model to provide explanation for the price effect of
block trades); David Easley and Maureen O'Hara, Information and the
Cost of Capital, 59 J. Fin. 1553 (2004) (showing that differences in
the composition of information between public and private
information affect the cost of capital, with investors demanding a
higher return to hold stocks with greater private information);
Yakov Amihud and Haim Mendelson, Asset Pricing and the Bid-Ask
Spread, 17 J. Fin. 223 (1986) (predicting that market-observed
expected return is an increasing and concave function of the spread,
and providing empirical results that are consistent with the
predictions of the model).
---------------------------------------------------------------------------

e. Results of Operations--Known Trends or Uncertainties (Item
303(b)(2)(ii))
    Current Item 303(a)(3)(ii) requires a registrant to describe any
known trends or uncertainties that have had or that the registrant
expects will have a material impact (favorable or unfavorable) on net
sales or revenues or income from continuing operations. As discussed
above, we are adopting the amendments to Item 303(b)(2)(ii)
substantially as proposed but with a slight modification to use a
``reasonably likely'' disclosure threshold throughout amended Item 303.
For example, the final amendments clarify that when a registrant knows
of events that are reasonably likely to cause a material change in the
relationship between costs and revenues, such as known or reasonably
likely future increases in costs of labor or materials or price
increases or inventory adjustments, the reasonably likely change must
be disclosed. This amendment aligns current Item 303(a)(3)(ii) with the
Commission's guidance on forward-looking disclosure.\419\ Since many
registrants may already be following relevant Commission guidance, the
marginal increase in compliance costs is not expected to be
significant.
---------------------------------------------------------------------------

    \419\ See supra footnote 145.
---------------------------------------------------------------------------

    As discussed above, the language in current Item 303(a)(3)(ii)
differs from other Item 303 disclosure requirements for forward-looking
information.\420\ This differing language may have led to confusion and
inconsistent practice regarding what events should be disclosed. While
the Commission has sought to alleviate some of these concerns by
clarifying the standard for forward-looking information in its MD&A
guidance,\421\ the amendments could further benefit registrants by
reducing any residual confusion, eliciting more consistent disclosure,
and potentially decreasing compliance costs and litigation risk. In
addition, a consistent disclosure threshold throughout Item 303 may
allow investors to make more meaningful comparisons across firms and
make more informed investment decisions. One commenter suggested that
the changes could result in the disclosure of various alternative
scenarios that could confuse or mislead investors,\422\ but we believe
that this increased consistency throughout Item 303 will decrease the
likelihood of confusing disclosure overall.
---------------------------------------------------------------------------

    \420\ See supra Section II.C.3. See also supra footnote 144 and
145.
    \421\ See 1989 MD&A Interpretive Release.
    \422\ See letter from FEI.
---------------------------------------------------------------------------

    Some registrants may experience an increased cost of compliance
under the final amendments to the extent that these registrants, for
example, have been disclosing events that will cause a material change
in the relationship between costs and revenues as opposed to events
that are reasonably likely to cause the change. One commenter, for
example, noted that the amended Item 303(a)(3)(ii) will require new
processes and controls to manage relevant judgments.\423\ Also, some
registrants might need to spend resources to evaluate the future
likelihood that such events might occur. However, such registrants
might be few in light of existing Commission guidance, and the increase
in compliance costs could be offset by the potential decrease in the
cost of capital as a result of enhanced disclosure and reduced
information asymmetry.\424\
---------------------------------------------------------------------------

    \423\ See id.
    \424\ See supra footnote 418.
---------------------------------------------------------------------------

f. Results of Operations--Net Sales and Revenues (Item 303(b)(2)(iii))
    Current Item 303(a)(3)(iii) requires management to discuss certain
factors, such as changes in prices or volume, that led to certain
material increases in net sales or revenues. The final amendments
broaden the current requirement, which focuses on ``material increases
in net sales or revenue'' in the ``financial statements'' to instead
require disclosure of ``material changes from period to period in one
or more line items'' in the ``statement of comprehensive income.'' Item
303(b) would similarly clarify that MD&A requires a narrative
discussion of the underlying reasons for material changes in
quantitative and qualitative terms.
    The final amendments are intended to codify Commission guidance on
results of operations disclosure. The Commission has previously stated
that MD&A disclosure should include both qualitative and quantitative
analysis and clarified that a results of operations discussion should
describe increases or decreases in any line item, including net sales
or revenues.\425\ The need for registrants to consult both current Item
303(a)(3)(iii) and the Commission's guidance to understand the
requirement could lead to confusion and inconsistent disclosure
practice among registrants. The additional clarity provided by the
amendments could benefit registrants by reducing any confusion,
eliciting more consistent disclosure, and potentially decreasing
compliance costs and litigation risk.
---------------------------------------------------------------------------

    \425\ See, e.g., 2003 MD&A Interpretative Release and 1989 MD&A
Interpretative Release.
---------------------------------------------------------------------------

    The final amendments could increase disclosure burdens for
registrants, thus potentially increasing compliance costs. However,
since many registrants may already be following relevant Commission
guidance, the marginal increase in compliance costs is not expected to
be significant.\426\ Additionally, to the extent that registrants do
incur additional

compliance costs, such costs could be offset by the potential decrease
in the cost of capital as a result of improved disclosure and reduced
information asymmetry.\427\
---------------------------------------------------------------------------

    \426\ See letter from FEI.
    \427\ See supra footnote 418.
---------------------------------------------------------------------------

    The amendments will require registrants to provide a nuanced
discussion of the underlying reasons that may be contributing to
material changes in line items, and therefore should enhance the
disclosure. More consistent and informative disclosure would allow
investors to make more meaningful comparisons across firms and make
more informed investment decisions. However, any potential benefits to
investors may be limited to the extent registrants already are
following the relevant Commission guidance.
g. Results of Operations--Inflation and Price Changes (Current Item
303(a)(3)(iv), Instruction 8, and Instruction 9)
    The final amendments will eliminate current Item 303(a)(3)(iv) and
related Instructions 8 and 9, which generally require that registrants
specifically discuss the impact of inflation and price changes on their
net sales, revenue, and income from operations for the three most
recent fiscal years, to the extent material. The purpose of the
elimination is to streamline Item 303 by eliminating the specific
reference to these topics, which may not be material to most
registrants. This change is consistent with the principles-based
disclosure framework of Item 303.
    We do not believe that these changes will result in a loss of
material information for market participants.\428\ Registrants will
still be required to discuss in their MD&A the impact of inflation and
changing prices, if material, as is currently required.
---------------------------------------------------------------------------

