Work, 25 J. Fin. 383, 383-417 (1970). The Sommer Report stated that
the efficient market theory is silent as to the optimum amount of
information required or whether the optimum should be achieved on a
mandatory or voluntary basis. The Sommer Report also stated that
market forces alone are insufficient to cause all material
information to be disclosed. See Sommer Report at D-6. Other studies
have noted the limitations of the efficient market theory. See,
e.g., Robert J. Shiller, From Efficient Markets Theory to Behavioral
Finance, J. Econ. Persp. 83, 83-104 (2003).
---------------------------------------------------------------------------

c. Request for Comment
    14. Should registrants assume some level of investor sophistication
in preparing their disclosures? If so, what level or levels of
sophistication? How should investor sophistication be measured? What
are the risks or other disadvantages to investors if registrants either
underestimate or overestimate the level of investor sophistication and
resources when preparing their disclosures? Does disclosure protect all
investors if it is tailored to a subset of the investor community?
    15. Should we revise our rules to require disclosure that is
formatted to provide information to various types of investors in a
manner that will facilitate their use of disclosure for investment and
voting decisions?
    16. Commenters have suggested that disclosure should be written for
a more sophisticated investor than current disclosure appears to
contemplate,\164\ and that tailoring disclosure to less sophisticated
investors contributes to excessive disclosure.\165\ Should our
disclosure requirements be revised to address these views? If so, how
could we revise our disclosure requirements, and which requirements
should we revise, to encourage more appropriately targeted disclosure?
If we revised our disclosure requirements to address these views, would
there be any harm or costs to investors?
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    \164\ See CFA Institute.
    \165\ See Shearman.
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    17. How do investors and other users of disclosure currently access
and use this information? How does this vary across different subsets
of the audience for the disclosure?
    18. Should we use investor testing, such as focus groups or
electronic surveys, to provide input on investors' use of and access to
disclosure?
    19. To what extent should the reliance of certain investors on
market prices or third-party analyses, rather than using

disclosure directly, be a factor in determining the type of investor to
which disclosures should be targeted?
    20. To what extent should we consider the needs of other market
participants, such as professional securities analysts and other third
parties, in revising our disclosure requirements? What would be their
needs?
3. Compliance and Competitive Costs
    When the Commission is engaged in rulemaking it is statutorily
required to consider, in addition to the protection of investors,
whether an action will promote efficiency, competition, and capital
formation.\166\ Disclosure requirements can help reduce information
asymmetries from management to investors,\167\ improving the allocative
efficiency of the capital markets and enhancing capital formation by
lowering the cost of capital.\168\ Lack of information may affect
investors' willingness to invest and may decrease the allocative
efficiency of the capital markets. Thus, requiring an appropriate level
of disclosure is critical to a well-functioning capital market.
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    \166\ See supra note 6.
    \167\ See Robert Verrecchia, Essays on Disclosure, 32 J. Acct.
Econ. 91, 91-180 (2001) (demonstrating that a credible commitment to
disclosure reduces uncertainty and information asymmetries between a
firm and its investors or among investors).
    \168\ See, e.g., Richard Lambert, Christian Leuz, and Robert E.
Verrecchia, Accounting Information, Disclosure, and the Cost of
Capital, 45 J. Acct. Res. 385, 385-420 (May 2007) ; Luzi Hail and
Christian Leuz, Cost of Capital Effects and Changes in Growth
Expectations around U.S. Cross-Listings, 93 J. Fin. Econ. 428, 428-
454 (2009). Lambert, Leuz, and Verrecchia (2007) demonstrate
theoretically that the quality of accounting information can
influence the cost of capital. Hail and Leuz (2009) find empirical
evidence that firms, especially firms from countries with weaker
institutional structures that cross-list securities on U.S.
exchanges, experience a decrease in their costs of capital.
---------------------------------------------------------------------------