    \428\ See letter from FEI.
---------------------------------------------------------------------------

    The elimination of this item could benefit registrants by
streamlining Item 303 and reducing compliance costs. Similar to what we
have discussed above,\429\ to the extent that the elimination
encourages registrants that currently disclose inflation and changing
prices even if not material to modify such disclosure,\430\ investors
could potentially benefit from a focus on material information, which
would allow them to process information more effectively. Similarly,
emphasizing a principles-based approach may encourage registrants to
present more tailored information, which also may benefit investors.
---------------------------------------------------------------------------

    \429\ See supra Section III.B.2.i.
    \430\ See supra footnote 385.
---------------------------------------------------------------------------

h. Off-Balance Sheet Arrangements (Instruction 8 to Item 303(b))
    Current Item 303(a)(4) requires, in a separately-captioned section,
disclosure of a registrant's off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on a
registrant's financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital
expenditures, or capital resources that is material to investors. The
final amendments will replace Item 303(a)(4) with a new principles-
based instruction that will require registrants to discuss commitments
or obligations, including contingent obligations, arising from
arrangements with unconsolidated entities or persons that have, or are
reasonably likely to have, a material current or future effect on a
registrant's financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, cash
requirements, or capital resources.
    We do not believe the amendments will lead to significant
information loss, as we expect the principles-based instruction will
continue to elicit material information about off-balance sheet
arrangements.\431\ As discussed above, we believe that the amendments
will encourage registrants to consider and integrate disclosure of off-
balance sheet arrangements in the context of their broader MD&A
disclosures and may avoid boilerplate disclosure that either duplicates
information in the financial statements, or cross-references the
financial statements without additional disclosure to put such
information into appropriate context. We acknowledge that the
flexibility associated with the principles-based approach might lead to
certain opportunistic firm behavior if registrants cherry pick the
information to be disclosed, although we do not believe this risk is
significant.
---------------------------------------------------------------------------

    \431\ See letter from FEI.
---------------------------------------------------------------------------

    The amendments could benefit registrants by avoiding duplicative
disclosure and reducing compliance costs. As discussed above, to the
extent the amendments improve the readability and conciseness of the
information provided, they may help investors process information more
effectively. Also, emphasizing a principles-based approach may
encourage registrants to provide disclosure that is more tailored and
informative, which could benefit investors.
    One commenter noted that obtaining a complete picture of an
entity's off-balance sheet exposures can be challenging for some
investors because this information may be dispersed throughout a
registrant's financial statements.\432\ We believe that investors might
need to spend time searching for the information and adjusting to the
new format and location of the disclosure as the final amendments will
no longer require the relevant disclosure in a separately captioned
section. Retail investors are likely to be affected more than
institution investors. Nevertheless, such costs are likely to be one-
time or decrease over time for both retail and institutional investors.
---------------------------------------------------------------------------

    \432\ See letter from CFA & CII.
---------------------------------------------------------------------------

i. Tabular Disclosure of Contractual Obligations (Current Item
303(a)(5))
    Under current Item 303(a)(5), registrants other than SRCs must
disclose in tabular format their known contractual obligations. There
is no materiality threshold for this item. A registrant must arrange
its table to disclose the aggregate amount of contractual obligations
by type and with subtotals by four prescribed periods. The Commission
originally adopted this requirement so that aggregated information
about contractual obligations was presented in one place and to improve
transparency of a registrant's short- and long-term liquidity and
capital resources needs and demands.\433\ However, as discussed above,
most of the information presented in response to this requirement is
already included in the notes to the financial statements. In order to
promote the principles-based nature of MD&A and streamline disclosures
by reducing overlapping requirements, the final amendments will
eliminate Item 303(a)(5) and enhance the liquidity and capital
resources requirements to specifically require disclosure of material
cash requirements from known contractual and other obligations. The
amendments also specify that such disclosures must include the type of
obligation and the relevant time period for the related cash
requirements. Under this approach, registrants will be relieved of the
burden associated with the current prescriptive table and be afforded
more flexibility to integrate a discussion of contractual obligations
in the broader context of its liquidity and capital resources
disclosures.
---------------------------------------------------------------------------

    \433\ See Off-Balance Sheet Arrangements and Contractual
Obligations Adopting Release, at 5990. See also Off-Balance Sheet
Arrangements and Contractual Obligations Proposing Release.

---------------------------------------------------------------------------

    We believe the amendments could lead to reduced compliance costs by
avoiding duplicative, prescriptive disclosures, therefore benefiting
registrants, while also providing important information to investors
regarding the registrants' liquidity and capital resource needs.\434\
We recognize that there might be increased costs associated with
assessing the materiality of contractual obligations under the
principles-based approach. However we do not expect such costs to be
significant given that the materiality standard is already used by
registrants when preparing MD&A disclosures. As discussed above, to the
extent the elimination of redundant or immaterial disclosure improves
the readability and conciseness of the information provided, the
amendments could potentially benefit investors by helping them process
information more effectively. Also, since a principles-based approach
allows registrants to present more tailored information, it could lead
to more informative disclosure, which would benefit investors.
---------------------------------------------------------------------------

    \434\ See, e.g., letters from Costco; Eli Lilly; FEI
---------------------------------------------------------------------------

    We recognize that there could be a loss of certain information due
to the elimination of the item. As discussed in Section II.C.7, some of
the information in the contractual obligations table such as purchase
obligations is not specifically called for under U.S. GAAP and is
therefore not typically disclosed in the financial statements.
Additionally, information related to the ``payments due by period''
currently required by the item may be difficult to ascertain from a
registrant's financial statements. However, since the final amendments
will encompass material cash requirements from known contractual and
other obligations, are not limited to those called for by U.S. GAAP,
and will require that such disclosures specify the type of obligation
and the relevant time period for the related cash requirements, we
believe any loss of information will not be significant.
    We expect investors could experience certain additional costs. A
centralized location and tabular format make it convenient for
investors to extract and analyze information.\435\ Under the
amendments, the absence of a centralized location and tabular format
may cause investors to incur search costs to derive the data from the
financial statements or from information embedded in MD&A, or monetary
costs to obtain the information through alternative channels, such as
database subscriptions. Investors may also incur opportunity costs,
such as time spent searching for alternative sources, and these costs
may fall more heavily on retail investors than on other types of
investors, such as institutional investors. Additionally, one commenter
suggested that the preparation of the contractual obligations table is
a useful exercise for management to obtain a ``picture of such
obligations,'' \436\ and to the extent that management needs but does
not otherwise have such information, management and investors could be
subjected to costs. However, to the extent management needs such a
table to conduct its duties or the benefits of collecting this
information in one place outweighs the costs, we expect that management
will continue to obtain this information without the additional costs
of preparing related disclosure.
---------------------------------------------------------------------------