    Disclosure may also have costs to registrants that could negatively
affect these factors, although advances in technology and
communications have the potential to reduce these costs. As disclosure
costs rise, registrants' costs of capital may increase, which can
reduce investment, lower the value of a company and impede economic
growth. Registrants may also choose to exit the Commission's reporting
system, when eligible, or remain private if the disclosure requirements
are sufficiently costly.\169\
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    \169\ See Brian J. Bushee & Christian Leuz, Economic
Consequences of SEC Disclosure Regulation: Evidence from the OTC
Bulletin Board, 39 J. Acct. Econ. 233, 233-264 (2005). Bushee and
Leuz find seventy-six percent of firms trading on the OTC Bulletin
Board (``OTCBB''), many of which tended to be on average
significantly smaller by market capitalization, left the market
after the OTCBB eligibility rule required registrants whose
securities were quoted on the OTCBB to file updated financial
reports with the Commission or with their banking or insurance
regulators.
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a. Comments Received
    S-K Study. One commenter stated its belief that ``certain
Regulation S-K disclosures impose unnecessary costs while not providing
concomitant value to investors . . . because the original purposes of
the disclosure requirements have been achieved or are no longer as
important.'' \170\ Two commenters stated that potential first-time
registrants evaluate Exchange Act reporting and compliance costs in
weighing the costs and benefits of an initial public offering.\171\
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    \170\ See Ernst & Young 1.
    \171\ See Silicon Valley and M. Liles.
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    Disclosure Effectiveness Initiative. Some commenters expressed
general support for changes in disclosure requirements that would
reduce costs for registrants while still providing needed information
to investors.\172\ Other commenters, in making specific
recommendations, acknowledged compliance costs of these recommendations
\173\ or suggested ways to minimize the cost of such
recommendations.\174\ One commenter noted the high cost of regulations,
especially those promulgated by the Commission.\175\
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    \172\ See, e.g., letters from Ernst & Young, dated Nov. 20, 2015
(``Ernst & Young 2''); letter from the Federal Regulation of
Securities Committee, Business Law Section, American Bar Association
(Nov. 14, 2014) (``ABA 1''); ABA 2; Business Roundtable; Arthur
Mboue (Jun 24, 2015); and the Biotechnology Industry Organization
(July 14, 2015) (``Biotech Industry Organization'').
    \173\ See, e.g., SCSGP at 14 (acknowledging that seeking repeal
of requirements only a few years after their enactment would impose
``an additional layer of costs''); ABA 2 (stating that, in its
review of specific Regulation S-K items, it considered whether
certain requirements could be better calibrated to provide investors
with relevant and useful disclosure while balancing compliance costs
to companies); letter from Allianz Global Investors (Aug. 13, 2015)
(``Allianz'') (stating that its goal in requesting certain
additional environmental data is to improve disclosure while
minimizing any additional reporting burden) and letter from Data
Transparency Coalition (Oct. 29, 2015) (``Data Transparency
Coalition'').
    \174\ See letter from Sustainability Accounting Standards Board
(Nov. 12, 2014) (``SASB'').
    \175\ See A. Radin.
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b. Discussion
    We are sensitive to the costs of disclosure, including the
administrative and compliance costs of preparing and disseminating
disclosure as well as the potential costs of disclosing sensitive
information to competitors. While the S-K Study did not specifically
consider costs to investors, the staff identified economic principles
that should be given consideration when reviewing and considering
changes to our disclosure requirements, including: (1) The extent to
which a given disclosure requirement entails high administrative and
compliance costs; and (2) the extent to which disclosure of a company's
proprietary information may have competitive or other economic
costs.\176\
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    \176\ See S-K Study at 94.
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    To address the potential negative effects that would result from
disclosing sensitive information, our rules permit registrants to
request confidential treatment of proprietary information, if
disclosure of such information would cause competitive harm to the
registrant.\177\ The Commission generally does not consider
confidential treatment to be appropriate for information that is
necessary for the protection of investors.\178\ If the Commission
grants a request for confidential treatment, the registrant may redact
the proprietary information from its public filings.
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    \177\ Rule 80(b)(4) [17 CFR 200.80(b)(4)] (adopted under the
Freedom of Information Act [5 U.S.C. 552] (``FOIA'')) (identifying
as ``nonpublic'' records those that disclose trade secrets and
commercial or financial information obtained from a person and
privileged or confidential); Securities Act Rule 406 [17 CFR
230.406]; Exchange Act Rule 24b-2 [17 CFR 240.24b-2] See also
National Parks and Conservation Association v. Morton, 547 F.2d 673
(D.C. Cir. 1974) (holding that information is confidential for
purposes of FOIA if it is of the type not usually released to the
public and, if released, would cause substantial competitive harm)
and National Parks and Conservation Association v. Kleppe, 547 F.2d
673 (D.C. Cir. 1976) (holding that information is confidential if
its release is likely to cause substantial competitive harm and that
actual competitive harm need not be shown).
    \178\ Securities Act Rule 406(b)(2)(iii) [17 CFR
230.406(b)(2)(iii)]. The staff has provided guidance that, except in
unusual circumstances, disclosure required by Regulation S-K or any
other applicable disclosure requirement is not an appropriate
subject for confidential treatment. See Staff Legal Bulletin 1A,
Confidential Treatment Requests (July 11, 2001) (``Staff Legal
Bulletin 1A''), available at http://www.sec.gov/interps/legal/slbcf1r.htm.
---------------------------------------------------------------------------

    The Commission also has addressed the costs of disclosure through
regulatory relief in the form of scaled disclosure requirements for
certain smaller registrants. These accommodations are intended to
promote capital formation and provide relief where the fixed costs of
compliance may be particularly high relative to the size of the company
while also considering investor protection.\179\
---------------------------------------------------------------------------

    \179\ See, e.g., SRC Adopting Release at 942 (stating that the
SRC definition ``is appropriately scaled in that it reduces costs to
smaller companies caused by unnecessary information requirements,
consistent with investor protection''); Smaller Reporting Company
Regulatory Relief and Simplification, Release No. 33-8819 (July 5,
2007) [72 FR 39670 (July 19, 2007)] at 39678 (stating the
Commission's objective to ``provide maximum flexibility for [SRCs]
without disadvantaging investors [by] establishing a baseline of
required disclosure, [while encouraging SRCs] to determine for
themselves the proper balance and mix of disclosure . . . given the
costs of compliance and the market demand for information'').

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

    Throughout this concept release, we seek comment on changes to
specific disclosure requirements that could reduce costs for
registrants, while still providing investors with information that is
important or useful to making informed investment and voting decisions.
Separately, we address the effectiveness of our scaled disclosure
requirements.\180\ In addition to those discussions, we are interested
in public comment on other methods we could consider to reduce costs
for registrants that would not compromise investors' access to
important information.
---------------------------------------------------------------------------

    \180\ For a discussion of our scaled disclosure requirements,
see Section IV.H.
---------------------------------------------------------------------------

c. Request for Comment
    21. Do current disclosure requirements appropriately consider the
costs and benefits of disclosure to registrants and investors? How
should the Commission evaluate benefits, such as those arising from
disclosure, that cannot be easily quantified?
    22. In addition to scaled disclosure and confidential treatment,
are there other accommodations that we could make to reduce costs for
registrants while still providing investors with the information that
is important or useful to making informed investment and voting
decisions?
    23. Are there other benefits and costs that we should consider when
evaluating disclosure effectiveness?