    \435\ See letter from CFA & CII.
    \436\ See letter from CFA & CII.
---------------------------------------------------------------------------

j. Critical Accounting Estimates (Item 303(b)(3))
    Item 303(a) does not currently explicitly require registrants to
disclose critical accounting estimates. U.S. GAAP requires disclosure
of significant accounting policies in the notes to the financial
statements, but does not require similar disclosure of estimates and
assumptions, except in limited circumstances. IFRS does require
disclosures regarding sources of estimation uncertainty and judgments
made in the process of applying accounting policies that have the most
significant effect on the amounts recognized in the financial
statements.\437\ Although the Commission has issued guidance on
disclosure of critical accounting estimates, many registrants repeat
the discussion of significant accounting policies from the notes to the
financial statements in their MD&A and provide limited additional
discussion of critical accounting estimates. We are amending Item 303
to explicitly require such disclosure due to the importance of critical
accounting estimates in providing meaningful insight into the
uncertainties related to these estimates and reported financials and
how accounting policies of registrants faced with similar facts and
circumstances may differ, and also to eliminate disclosure that
duplicates the financial statement discussion of significant accounting
policies. Providing a clear disclosure framework could benefit
registrants by reducing confusion and duplicative disclosure, thereby
decreasing compliance costs.
---------------------------------------------------------------------------

    \437\ See IAS 1, paragraphs 122 to 133.
---------------------------------------------------------------------------

    A number of commenters expressed concerns that the required
disclosure of critical accounting estimates may result in information
that is not material and costly or otherwise challenging to
prepare.\438\ To allay such concerns, the final amendments will clarify
that the material and reasonably available qualifier applies to all
parts of the disclosure, not just to quantitative information.
---------------------------------------------------------------------------

    \438\ See letters from RSM; PWC; Pfizer; EEI & AGA; Deloitte;
KPMG; Grant Thornton; CAQ; BDO; FEI; SIFMA; IMA; UnitedHealth;
Medtronic; Chamber; ABA; E&Y Society.
---------------------------------------------------------------------------

    Investors will likely benefit from the amendments. The amendments
could elicit more informative disclosure from registrants related to
their estimates and assumptions, which would help investors better
understand any potential risk or uncertainty related to these estimates
and make more informed investment decisions. The amendments could also
promote more consistent disclosure practices among registrants by
providing more clarity, allowing investors to make more meaningful
comparisons across registrants and better informed investment
decisions.
    We recognize that this disclosure requirement could introduce
additional costs to market participants. While we do not anticipate
that investors would incur any direct costs (other than information
processing costs) associated with this amendment, compliance costs
might increase for registrants because of the more explicit disclosure
requirement compared to the existing Commission guidance. However, some
of these costs may be minimized because this disclosure requirement
only applies to the extent the information is material and reasonably
available. Additionally, the potential increase in compliance costs
might decline over time as registrants become more accustomed to the
new filing requirements. We also note that, consistent with Commission
guidance, some registrants may already provide disclosures related to
critical accounting estimates that do not duplicate the financial
statement disclosures, thus the increase in compliance costs might be
minimal to those registrants. Finally, the increase in compliance costs
could be offset by a potential decrease in registrants' cost of
capital, because such disclosure could reduce information asymmetry
between investors and firms.\439\
---------------------------------------------------------------------------

    \439\ See supra footnote 418.

---------------------------------------------------------------------------

k. Interim Period Discussion (Item 303(c))
    Current Item 303(b) requires registrants to provide MD&A disclosure
for interim periods that enables market participants to assess material
changes in financial condition and results of operations between
certain specified periods. The final rules will amend current Item
303(b) (renumbered as Item 303(c)), to allow for flexibility in
comparisons of interim periods and to streamline the item.
Specifically, under Item 303(c), registrants will be allowed to compare
their most recently completed quarter to either the corresponding
quarter of the prior year (as is currently required) or to the
immediately preceding quarter. The amendments will also streamline the
instructions to current Item 303(b), consistent with the amendments to
current Item 303(a) and the related instructions.
    This more flexible approach is intended to allow registrants to
provide an analysis that is better tailored to their business cycles.
This may result in more informative disclosure that could reduce
information asymmetry and firms' cost of capital, benefiting
registrants.\440\ In addition, streamlining the item could avoid
duplicative disclosure and reduce associated compliance costs.
---------------------------------------------------------------------------

    \440\ See id.
---------------------------------------------------------------------------

    Investors also may benefit from the amendments. As noted above, the
amendments will provide registrants flexibility to choose the interim
period presented, which could allow them to provide a more tailored
analysis. This, in turn, could allow investors to make better informed
investment decisions. While this flexibility may encourage certain
registrants to be opportunistic in terms of what to disclose, thus
potentially negatively affecting investors, we do not anticipate this
risk to be significant because we believe that other disclosure
obligations are likely to provide material disclosure. More flexibility
in disclosure could also decrease comparability across firms,
potentially increasing the cost of investors' decision-making. However,
we do not expect the flexibility in reporting to significantly reduce
comparability, because registrants in the same industry are likely to
have similar business cycles and choose similar interim periods.
Therefore, concerns about a reduction of comparability across firms in
the same industry could be mitigated. The resulting reduction of
duplicative disclosure might increase the effectiveness of information
processing by investors, thus helping them make more informed
decisions. Investors will also benefit from the requirement that
companies that choose to change the method of their presentation must
discuss the reasons for changing the basis of comparison and provide
both comparisons in the first filing in which the change is made. This
requirement is intended to prevent companies from using a change in
presentations to obscure negative information, and to discourage
frequent switching between them from quarter to quarter.
l. Safe Harbor for Forward-Looking Information (Current Item 303(c))
    Current Item 303(c) \441\ states that the safe harbors provided in
Section 27A of the Securities Act and 21E of the Exchange Act apply to
all forward-looking information provided in response to Item 303(a)(4)
(off-balance sheet arrangements) and Item 303(a)(5) (contractual
obligations), provided such disclosure is made by certain enumerated
persons.\442\ The final amendments will eliminate this item to conform
to the elimination of Items 303(a)(4) and (a)(5). As discussed above,
the final amendments replace the current prescriptive off-balance sheet
disclosure required by these items with more principles-based
requirements located in other paragraphs of Item 303. We do not believe
eliminating Item 303(c) will have any economic effect by itself because
forward-looking disclosure responsive to the new principles-based
requirements will continue to be protected by the existing statutory
and regulatory safe harbors. Therefore, we do not expect changes in
market behavior. To the extent that the elimination of the section may
result in any confusion as to the application of the safe harbors,
there could be a cost to registrants. However, we believe such cost
should be minimal, as registrants are already familiar with analyzing
the applicability of the safe harbors.
---------------------------------------------------------------------------

    \441\ Item 303(c) of Regulation S-K.
    \442\ Such persons are: An issuer; a person acting on behalf of
the issuer; an outside reviewer retained by the issuer making a
statement on behalf of the issuer; or an underwriter, with respect
to information provided by the issuer or information derived from
information provided by the issuer.
---------------------------------------------------------------------------

m. Smaller Reporting Companies (Current Item 303(d))
    Current Item 303(d) \443\ states that an SRC may provide Item
303(a)(3)(iv) information for the most recent two fiscal years if it
provides financial information on net sales and revenues and income
from continuing operations for only two years. Item 303(d) also states
that an SRC is not required to provide the contractual obligations
chart specified in Item 303(a)(5). To conform to the elimination of the
prescriptive requirements of Item 303(a)(3)(iv) and (a)(5), the final
rules will eliminate Item 303(d). SRCs may rely on Instruction 1 to
Item 303(b),\444\ which states that an SRC's discussion shall cover the
two-year period required in Sec. Sec.  210.8-01 through 210.8-08
(Article 8 of Regulation S-X).
---------------------------------------------------------------------------

    \443\ Item 303(d) of Regulation S-K.
    \444\ Amended Item 303(b).
---------------------------------------------------------------------------

    The elimination of Item 303(d) will have the effect of subjecting
SRCs to the newly-adopted disclosure requirements in Item 303(b), a
principles-based liquidity and capital resources disclosure requirement
that includes a requirement to discuss material contractual obligations
in the context of that disclosure.\445\ We do not believe that the
preparation of such disclosure will be burdensome for SRCs because SRCs
are currently required to provide a discussion and analysis that
addresses material impacts on their liquidity and capital resources and
are also required under U.S. GAAP to assess most of the currently
prescribed categories of contractual obligations. We believe that this
disclosure will have a benefit to investors because such disclosure may
be necessary to an understanding of the registrant's financial
condition, cash flows, and other changes in financial condition and
results of operations.
---------------------------------------------------------------------------

    \445\ See supra Section II.C.7 and II.C.9.
---------------------------------------------------------------------------

n. Foreign Private Issuers
    The changes related to Item 3.A and Item 5 of Form 20-F and General
Instructions B.(11), (12), and (13) of Form 40-F are intended to
conform to the other changes related to selected financial data and
MD&A. Therefore, our analysis of the costs and benefits for domestic
issuers and their investors under the amendments to Item 301 can be
carried over to FPIs and their investors under the amended items. The
changes could benefit FPIs through a reduction in compliance costs,
although the benefits are likely to be smaller given that current Item
3.A permits a FPI to omit either or both of the earliest two years of
data under certain conditions and registrants that file on Form 40-F
use Canadian disclosure documents to satisfy the Commission's
registration and disclosure requirements. Since FPIs would have more
flexibility to provide information that is better tailored to their
industry or country, investors could benefit from more informative
disclosure. However, investors might incur additional search

costs when looking for information through alternative channels.
    To maintain a consistent approach to MD&A for domestic registrants
and FPIs, the final rules will make changes to Forms 20-F and 40-F that
generally conform to the amendments to Item 303. Therefore, our
discussion of the costs and benefits for domestic issuers and their
investors under the amendments to Item 303 generally can be carried
over to FPIs under the amended item. The final rules add to Item 303
the current Form 20-F instruction that requires FPIs that are not
subject to the multijurisdictional disclosure system to discuss
hyperinflation in a hyperinflationary economy. This disclosure can be
beneficial to investors when analyzing FPIs, as hyperinflation in some
FPIs' home countries might be an important risk factor for the firm's
results of operations or financial health.

D. Anticipated Effects on Efficiency, Competition, and Capital
Formation

    We believe the final amendments could have positive effects on
efficiency, competition, and capital formation. As discussed above, we
expect the amendments could reduce duplicative disclosure and elicit
disclosure that is more focused on material information and tailored to
a registrant's business, making the disclosure more informative. We
believe more informative disclosure could reduce information asymmetry
between firms and investors, thereby improving firm liquidity and price
efficiency.\446\ We also believe the amendments could promote
competition in the capital markets and facilitate capital formation.
This is because more informative disclosure could allow investors to
make more meaningful comparisons across firms and make more informed
investment decisions, and as a result, more value-enhancing projects
may receive more capital allocation.
---------------------------------------------------------------------------

    \446\ See supra footnote 418. See also David Hirshleifer and
Siew Hong Teoh, Limited attention, information disclosure, and
financial reporting, 36 J. Acct. & Econ. 337 (2003) (developing a
theoretical model where investors have limited attention and
processing power and showing that, with partially attentive
investors, the means of presenting information may have an impact on
stock price reactions, misvaluation, long-run abnormal returns, and
corporate decisions).
---------------------------------------------------------------------------

    However, as discussed above, since registrants no longer need to
present certain information (e.g., five-year comparable data),
investors could incur costs when searching for alternative channels to
obtain or reconstruct the information. Since each investor would have
to consider the need for alternative sources of information, the final
amendments could result in inefficiency in the information distribution
process. Additionally, if registrants misjudge what information is
material, there could be an increase in information asymmetries between
registrants and investors, negatively affecting efficiency,
competition, and capital formation. However, we expect this risk to be
mitigated by factors such as accounting controls and the antifraud
provisions of the securities laws.
    The amendments, in particular by simplifying and codifying certain
positions expressed in various Commission guidance, might reduce the
compliance costs of private companies considering going public. For
companies considering an IPO, the benefit of easing the burdens
associated with preparing these disclosures for the first time could
decrease the costs of going public and thus leave more capital for
future investment. This could lead to more efficient capital formation.