IV. Information for Investment and Voting Decisions

A. Core Company Business Information

    Disclosure about a registrant's business lays the groundwork for
understanding and assessing a company, its operations and financial
condition. Information about a registrant's industry, business
environment and other factors affecting the business helps inform
investment and voting decisions by placing other disclosure in context.
Schedule A of the Securities Act requires disclosure of the general
character of the business transacted or to be transacted by the
registrant. Item 101 of Regulation S-K similarly requires a description
of a registrant's business. Item 102 requires disclosure about a
registrant's materially important physical properties. We are reviewing
the disclosure required by Item 101(a)(1) and (c) \181\ and Item 102 of
Regulation S-K to determine whether they continue to provide investors
with the information they need to understand the nature of a
registrant's business and properties. We are seeking public input on
whether there are any disclosure requirements that should be eliminated
or modified and whether we should add any new disclosure requirements
to these Items.
---------------------------------------------------------------------------

    \181\ The staff is separately considering certain aspects of
Item 101 in developing recommendations for potential changes to
update or simplify certain disclosure requirements. For a
description of this project, see supra Section I.
---------------------------------------------------------------------------

1. General Development of Business (Item 101(a)(1))
    Item 101(a) of Regulation S-K requires a description of the general
development of the business of the registrant during the past five
years, or such shorter period as the registrant may have been engaged
in business.\182\ In describing the general development of the
business, Item 101(a)(1) requires disclosure such as the following: The
year in which the registrant was organized and its form of
organization; the nature and results of any bankruptcy, receivership or
similar proceedings with respect to the registrant or any of its
significant subsidiaries; the nature and results of any other material
reclassification, merger or consolidation of the registrant or any of
its significant subsidiaries; the acquisition or disposition of any
material amount of assets otherwise than in the ordinary course of
business; and any material changes in the mode of conducting the
business.
---------------------------------------------------------------------------

    \182\ 17 CFR 229.101(a)(1). Item 101(a)(1) states information
shall be disclosed for earlier periods if material to an
understanding of the general development of the business.
---------------------------------------------------------------------------

a. Comments Received
    S-K Study. None.
    Disclosure Effectiveness Initiative. One commenter, as part of a
general recommendation to limit disclosure requirements asking for the
same or very similar information on multiple occasions, noted
redundancies between current reports on Form 8-K and annual reports on
Form 10-K and recommended that redundant disclosure in reports
subsequent to disclosure in a Form 8-K should not be required.\183\ For
example, and as noted by this commenter, Items 1.03 (Bankruptcy or
Receivership) and 2.01 (Completion of Acquisition or Disposition of
Assets) of Form 8-K require disclosure similar to the disclosure
required under Item 101(a)(1). This commenter also recommended making a
distinction under Item 101(a)(1) for new registrants, which may be
disclosing the general development of their business for the first time
in a registration statement, and established reporting registrants,
which would have disclosed such information in a previous filing.
---------------------------------------------------------------------------

    \183\ See CCMC (also noting redundancies between Item 4.01 of
Form 8-K (Changes in Registrant's Certifying Accountant) and Item
304 of Regulation S-K (disclosure of changes in and disagreements
with accountants) and Item 3.02 of Form 8-K (Unregistered Sales of
Equity Securities) and Item 701 of Regulation S-K (disclosure of
recent sales of unregistered securities)).
---------------------------------------------------------------------------

b. Discussion
    A requirement to provide a brief outline of the general development
of the business for the preceding five years was included in the
earliest forms of registration statements and annual reports.\184\ The
first version of Regulation S-K adopted in 1977 included Item 101(a)(1)
as part of the description of business disclosure requirements.\185\ At
that time, the Commission amended Item 101(c) to delete a requirement
to discuss specific business changes during the past three fiscal years
noting ``[a]ny material changes would be described pursuant to
paragraph (a) of the item.'' \186\
---------------------------------------------------------------------------

    \184\ See, e.g., Item 6 of Form A-2 adopted in 1935, which
required registrants to outline briefly ``the general development of
the business for the preceding five years.'' See Release No. 33-276
(Jan. 14, 1935) [not published in the Federal Register].
Additionally, Item 5 of Form A-1, adopted in 1933, required
registrants to briefly describe the length of time the registrant
had been engaged in its business. See Release No. 33-5 (July 6,
1933) [not published in the Federal Register]. See also S-K Study at
32, footnote 88.
    \185\ See 1977 Regulation S-K Adopting Release.
    \186\ Id. at 65553. (``The disclosure requirement relating to
descriptions of products or services has also been amended to delete
the requirement that changes in the kinds of products produced or
services rendered or in the markets or methods of distribution
during the past three fiscal years be discussed. Any material
changes would be required to be described pursuant to paragraph (a)
of the item.'').
---------------------------------------------------------------------------

    Business developments and other disclosure called for by Item
101(a)(1) are often reflected elsewhere in the filing, such as in the
financial statements or MD&A. Additionally, in 2004, the Commission
expanded the number of reportable events on Form 8-K to include items
that may result in disclosure that overlaps with the requirements of
Item 101(a)(1), such as disclosure of entry into a material definitive
agreement, including business combination agreements.\187\
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    \187\ See Additional Form 8-K Disclosure Requirements and
Acceleration of Filing Date, Release No. 33-8400 (Mar. 16, 2004) [69
FR 15594 (Mar. 25, 2004)] (``2004 Form 8-K Adopting Release'').
---------------------------------------------------------------------------

c. Request for Comment
    24. Does the current requirement in Item 101(a)(1) to describe the
general development of a registrant's business during the past five
years provide useful disclosure that is not available either elsewhere
in the current filing (e.g., MD&A or the notes to the financial

statements) or in any prior filing, including current reports on Form
8-K? Should we require additional or more specific information under
Item 101(a)(1) and, if so, what type of information and why?
    25. How could we improve Item 101(a)(1)? For example, is the five-
year time frame for this disclosure appropriate? Would a shorter or
longer time frame be more appropriate? If so, what time frame would be
appropriate and why?
    26. Does this disclosure continue to be useful for registrants with
a reporting history? Once a registrant has disclosed this information
in a registration statement should we allow registrants to omit this
disclosure from subsequent periodic reports unless material changes
occur? Alternatively, should we require registrants to describe its
business as currently conducted as well as any material changes that
have occurred in the last five years?
    27. Should we revise Item 101(a)(1) to require disclosure of a
registrant's business strategy? Would investors find such a disclosure
important or useful? If so, should this requirement be included in a
registrant's MD&A? Should we define ``business strategy''? If so, how?
    28. Should we permit a summary disclosure of the general
development of a registrant's business in all filings except the
initial filing? For example, should we require a more detailed
discussion of a registrant's business in the initial filing, and in
subsequent filings only require a summary of the registrant's business
along with a discussion of material changes in the business as
previously disclosed in the registrant's Form 10-K? Alternatively,
should we require a more detailed discussion of a registrant's business
on a periodic basis, such as every three years, and a summary
disclosure in other years? Should any such requirement be conditioned
on timely reporting or some other consideration?
    29. What types of investors or audiences are most likely to value
the information required by Item 101(a)(1)?
    30. What is the cost of providing the disclosure required by Item
101(a), including the administrative and compliance costs of preparing
and disseminating this disclosure? How would these costs change if we
made any of the changes contemplated here? Please provide quantified
estimates where possible and include only those costs associated with
providing disclosure under Item 101(a).
2. Narrative Description of Business (Item 101(c))
    While Item 101(a) requires disclosure of the general development of
the business, Item 101(c) requires a narrative description of a
registrant's business and identifies thirteen specific items that must
be disclosed: \188\
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    \188\ 17 CFR 229.101(c). Item 101(c)(1) specifies that, to the
extent material to an understanding of the registrant's business
taken as a whole, the description of each segment must include the
information specified in subsections (i) through (x). Information in
subsections (xi) to (xiii) is required to be discussed for the
registrant's business in general; where material, the segments to
which these matters are significant also must be identified.