E. Alternatives

1. Alternatives Regarding Item 301
    As an alternative to the elimination of Item 301, which requires
registrants to furnish selected financial data in comparative tabular
form for each of the registrant's last five fiscal years, we considered
amending the item to require only the same number of years of data as
presented in the registrant's financial statements in that same filing.
Similarly, another alternative we considered is expanding the current
EGC accommodation to all initial registrants. The EGC accommodation
generally provides that an EGC need not present selected financial data
for any period prior to the earliest audited period presented in its
initial filing.\447\ This accommodation allows EGCs to build up to the
full five years of selected financial data.
---------------------------------------------------------------------------

    \447\ See Item 301(d) of Regulation S-K [17 CFR 229.301].
---------------------------------------------------------------------------

    The benefit of these alternatives would be potential cost savings
from a reduction in compliance burdens by not having to reproduce the
earliest years of selected financial data. These alternatives might be
sufficient for investors to make a quick comparison with the most
recent financial data without cross-referencing to other sources.
However, given the nature of electronic access to financial data
through EDGAR, we think the potential benefits of these alternatives
would be more limited than the elimination of Item 301. We decided not
to adopt the alternative of requiring the same number of years of data
as presented in the registrant's financial statements in that same
filing because such disclosure would be largely duplicative and
therefore, have limited utility. Regarding the alternative that we
expand the current EGC accommodation to all initial registrants, while
this approach could provide cost savings to non-EGC initial registrants
at the beginning, in the long run, these registrants would still face
the same duplicative disclosure problem that other registrants do
currently. As a result, we decided not to adopt this alternative.
    As another alternative, we considered amending Item 301 to require
the earliest years only in circumstances where the company can
represent that the information cannot be provided without unreasonable
effort and expense, as is currently allowed under Item 3.A of Form 20-
F. Under this approach, registrants would experience reduced compliance
costs under the exempted circumstances, albeit a smaller reduction
compared to the final amendments, because they would still need to
disclose selected financial data for the earliest years when it is
deemed not time consuming and costly. At the same time, while investors
would still incur search costs if they prefer to analyze five years'
financial data, such costs would be smaller compared to the proposed
approach. We decided not to adopt this alternative because the lack of
a consistent or objective standard to determine when additional
financial disclosure is required could be time consuming or burdensome
for registrants.
2. Alternatives Regarding Item 302
    Some commenters stated that, in some instances, it was difficult to
calculate fourth quarter data from data disclosed elsewhere.\448\ As an
alternative to streamlining Item 302(a) to only require disclosure of
retrospective changes from amounts previously reported within the last
two most recent fiscal years that, individually or in the aggregate,
are material, we considered requiring a registrant to only disclose
fourth quarter data elsewhere in its annual report, such as in MD&A.
This approach could prevent or mitigate the potential loss of the
fourth quarter financial data under the proposed approach. As discussed
above, however, we believe that the revised disclosure requirements in
Item 302(a) will allow investors to calculate this data in most
instances without substantial costs, while also highlighting material
retrospective changes better than the existing

requirement. Therefore, we decided not to adopt this alternative.
---------------------------------------------------------------------------

    \448\ See, e.g., letters from NASAA and CFA & CII.
---------------------------------------------------------------------------

3. Alternatives Regarding Item 303
    We are amending current Item 303(a)(2) to specify that a registrant
should broadly disclose material cash requirements, including but not
limited to capital expenditures. We considered adopting a definition
for the term ``capital resources.'' While defining the term could
provide more clarity for registrants, it would also result in a
disclosure requirement more prescriptive in nature, inconsistent with
our current objective to promote the principles-based nature of MD&A.
We therefore decided not to adopt this alternative.
    Another alternative, as suggested by commenters, that we considered
adopting was a term with a narrower meaning than material cash
requirements such as ``material cash commitments'' or ``material cash
commitments outside of normal operations.'' \449\ According to those
commenters, using ``material cash requirements'' could increase
compliance costs in the form of new record keeping and controls. We
have decided not to adopt this alternative because, as mentioned above,
our amendments are limited to and address only those cash requirements
that are material and hence should not require extensive or new
procedures or controls. Since registrants can and do have cash
requirements related to their routine operations that are material,
such an alternative could also result in material information remaining
undisclosed, thus negatively affecting investors.
---------------------------------------------------------------------------

    \449\ See letter from FEI and IMA.
---------------------------------------------------------------------------

    As an alternative to the replacement of the Item 303(a)(4) off-
balance sheet arrangements disclosure requirement, we considered
allowing registrants discretion to make the disclosure currently
required under Item 303(a)(4) under a separate caption within the
capital resources section. Compared to the final amendments, such an
alternative would have kept information on off-balance sheet items in a
single location instead of such information being dispersed throughout
the financial statements, thus making it easier for investors to
locate. Such an alternative, however, would still result in duplicate
disclosure and compliance costs for issuers.
    As an alternative to the elimination of Item 303(a)(5), which
requires registrants to disclose in tabular format contractual
obligations by type of obligation, overall payments due and prescribed
periods, we considered maintaining the prescriptive contractual
obligations disclosure requirement in a modified form. For example, we
considered reducing the prescribed time periods that need to be
disclosed, or requiring disclosures of only short-term or long-term
obligations rather than requiring disclosure to be grouped in the four
time periods currently specified in Item 303(a)(5). While this approach
could be more beneficial to investors by reducing their search costs
compared to the final approach, it would result in redundant disclosure
and higher compliance costs to registrants.
    As an alternative to the adopted Item 303(b)(3), we considered
issuing additional guidance on critical accounting estimates that
enhances the guidance issued in the 2003 MD&A Release. While this
alternative could save compliance costs for registrants because it
would not create a new requirement, the savings might not necessarily
be significant, given the existing Commission guidance on this topic.
Further, we believe that by codifying existing guidance, adopted Item
303(b)(3) should provide investors with more enhanced disclosure and
protection by ensuring that companies consistently provide such
disclosure. Therefore, we decided not to adopt this alternative.
    Another alternative that we could have adopted is the use of
different thresholds for information necessary to understand critical
accounting estimates, such as when ``practicable'' or ``in the ordinary
course of business and not solely for purposes of disclosure.'' As
mentioned above, however, we believe that if the disclosure is
``impracticable'' to provide, it would not be ``reasonably available.''
In addition, limiting the discussion to material information is
intended to avoid disclosure that is not useful to investors and is
consistent with the principles-based nature of MD&A.
    Another alternative that we considered was to require disclosure of
how much a critical accounting estimate has changed during a reporting
period. This alternative could have provided information on the
quantitative changes to the reported amounts. But such an alternative
could result in information that is not material and may impede
investors' assessments of the uncertainty associated with the critical
accounting estimate. We believe that the adopted requirement which
allows issuers to address the change in a critical accounting estimate
through a discussion of the change in the assumptions of that estimate
over a relevant period would provide investors with a greater
understanding of the variability that is reasonably likely to impact
the financial condition or results of operations.
    Another alternative that some commenters suggested is to specify a
relevant period for which this disclosure is required (e.g., most
recent period, all periods presented, etc.).\450\ Such a specification
would make it easier for issuers to comply and hence reduce their
compliance costs. We note, however, that for different estimates the
relevant disclosure may vary over different periods of time to
facilitate an understanding of the estimation uncertainty. Thus, such
an alternative would have restricted issuers' flexibility in
determining the relevant period necessary to describe material changes
in estimates or assumptions that would facilitate an understanding of
estimation uncertainty. Therefore, we decided not to adopt this
alternative.
---------------------------------------------------------------------------

    \450\ See, e.g., letters from RSM; Deloitte; KPMG; CAQ.
---------------------------------------------------------------------------

    Item 303(c) would allow flexibility for registrants to compare
their most recently completed quarter to either the corresponding
quarter of the prior year (as is currently required) or to the
immediately preceding quarter. As an alternative, we considered an
approach under which registrants would be required to compare the most
recent quarter to both the corresponding quarter of the prior year and
the immediately preceding quarter. While this alternative approach
would provide investors with more disclosure, it might not be clear to
investors which time period is more representative of the registrant's
business, and registrants would incur more compliance costs. Also, this
alternative is less consistent with the principles-based nature of
MD&A. Therefore, we decided not to adopt this alternative.
    We proposed deleting Item 303(d) which, in part, provides that an
SRC is not required to provide the contractual obligations table
specified in Item 303(a)(5). In a change from the Proposing Release,
the final amendments add a principles-based disclosure requirement for
contractual obligations to Item 303 and, unlike the existing SRC carve-
out in Item 303(d), do not carve out SRCs from this disclosure
requirement. As an alternative, we could have carved out SRCs from this
disclosure requirement. Such an alternative could have reduced SRCs'
compliance costs. However, such an alternative could have discouraged
the disclosure of material contractual obligations that may be
important for investors. By adopting a principles-

based approach that requires a robust discussion of material
contractual obligations, the final amendments will help ensure that
investors are provided with information about material contractual
obligations, without imposing significant new compliance burdens on
SRCs.
4. Alternatives Regarding Structured Disclosure
    The final amendments do not require registrants to structure
disclosures required by the amendments in a machine-readable format. An
alternative suggested by some commenters \451\ would be to require
registrants to structure MD&A in the Inline XBRL format. Requiring
registrants to structure MD&A disclosures could create benefits for
investors (either through direct use of the data or through reliance on
the data as extracted and analyzed by intermediaries) as well as other
market participants by enabling more efficient retrieval, aggregation,
and analysis of disclosed information and facilitating comparisons
across issuers and time periods.\452\ However, filers could incur
increased costs under this alternative, with a block text and detail
tagging requirement imposing greater costs than a block text tagging-
only requirement. In the Proposing Release, the Commission noted that
such costs would be incremental to the costs that registrants already
incur to structure financial statement and cover page disclosures in
the Inline XBRL format and that concerns as to filer cost might be
partially alleviated by the overall decline in the costs of XBRL
tagging over time, including for small public companies.\453\ In
response to a request for comment on whether current XBRL-tagging
requirements reliably facilitate compilation and comparison of certain
financial information, and a separate request for comment as to whether
to require MD&A to be structured in Inline XBRL format, one commenter
recommended reconsidering current XBRL requirements more broadly,
stating concerns about the cost and data quality.\454\ This commenter
also stated that XBRL should be optional and provided specific
information based on a survey finding that issuers incur substantial
costs associated with XBRL despite the fact that less than ten percent
``observ[e] active analyst or investor use of the XBRL data.'' \455\ As
discussed above, the final amendments emphasize MD&A's principles-based
framework, which encourages registrants to provide meaningful
disclosure that is tailored to their specific facts and circumstances.
This may make MD&A less comparable across issuers, thereby reducing the
benefits of this alternative. As a result, we did not adopt this
alternative.
---------------------------------------------------------------------------

    \451\ See letters from XBRL US dated April 28, 2020 (``XBRL
US''); Data Coalition dated April 28, 2020 (``Data Coalition''); CFA
& CII; D. Jamieson.
    \452\ See Rel. No. 33-10514 (Jun. 28, 2018), Inline XBRL Filing
of Tagged Data [83 FR 40846 (Aug. 16, 2018)] (``Inline XBRL Adopting
Release''), at 40851, footnote 71 and accompanying text, and 40862.
See also, e.g., Mohini Singh, Data and Technology: How Information
is Consumed in the New Age, CFA Institute: Data Technology (Jul. 3,
2018) (describing examples of analytical, benchmarking, and
regulatory XBRL usage); Chunhui Liu, Tawei Wang, and Lee J. Yao,
XBRL's Impact on Analyst Forecast Behavior: An Empirical Study, 33
J. Acct. & Pub. Pol'y 69 (2014) (finding that XBRL adoption has
significantly increased information quantity and quality, as
measured by analyst following and forecast accuracy).
    \453\ A 2018 AICPA pricing survey of 1,032 reporting companies
with $75 million or less in market capitalization found an average
cost of $5,850 per year, a median cost of $2,500 per year, and a
maximum cost of $51,500 per year for fully outsourced XBRL creation
and filing, representing a 45% decline in average cost and a 69%
decline in median cost since 2014. See AICPA, ``XBRL costs for small
reporting companies have declined 45% since 2014,'' available at
https://www.aicpa.org/InterestAreas/FRC/AccountingFinancialReporting/XBRL/DownloadableDocuments/XBRL%20Costs%20for%20Small%20Companies.pdf. See also Mohini Singh,
The Cost of Structured Data: Myth vs. Reality, CFA Institute: Survey
(Aug. 2017), available at https://www.cfainstitute.org/-/media/documents/survey/the-cost-of-structured-data-myth-vs-reality-august-2017.ashx.
    \454\ See letter from Nasdaq.
    \455\ Id. (stating that a ``2019 Nasdaq survey of 151 issuers
found that they spend, on average, over $334,000 per firm per
quarter to outside vendors, lawyers, and other advisors to address
the requirement of quarterly reporting, including $20,000 per firm
per quarter in XBRL costs alone. Meanwhile, only eight percent of
issuers reported observing active analyst or investor use of XBRL
data.''). See also letter from Nasdaq, Inc. dated March 21, 2019 to
the Request for Comment on Earnings Releases and Quarterly Reports,
Release No. 33-10588 (Dec. 18, 2018) [83 FR 65601 (Dec. 21, 2018)]
(providing selected survey results including an average response of
$20,000, a median response of $7,500, and a maximum response of
$350,000 in XBRL costs per quarter). Comment letters related to the
Request for Comment on Earnings Releases and Quarterly Reports are
available at https://www.sec.gov/comments/s7-26-18/s72618.htm.
---------------------------------------------------------------------------