    (i) principal products produced and services rendered;
    (ii) new products or segments;
    (iii) sources and availability of raw materials;
    (iv) intellectual property;
    (v) seasonality of the business;
    (vi) working capital practices;
    (vii) dependence on certain customers;
    (viii) dollar amount of backlog orders believed to be firm;
    (ix) business subject to renegotiation or termination of
government contracts;
    (x) competitive conditions;
    (xi) company-sponsored research and development activities;
    (xii) compliance with environmental laws; and
    (xiii) number of employees.
a. Comments Received
    S-K Study. Two commenters recommended eliminating the requirement
in Item 101(c) to disclose the amount of backlog orders believed to be
firm for EGCs, stating the concept of backlog is not a ``meaningful
metric'' for most of these companies.\189\ These commenters stated that
eliminating this requirement for EGCs would not ``compromise the
delivery of meaningful disclosure to investors.'' These commenters also
raised the question of whether the concept of backlog (or for
businesses other than industrials, some other measure of committed
revenue that is not yet reflected in the financial statements) would be
addressed more appropriately in MD&A. Another commenter recommended
eliminating disclosure requirements that no longer apply due to market
or other changes and noted backlog as an example.\190\ This commenter
recommended eliminating this requirement for all registrants, not only
EGCs, or moving this requirement to MD&A.
---------------------------------------------------------------------------

    \189\ See Silicon Valley and M. Liles. Item 101(c)(1)(viii)
requires disclosure of the dollar amount of backlog orders believed
to be firm, as of a recent date and as of a comparable date in the
preceding fiscal year, together with an indication of the portion
thereof not reasonably expected to be filled within the current
fiscal year, and seasonal or other material aspects of the backlog.
    \190\ See Ernst & Young 1.
---------------------------------------------------------------------------

    Disclosure Effectiveness Initiative. One commenter stated that many
of the subsections of Item 101(c) would be more appropriately addressed
elsewhere in the filing, stating that when such information is material
to a registrant, investors would be better served by having the
registrant address that information in its MD&A or risk factors.\191\
---------------------------------------------------------------------------

    \191\ See SCSGP (stating that the following subsections of Item
101 would be more useful if included in MD&A: backlog
((c)(1)(viii)), working capital practices ((c)(1)(vi)), sources and
availability of raw materials ((c)(1)(iii)), dependence on certain
customers ((c)(1)(vii)), competitive conditions ((c)(1)(x)),
compliance with environmental laws ((c)(1)(xii)) and risks attendant
to foreign operations ((d)(3))).
---------------------------------------------------------------------------

b. Discussion
    Consistent with Schedule A of the Securities Act, the earliest
forms of registration statements and annual reports required a brief
outline of the general character of the business done and intended to
be done by a registrant.\192\ Many of the disclosure requirements that
currently appear in Item 101(c) were adopted in 1973 following
investigation of the hot issues markets.\193\ The adopting release
notes that, in making investment decisions, venture capitalists and
underwriters typically obtain specific information from companies about
their competitive position and the methods of competition in their
respective industries, and accordingly, the new requirements were
expected to provide similar information to the investing public.\194\
At the same time, the Commission also added requirements for the
disclosure of the amount of backlog orders, the sources and
availability of raw materials essential to the business, the number of
employees and working capital practices.\195\
---------------------------------------------------------------------------

    \192\ See, e.g., Item 5 of Form A-2 adopted in 1935, which
required registrants to outline briefly ``the general character of
the business done and intended to be done by the registrant and its
subsidiaries.'' See Release No. 33-276 (Jan. 14, 1935) [not
published in the Federal Register]. Additionally, Items 3 through 5
of Form A-1, adopted in 1933, required registrants to briefly
describe the ``character of business done or intended to be done,''
disclose a list of states where the issuer owned property and was
qualified to do business, and the length of time the registrant had
been engaged in its business. See Release No. 33-5 (July 6, 1933)
[not published in the Federal Register]. See also S-K Study at 32,
footnote 88.
    \193\ See Hot Issues Adopting Release. See also Hot Issues;
Meaningful Disclosure, Release No. 33-5274 (July 26, 1972) [37 FR
16005 (Aug. 9, 1972)].
    \194\ See Hot Issues Adopting Release.
    \195\ See id.
---------------------------------------------------------------------------

    In the S-K Study, the staff recommended reviewing the description
of business for continuing relevance in

light of changes that have occurred in the way businesses operate,
which may make other disclosures relevant that are not expressly
addressed under current requirements.\196\ As an example, the S-K Study
noted that requirements could be more specific as to additional
disclosure that would be necessary where a business relies heavily on
intellectual property owned by a third party or relies on a service
agreement with third parties to perform necessary business
functions.\197\
---------------------------------------------------------------------------