V. Paperwork Reduction Act

A. Summary of the Collections of Information

    Certain provisions of our rules, schedules, and forms that would be
affected by the final amendments contain ``collection of information''
requirements within the meaning of the PRA.\456\ The Commission
published a notice requesting comment on changes to these collection of
information requirements in the Proposing Release and submitted these
requirements to the Office of Management and Budget (``OMB'') for
review in accordance with the PRA.\457\ The hours and costs associated
with preparing, filing, and sending the schedules and forms constitute
reporting and cost burdens imposed by each collection of information.
An agency may not conduct or sponsor, and a person is not required to
comply with, a collection of information unless it displays a currently
valid OMB control number. Compliance with the information collections
is mandatory. Responses to the information collections are not kept
confidential and there is no mandatory retention period for the
information disclosed. The titles for the collections of information
are:
---------------------------------------------------------------------------

    \456\ 44 U.S.C. 3501 et seq.
    \457\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
---------------------------------------------------------------------------

    ``Form 1-A'' (OMB Control No. 3235-0286);
    ``Form 10'' (OMB Control No. 3235-0064);
    ``Form 10-Q'' (OMB Control No. 3235-0070);
    ``Form 10-K'' (OMB Control No. 3235-0063);
    ``Schedule 14A'' (OMB Control No. 3235-0059);
    ``Form 20-F'' (OMB Control No. 3235-0288);
    ``Form 40-F'' (OMB Control No. 3235-0381);
    ``Form F-1'' (OMB Control No. 3235-0258);
    ``Form F-4'' (OMB Control No. 3235-0325);
    ``Form N-2'' (OMB Control No. 3235-0026);
    ``Form S-1'' (OMB Control No. 3235-0065);
    ``Form S-4'' (OMB Control No. 3235-0324);
    ``Form S-11'' (OMB Control No. 3235-0067);
    The Commission adopted all of the existing regulations, schedules,
and forms pursuant to the Securities Act, the Exchange Act, and/or the
Investment Company Act. The regulations, schedules, and forms set forth
the disclosure requirements for registration statements, periodic
reports, and proxy and information statements filed by registrants to
help investors make informed investment and voting decisions.
    A description of the final amendments, including the need for the
information and its use, as well as a description of the likely
respondents, can be found in Section II above, and a discussion of the
economic effects of the final amendments can be found in Section IV
above.

B. Summary of Comment Letters and Revisions to PRA Estimates

    In the Proposing Release, the Commission requested comment on the

PRA burden hour and cost estimates and the analysis used to derive such
estimates. We did not receive any comments that directly addressed the
PRA analysis of the proposed amendments. As discussed, above, however,
we have made some changes to the proposed amendments as a result of
comments received. We have revised our estimates from the Proposing
Release accordingly, as discussed in more detail below.

C. Effects of the Amendments on the Collections of Information

    The following PRA Table 1 summarizes the estimated effects of the
final amendments on the paperwork burdens associated with the affected
collections of information listed in Section V.A.

 PRA Table 1--Estimated Paperwork Burden Effects of the Final Amendments
------------------------------------------------------------------------
                                        Affected
   Final amendments and effects      collections of      Estimated net
                                       information          effect *
------------------------------------------------------------------------
Item 301: Selected Financial Data
 Elimination of Item 301    Forms 10,   2 hour
 requirement to furnish selected    10-K, S-1, S-4,     net decrease in
 financial data for each of the     and S-11.           compliance
 registrant's last five fiscal     ..................   burden per form.
 years because Item 303 already     Schedule    0.2 hour
 calls for disclosure of material   14A **.             net decrease in
 trend information, which would                         compliance
 decrease the paperwork burden by                       burden per
 reducing repetitive information                        schedule.
 about a registrant's historical
 performance.
 Replacing the reference    Form N-2    0.3 hour
 to Item 301 with a reference to    .       net decrease in
 Rule 1-02(bb) of Regulation S-X   ..................   compliance
 in Items 1112, 1114, and 1115 of  ..................   burden per form.
 Regulation AB would generally     ..................   No
 result in similar disclosure       Forms SF-   change in
 being presented under these        1 and SF-3.         compliance
 Items, and therefore not affect                        burden per form.
 the burden estimate.
    Item 302(a): Supplementary
      Financial Information
 Streamlining Item 302(a)   Forms 10,   2 hour
 to eliminate disclosure            10-K, S-1, S-4,     net decrease in
 requirement except when there      and S-11.           compliance
 are one or more retrospective     ..................   burden per form.
 changes to the statements of       Schedule    0.2 hour
 comprehensive income for any of    14A **.             net decrease in
 the quarters within the two most  ..................   compliance
 recent fiscal years and any       ..................   burden per
 subsequent interim period for      Form N-2    schedule.
 which financial statements are     .       0.3 hour
 included or required to be                             net decrease in
 included by Article 3 of                               compliance
 Regulation S-X that,                                   burden per form.
 individually or in the
 aggregate, are material.
  Item 303(a): Full Fiscal Years
Restructuring and Streamlining:
 Establishing a new         Forms 10,   2.1 hour
 paragraph Item 303(a), to          10-K, 10-Q, S-1,    net increase in
 emphasize the purpose of the       S-4, and S-11.      compliance
 MD&A section at the outset to     ..................   burden per form.
 clarify and focus registrants is   Form 1-     0.3 hour
 expected to have a minimal         A[supcaret].        net increase in
 impact on the paperwork burden,   ..................   compliance
 as the change would codify        ..................   burden per form.
 existing guidance. Estimated       Schedule    0.3 hour
 burden increase: 0.1 hour per      14A **.             net increase in
 form and per schedule.                                 compliance
                                                        burden per
                                                        schedule.
 Amendments to streamline   Form N-2    0.5 hour
 the text of new Item 303 would     .       net increase in
 have no effect on the paperwork                        compliance
 burden because these amendments                        burden per form.
 are clarifications of existing
 requirements.
Liquidity and Capital Resources:
 Expanding Item
 303(b)(1)(ii) (current Item
 303(a)(2)) to also require a
 discussion of material cash
 requirements, in addition to
 commitments for capital
 expenditures, would increase the
 paperwork burden.
 Clarifying the liquidity
 and capital resources disclosure
 requirements of Item 303(b)(1),
 including to specifically
 require disclosure of material
 cash requirements from known
 contractual and other
 obligations. Estimated burden
 increase: 1.5 hour per form and
 0.2 hour increase per schedule.
 [ohm]
Results of Operations--Known
 Trends or Uncertainties:
 Amending Item
 303(b)(2)(ii) (current Item
 303(a)(3)(ii)) to clarify that a
 registrant should disclose
 reasonably likely changes in the
 relationship between costs and
 revenues would increase the
 paperwork burden, although this
 effect is expected to be minimal
 because the amendment is
 consistent with existing
 guidance. Estimated burden
 increase: 1.0 hour per form and
 0.1 hour increase per schedule.
Results of Operations--Net Sales,
 Revenues, and Line Item Changes:
 Amending Item 303(b)
 (current Item 303(a)(3), Item
 303(a)(3)(iii) and Instruction 4
 to Item 303(a)) to clarify that
 a registrant should include in
 its MD&A a discussion of the
 reasons underlying material
 changes from period-to-period in
 one or more line items could
 marginally increase the
 paperwork burden by requiring a
 more nuanced discussion
 consistent with the overall
 objective of MD&A. Estimated
 burden increase: 1.0 hour per
 form and 0.1 hour increase per
 schedule.
Results of Operations--Inflation
 and Price Changes:

 Eliminating the specific
 reference to inflation within
 current Item 303(a)(3)(iv) for
 issuers should marginally reduce
 the paperwork burden, although
 such decrease is expected to be
 minimal. Estimated burden
 decrease: 0.5 hours per form and
 0.1 hour decrease per schedule.
Off-Balance Sheet Arrangements:
 Replacing current Item
 303(a)(4) with an instruction
 emphasizing a more principles-
 based approach with respect to
 off-balance sheet arrangement
 disclosures, would reduce
 duplicative disclosures and
 decrease the paperwork burden.
 Estimated burden decrease: 1.0
 hour per form and 0.1 hour
 decrease per schedule.
 Amending Items 2.03 and
 2.04 of Form 8-K to retain the
 definition of ``off-balance
 sheet arrangements'' that is in
 current Item 303(a)(4) would not
 result in any changes in
 reporting obligations under Item
 2.03 and Item 2.04 of Form 8-K,
 and would therefore result in no
 change in paperwork burden for
 this form.
Contractual Obligations Table:
 Eliminating current Item
 303(a)(5), the requirement that
 registrants provide a tabular
 disclosure of contractual
 obligations, would reduce
 duplicative disclosures and
 decrease the paperwork burden.
 Estimated burden decrease: 2.0
 hour per form and 0.2 hour
 decrease per schedule.
Critical Accounting Estimates:
 Adopting Item 303(b)(3)
 to explicitly require disclosure
 of critical accounting estimates
 would provide more clarity on
 the uncertainties involved in
 creating an accounting policy
 and how significant accounting
 policies of registrants may
 differ. This would increase the
 paperwork burden. Estimated
 burden increase: 2.0 hours per
 form and 0.2 hour increase per
 schedule.
   Item 303(c): Interim Periods
 Amending Item 303(c)       Forms 10,   4.0 hour
 (current Item 303(b)) to allow     10-K, 10-Q, S-1,    net decrease in
 for more flexibility in interim    S-4, and S-11.      compliance
 periods compared and eliminating  ..................   burden per form.
 certain instructions and           Form 1-A    0.4 hour
 providing cross-references to      [supcaret].         net decrease in
 similar instructions to Item                           compliance
 303(b) would decrease the                              burden per form.
 paperwork burden.
                                    Schedule    0.4 hour
                                    14A **.             net decrease in
                                                        compliance
                                                        burden per
                                                        schedule.
                                    Form N-2    0.7 hour
                                    .       net decrease in
                                                        compliance
                                                        burden per form.
 Current Item 303(c): Safe Harbor
 for Forward-Looking Information
 Eliminating current Item
 303(c) as a conforming change
 would have no effect on the
 paperwork burden.
       Current Item 303(d):
     Accommodations for SRCs
 Eliminating current Item
 303(d) as a conforming change
 would have no effect on the
 paperwork burden.
          Effect on FPIs
 Eliminating Item 3.A and   Form 20-F   2.0 hour
 generally conforming Item 5 of                         net decrease in
 Form 20-F to the final                                 compliance
 amendments to Item 303 would                           burden per form.
 reduce the paperwork burden.
 Eliminating the            Form 40-F   2.0 hour
 contractual obligations                                net decrease in
 disclosure requirement and                             compliance
 replacing the off-balance sheet                        burden per form.
 disclosure requirements in Forms
 20-F and 40-F with a principles-
 based instruction would reduce
 the paperwork burden.
 Amending current           Forms F-1   3.5 hour
 Instruction 11 to Item 303 to      and F-4.            net decrease per
 conform to the hyperinflation                          form.
 disclosure requirements of Form
 20[dash]F would not affect the
 paperwork burden.
                                  --------------------------------------
    Total........................   Form 1-A.   0.1 hour
                                                        net decrease per
                                                        form.
                                    Form 10-Q   1.9 hour
                                                        net decrease per
                                                        form.
                                    Forms 10,   5.90
                                    10-K, S-1, S-4,     hour net
                                    and S-11.           decrease per
                                                        form.
                                    Schedule    0.5 hour
                                    14A.                net decrease per
                                                        form.
                                    Forms F-1   3.5 hour
                                    and F-4.            net decrease per
                                                        form.
                                    Form 20-F   2.0 hour
                                                        net decrease per
                                                        form.
                                    Form 40-F   2.0 hour
                                                        net decrease per
                                                        form.

                                    Form N-2.   0.8 hour
                                                        net decrease per
                                                        form.
------------------------------------------------------------------------
* Estimated net effect expressed as an increase or decrease of burden
  hours on average and derived from Commission staff review of samples
  of relevant sections of the affected forms and schedules.
** The lower estimated average incremental burden for Schedule 14A
  reflects the Commission staff estimates that no more than 10% of the
  Schedules 14A filed annually include Item 301-303 disclosures.
 Form N-2 states that disclosure under Items 301-303 of
  Regulation S-K is only required if ``the Registrant is regulated as a
  business development company under the 1940 Act.'' The estimated
  average incremental burden for Form N-2 reflects the fact that
  approximately 13% of registrants are BDCs (of the estimated 765 closed-
  end funds that could file on Form N-2 as of July 20, 2020, only 99
  were BDCs. See Use of Derivatives by Registered Investment Companies
  and Business Development Companies, Release No IC-34084 (Nov. 2, 2020)
  at 273.). The estimated burden has been reduced to adjust for this
  percentage.
[supcaret] In the preparation of Part II of Form 1-A, Regulation A
  issuers have the option of disclosing either the information required
  by (i) the Offering Circular format or (ii) Part I of Forms S-1 or S-