    \196\ See S-K Study at 99-100.
    \197\ Below, and in other parts of this release, we discuss
other areas where our requirements could be revised to reflect
changes in the way businesses operate.
---------------------------------------------------------------------------

c. Request for Comment
    31. Do the disclosure requirements in Item 101(c) continue to
provide useful information to investors? How could we improve Item
101(c)'s requirements?
    32. How could we update Item 101(c) to better reflect changes in
the way businesses operate? Are there particular categories or types of
registrants for which these disclosure requirements are more or less
relevant?
    33. Are there additional line-item disclosure requirements about a
registrant's business that would improve the quality and consistency of
disclosure? Are there any categories of information that certain
registrants voluntarily provide, and are not required to disclose under
Item 101(c), that we should include in Item 101(c)? \198\ What would be
the benefits and challenges of requiring disclosure of additional
categories of information?
---------------------------------------------------------------------------

    \198\ For example, the staff has observed that many registrants
provide disclosure about the regulatory environment in which their
business operates although no specific line-item disclosure
requirement for this exists.
---------------------------------------------------------------------------

    34. Currently, some registrants include in their business section a
general description of their industry. Should industry disclosure be a
separate requirement? If so, would this requirement be more useful to
investors in the business section or in MD&A?
    35. Should we require additional specific disclosure relevant to
particular industries, such as manufacturing or technology companies?
If so, which industries and why? What are the benefits and challenges
of requiring industry-specific disclosure? \199\
---------------------------------------------------------------------------

    \199\ For a discussion of industry-specific disclosures, see
Section IV.E.
---------------------------------------------------------------------------

    36. What is the impact on disclosure of listing the thirteen item
requirements in Item 101(c)? In practice, do registrants view Item
101(c) as a checklist? Do the prescriptive items result in disclosure
of information that is not important by some registrants?
    37. Should we require Item 101(c) disclosure only in the initial
filing with follow-up disclosure of any material changes for subsequent
years? Should any such requirement be conditioned on timely reporting
or some other consideration? Should the requirements differ for
registration statements and periodic reports?
    38. Is there any information currently disclosed in the description
of business that should be presented in a different context such as
MD&A or risk factors? Why?
    39. In some circumstances, disclosure is required under Item
101(c)(1) if material. The item specifies that, to the extent material
to an understanding of the registrant's business taken as a whole, the
description of each segment shall include the information in (c)(1)(i)
through (x) and that matters in (c)(1)(xi) through (xiii) shall be
discussed for the registrant's business in general; where material, the
segments to which these matters are significant shall be identified.
Additionally, some sub-items of Item 101(c)(1) require disclosure if
material, such as (c)(1)(ii) and (c)(1)(ix),\200\ while others do
not.\201\ Should we require disclosure of all line items in Item 101(c)
in all circumstances, regardless of materiality? Why or why not?
Alternatively, would a principles-based approach to disclosure about a
registrant's business and operations allow flexibility to disclose
information that is important to investors? If so, how should such a
disclosure requirement be structured? What factors should we consider
in developing such a requirement?
---------------------------------------------------------------------------

    \200\ For example, Item 101(c)(1)(ii) requires a description of
the status of a product or segment (e.g., whether in the planning
stage, whether prototypes exist, the degree to which product design
has progressed or whether further engineering is necessary), if
there has been a public announcement of, or if the registrant
otherwise has made public information about, a new product or
segment that would require the investment of a material amount of
the assets of the registrant or that otherwise is material. In
addition, Item 101(c)(1)(ix) requires a description of any material
portion of the business that may be subject to renegotiation of
profits or termination of contracts or subcontracts at the election
of the Government.
    \201\ For example, Item 101(c)(1)(xiii) requires disclosure of
the number of persons employed by the registrant.
---------------------------------------------------------------------------

    40. What types of investors or audiences are most likely to value
the information required by Item 101(c)? Would an alternative format or
presentation of the information improve the value of such disclosure to
a particular type of investor or audience? If so, what type of format
or presentation?
    41. What is the cost of providing the disclosure required by Item
101(c), including the administrative and compliance costs of preparing
and disseminating this disclosure? How would these costs change if we
made any of the changes contemplated here? Please provide quantified
estimates where possible and include only those costs associated with
providing disclosure under Item 101(c).
3. Technology and Intellectual Property Rights (Item 101(c)(1)(iv))
    Item 101(c)(1)(iv) requires disclosure of the importance to the
segment and the duration and effect of all patents, trademarks,
licenses, franchises and concessions held.\202\
---------------------------------------------------------------------------

    \202\ 17 CFR 229.101(c)(1)(iv).
---------------------------------------------------------------------------

a. Comments Received
    S-K Study. None
    Disclosure Effectiveness Initiative. None.
b. Discussion
    A broad range of industries benefit from intellectual property,
both directly and indirectly,\203\ and intellectual property has become
increasingly important to business performance.\204\ Certain industries
produce or use significant amounts of intellectual property or rely
more heavily on these rights.\205\ Accordingly, certain registrants
provide detailed disclosure in response to Item 101(c)(1)(iv), and
disclosure varies among registrants and across industries.
---------------------------------------------------------------------------

    \203\ See Economics and Statistics Administration and United
States Patent and Trademark Office, Intellectual Property and the
U.S. Economy: Industries in Focus (March 2012) at iv, available at
http://www.uspto.gov/sites/default/files/news/publications/IP_Report_March_2012.pdf (``Intellectual Property and the U.S.
Economy'').
    \204\ See, e.g., Kelvin W. Willoughby, What impact does
intellectual property have on the business performance of technology
firms?, Int. J. Intellectual Property Management, Vol. 6, No. 4
(2013).
    \205\ See Intellectual Property and the U.S. Economy. This
report identifies seventy-five industries as ``IP-intensive.'' In
this report, patents, trademarks and copyrights were the categories
of intellectual property assessed. The methodology for designating
each of these subcategories as ``IP-intensive'' is outlined further
in this report. For patent intensive industries, the report utilized
the North American Industry Classification System (NAICS) codes and
identified, as the four most patent-intensive industries, those
industries classified in computer and electronic product
manufacturing (NAICS 334). This three-digit NAICS industry includes
computer and peripheral equipment; communications equipment; other
computer and electronic products; semiconductor and other electronic
components; and navigational, measuring, electro-medical, and
control instruments.
---------------------------------------------------------------------------

    In the biotechnology and pharmaceutical industries, registrants
that provide detailed patent disclosure often disclose the jurisdiction
in which the patent was filed, year of expiration, type of patent
(e.g., composition of

matter, method of use, method of delivery or method of manufacturing),
products or technologies to which the patent relates and how the patent
was acquired (e.g., licensed from another entity or owned and filed by
the registrant). Some registrants in these industries aggregate patent
disclosure by groups of patents, potentially making disclosure about
individual material patents difficult to discern. As registrants in the
biotechnology and pharmaceutical industries regularly sell one or a few
patented products that generate substantial revenue, disclosure of
``patent cliffs,'' \206\ which often result in material adverse
financial effects, may be required in the risk factors section or MD&A.
---------------------------------------------------------------------------

    \206\ The term ``patent cliff'' as used in the biotechnology and
pharmaceutical industry refers to a future loss of patent protection
and consequential loss of revenue. These potential future losses are
known to registrants far in advance of their onset. When they occur,
they often precipitate material adverse financial effects. See,
e.g., Andrew Jack, Pharma tries to avoid falling off `patent cliff,'
Financial Times, May 6, 2012 and Cliffhanger, Economist, Dec. 3,
2011. See also Ed Silverman, Big Pharma Faces Some Big Patent
Losses, but Pipelines are Improving, Wall St. J.: L. Blog, available
at http://blogs.wsj.com/pharmalot/2015/02/09/big-pharma-faces-some-big-patent-losses-but-pipelines-are-improving/.
---------------------------------------------------------------------------

    In the information technologies and services industry, registrants
protect their intellectual property through the use of patents,
trademarks, copyrights, trade secrets, licenses and confidentiality
agreements.\207\ Registrants with large portfolios of intellectual
property often disclose that their products, services and technologies
are not dependent on any specific patent, trademark, copyright, trade
secret or license. As a result, these registrants often provide only
high-level discussions of their intellectual property portfolios, which
include general statements of a registrant's development, use and
protection of its intellectual property. Registrants with smaller
intellectual property portfolios tend to provide slightly more detailed
discussions, including, for example, disclosure of their total number
of issued patents, a range of years during which those patents expire
and their total number of pending patent applications.
---------------------------------------------------------------------------

    \207\ See Bruce Abramson, Promoting Innovation in the Software
Industry: A First Principles Approach to Intellectual Property
Reform, 8 B.U. J. Sci. & Tech. L. 75 (2002) (discussing the software
industry's use of intellectual property law).
---------------------------------------------------------------------------

    In general, registrants in the information technologies and
services industry use copyrights to protect against the unauthorized
copying of software programs \208\ and trade secrets to protect
proprietary and confidential information that derives its value from
continued secrecy.\209\ Since Item 101(c)(1)(iv) does not require
disclosure about copyrights or trade secrets, registrants currently
make disclosure about such matters voluntarily.
---------------------------------------------------------------------------

    \208\ See Dennis S. Karjala, Copyright Protection of Operating
Software, Copyright Misuse, and Antitrust, 9 Cornell J.L. & Pub.
Pol'y 161, 172 (1999) (discussing the dependence of software
technology companies on copyright).
    \209\ See Raymond T. Nimmer & Patricia Ann Krauthaus, Software
Copyright: Sliding Scales and Abstracted Expression, 32 Hous. L.
Rev. 317, 325 (1995) (distinguishing between the software industry's
use of trade secret law, patent law and copyright law).
---------------------------------------------------------------------------

c. Request for Comment
    42. Should we retain the current scope of Item 101(c)(1)(iv), which
requires disclosure of a registrant's patents, trademarks, licenses,
franchises and concessions? Should we expand the rule to include other
types of intellectual property, such as copyrights? Should we remove
the individual categories and instead require disclosure of
``intellectual property''? If so, should we define that term and what
should it encompass?
    43. What, if any, additional information about a registrant's
reliance on or use of technology and related intellectual property
rights should we require and why? Should we revise Item 101(c)(1)(iv)
to require more detailed intellectual property disclosure, similar to
the disclosure currently provided by some biotechnology and
pharmaceutical registrants? If so, should we require such detailed
disclosures for all or only some of a registrant's intellectual
property, such as those that are material to the business?
    44. For registrants with large intellectual property portfolios,
does aggregate disclosure of the total number of patents, trademarks
and copyrights and a range of expiration dates provide investors with
sufficient information? If not, what additional information do
investors need about a company's portfolio of intellectual property?
Would tabular disclosure or an alternate format or presentation of a
registrant's intellectual property portfolio make the information more
useful to investors? What would be the benefits and challenges of
requiring disclosure of this information in this format?
    45. Should we limit these disclosure requirements to registrants in
particular industries? If so, which industries should we specify and
why? Is disclosure about a registrant's intellectual property most
useful in the context of the description of business, disclosure about
trends and developments affecting results of operations, or in a
discussion of risk and risk management?
    46. What are the competitive costs of disclosure under Item
101(c)(1)(iv)?
4. Government Contracts and Regulation, Including Environmental Laws
(Items 101(c)(1)(ix) and (c)(1)(xii))
    Item 101(c)(1)(ix) requires disclosure of any material portion of a
business that may be subject to renegotiation of profits or termination
of contracts or subcontracts at the election of the government.\210\
Item 101(c)(1)(xii) requires disclosure of the material effects of
compliance with environmental laws on the capital expenditures,
earnings and competitive position of the registrant and its
subsidiaries, as well as any material estimated capital expenditures
for the remainder of the fiscal year, the succeeding fiscal year, and
such future periods that the registrant deems material.\211\ There is
no separate line-item requirement to discuss government regulation that
may be material to a registrant's business.
---------------------------------------------------------------------------

    \210\ 17 CFR 229.101(c)(1)(ix).
    \211\ 17 CFR 229.101(c)(1)(xii).
---------------------------------------------------------------------------

a. Comments Received
    S-K Study. None.
    Disclosure Effectiveness Initiative. One commenter suggested
including an instruction to Item 101(c)(1)(ix) to specify that, to the
extent disclosure responsive to this item is included in the notes to
the financial statements, cross-references should be used to avoid
duplicative disclosure.\212\ Another commenter stated that registrants
in the pharmaceutical industry noted that high levels of regulatory
disclosure and other issues common to all pharmaceutical registrants
have become commonplace and have detracted from meaningful
disclosure.\213\ Two commenters sought

increased disclosure of a registrant's corporate structure and tax
strategy.\214\ One of these commenters recommended specific disclosures
such as a list of each country of operation and the name of each entity
of the issuer group domiciled in each country of operation and the
total pre-tax gross revenues of each member of the issuer group in each
country of operation.\215\
---------------------------------------------------------------------------

    \212\ See ABA 2.
    U.S. government contracts generally contain provisions that
enable the contract to be terminated, in whole or in part, without
prior notice, at the government's convenience (due to lack of
funding or for other reasons) or for default based on performance.
ASC 912-275-50-1 requires footnote disclosure of renegotiation
uncertainties, their significance, and renegotiation discussions
relating to the current year. In addition, ASC 912-275-50-6 states
that if there are indications that a contract termination may occur
and the termination would have a material effect on the contractor's
operations, disclosure of the circumstances and the potential
effects shall be made in the notes to financial statements. The
staff has observed that, rather than provide duplicative disclosure,
some government contractors cross-reference their discussion of the
government's right to terminate a contract under Item 101(c)(1)(ix)
to either their accounting policy disclosure for revenue recognition
in the critical accounting estimates disclosure in MD&A or to their
significant accounting policies in the notes to the financial
statements.
    \213\ See Shearman.
    \214\ See letter from US SIF and US SIF Foundation (Sept. 18,
2014) (``US SIF 1'') (stating that a lack of information about a
registrant's subsidiaries ``prevent investors from accurately
assessing corporate tax structure and tax strategy and the attendant
contingent liabilities, as well as exposures to political risks in
these countries''), and AFL-CIO (``Even minor changes to US or
foreign tax policy could lead to major changes in the issuer's
financial performance.'').
    \215\ See AFL-CIO.
---------------------------------------------------------------------------

b. Government Contracts (Item 101(c)(1)(ix))
i. Discussion
    Business contracts with agencies of the U.S. government and the
various laws and regulations relating to procurement and performance of
U.S. government contracts impose terms and rights that are different
from those typically found in commercial contracts. In a 1972 Notice to
Registrants, the Commission noted that government contracts are subject
to renegotiation of profit and to termination for the convenience of
the government.\216\ At any given time in the performance of a
government contract, an estimate of its profitability is often subject
not only to additional costs to be incurred but also to the outcome of
future negotiations or possible claims relating to costs already
incurred.\217\
---------------------------------------------------------------------------

    \216\ See Defense and Other Long Term Contracts; Prompt and
Accurate Disclosure of Information, Release No. 33-5263 (June 22,
1972) [37 FR 21464 (Oct. 11, 1972)].
    \217\ Id.
---------------------------------------------------------------------------

    Registrants with U.S. government contracts tend to disclose that
the funding of these contracts is subject to the availability of
Congressional appropriations and that, as a result, long-term
government contracts are partially funded initially with additional
funds committed only as Congress makes further appropriations. These
registrants disclose that they may be required to maintain security
clearances for facilities and personnel in order to protect classified
information. Additionally, these registrants state that they may be
subject to routine government audits and investigations, and any
deficiencies or illegal activities identified during the audits or
investigations may result in the forfeiture or suspension of payments
and civil or criminal penalties.
ii. Request for Comment
    47. Is disclosure about government contracts important to
investors? Why? Is there any additional information about a
registrant's contracts with the government that would be important to
investors?
    48. Rather than focusing specifically on government contracts,
should we require registrants to briefly describe all material
contracts? Would such a requirement elicit disclosure not otherwise
provided in MD&A or the description of business?
c. Compliance with Environmental Laws (Item 101(c)(1)(xii))
i. Discussion
    Pursuant to NEPA, which mandated consideration of the environment
in regulatory action, the Commission adopted Item 101(c)(1)(xii) in
1973 to require disclosure of the material effects compliance with
federal, state and local environmental laws may have on the capital
expenditures, earnings and competitive position of the registrant.\218\
Subsequent litigation concerning both the denial of a rulemaking
petition and adoption of the 1973 environmental disclosure requirements
resulted in the Commission initiating public proceedings in 1975
primarily to elicit comments on whether the provisions of NEPA required
further rulemaking.\219\ As a result of these proceedings, the
Commission in 1976 amended the requirements to specifically require
disclosure of any material estimated capital expenditures for
environmental control facilities for the remainder of the registrant's
current and succeeding fiscal years, and for any further periods that
are deemed material.\220\
---------------------------------------------------------------------------

    \218\ See supra note 61.
    \219\ See Notice of Public Proceedings on Environmental
Disclosure Release.
    \220\ See 1976 Environmental Release.
---------------------------------------------------------------------------

ii. Request for Comment
    49. Should we increase or reduce the environmental disclosure
required by Item 101(c)(1)(xii)? Why? What kind of information should
we add to or remove from this requirement?
    50. Is disclosure about the material effects that compliance with
provisions regulating the discharge of materials into the environment,
or otherwise relating to the protection of the environment, may have
upon a registrant's capital expenditures, earnings and competitive
position important to investors? If so, should we require registrants
to present this disclosure in a specific format? Would this disclosure
be more appropriate in MD&A or the business section?
    51. Should we require specific disclosure about the material
effects that other regulations may have on a registrant's capital
expenditures, earnings and competitive position? If so, are there
specific laws and regulations that our rules should cover?
d. Government Regulation
i. Discussion
    Although not referenced in Item 101, many registrants discuss
government regulations relevant to their business.\221\ Healthcare and
insurance providers regularly disclose the registrant's collection, use
and protection of individually-identifiable information and its
compliance with the Health Insurance Portability and Accountability Act
of 1996,\222\ as well as the impact of the Patient Protection and
Affordable Care Act \223\ on its business. Biotechnology or medical
device companies often disclose the status of and process for FDA
approval of significant new drugs or medical devices. Public utilities
typically discuss regulation by various federal, state and local
authorities and include information about state ratemaking procedures,
which determine the rates utilities charge and the return on invested
capital they earn.
---------------------------------------------------------------------------

    \221\ However, the disclosure requirements applicable to SRCs do
require some of this information, to the extent material. Item
101(h)(4)(viii) requires disclosure of the need for any government
approval of principal products or services. If government approval
is necessary and the SRC has not yet received that approval, SRCs
are required to discuss the status of the approval within the
government approval process. The staff has observed that
biotechnology or medical device companies that are not SRCs also
provide this disclosure. Additionally, Item 101(h)(4)(ix) requires
disclosure of the effect of existing or probable governmental
regulations on the business. For a discussion of scaled disclosure
requirements, see Section IV.H.2.
    \222\ Public Law 104-191, 110 Stat. 1936 (1996).
    \223\ Public Law 111-148, 124 Stat. 119 (2010).
---------------------------------------------------------------------------

    Registrants in the financial services industry regularly describe
federal and state regulation as well as supervision by the Federal
Reserve Board, while registrants with a material amount of U.S.
government contracts disclose the laws and regulations for government
contracts. Registrants with tax strategies involving foreign
jurisdictions typically disclose that they are subject to income taxes
in both the U.S. and numerous foreign jurisdictions, and that future
changes to U.S. and non-U.S. tax law could adversely affect their
anticipated financial position and results. Some disclose the impact on
their business of tax treaties between the U.S. and one or more foreign
jurisdictions.

ii. Request for Comment
    52. Given that many registrants provide disclosure of material
government regulations without a specific line-item requirement, are
the current disclosure requirements sufficient? Would a specific
requirement seeking this disclosure provide additional information that
is important to investors? If so, what specific information and level
of detail should we require and why? What would be the costs of
requiring disclosure of this information?
    53. Foreign regulations, including foreign tax rates and treaties,
may have a material impact on a registrant's operations. Should we
specifically require registrants to describe foreign regulations that
affect their business? If so, what specific information and level of
detail should we require? How would any additional information inform
investment and voting decisions? Would there be challenges for
registrants to provide such disclosure?
5. Number of Employees (Item 101(c)(1)(xiii))
    Item 101(c)(1)(xiii) requires disclosure of the number of persons
employed by the registrant. The Division of Corporation Finance
(``Division'') has provided interpretive guidance on this requirement
stating that, in industries where the general practice is to hire
independent contractors rather than employees, companies should
disclose the number of persons retained as independent contractors as
well as the number of regular employees.\224\
---------------------------------------------------------------------------

    \224\ See Regulation S-K Compliance and Disclosure
Interpretations Question 203.01, available at http://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.htm.
---------------------------------------------------------------------------

a. Comments Received
    S-K Study. None.
    Disclosure Effectiveness Initiative. One commenter suggested
requiring disclosure of the number of employees for each of a
registrant's subsidiaries along with other information about the
subsidiaries, to provide investors with the information necessary to
understand the structure of the registrant and its international
strategy.\225\ This commenter stated that disclosure of a subsidiary in
a known tax haven with ``zero employees and billions in profits, for
example, would signal to investors the use of a particularly aggressive
and potentially risky strategy to hide profits from regulators.''
---------------------------------------------------------------------------

    \225\ See US SIF 1.
---------------------------------------------------------------------------

b. Discussion
    The number of persons employed by the registrant can help investors
assess the size and scale of a registrant's operations. Changes in the
number or type of persons employed can also be indicative of trends or
shifts in a registrant's operations. Disclosure of the number of
employees varies among registrants. Some registrants distinguish
between the number of full-time and part-time employees, and others
specify the number of employees in each department or division.
Registrants with large numbers of employees often disclose the
approximate number of employees and discuss their employees' membership
in a union or similar organization. Other registrants characterize the
state of their employee relations and disclose whether their employees
are covered by a collective bargaining agreement or represented by a
labor union.
c. Request for Comment
    54. Does disclosure of the number of persons employed by the
registrant help investors assess the size, scale and viability of a
registrant's operations and any trends or shifts in operations? Is this
disclosure important to investors and why? Is there any additional
information about employees that would be important to investors? If
so, what information?
    55. For new registrants filing a registration statement that have
not had revenue from operations during each of the preceding three
fiscal years, Item 101(a)(2)(iii) requires disclosure of any
anticipated material changes in the number of employees in the various
departments such as research and development, production, sales or
administration.\226\ Is this information useful to investors? Should we
include a similar requirement for all registrants in periodic and
current reports? Should this requirement be in addition to or in lieu
of the current requirement to disclose the number of employees?
---------------------------------------------------------------------------

    \226\ Item 101(a)(2) applies to registrants filing a
registration statement on Form S-1 or Form 10 that are not subject
to Sections 13(a) or 15(d) of the Exchange Act and have not received
revenue from operations during each of the three fiscal years
immediately before the filing of such registration statement.
---------------------------------------------------------------------------

    56. Should we require registrants to distinguish among their total
number of persons employed, such as by distinguishing between:
     Full-time and part-time or seasonal employees;
     Employees and independent contractors; or
     Domestic and foreign employees?
    Why or why not?
    57. Rather than requiring registrants to disclose the number of
employees or independent contractors, should we require or permit
registrants to provide a range? Why? Should we allow for different
ranges based on the size of the registrant? Would reporting a range
rather than a specific number reduce the costs of producing this
disclosure?
    58. Should we require disclosure of additional information about a
registrant's employees or employment practices? What would be the
challenges of requiring disclosure of any additional information, and
what would be the benefits to investors?
    59. As outsourcing and subcontracting have become more prevalent in
the last few decades,\227\ what, if any, additional information about a
registrant's outsourcing or subcontracting arrangements should we
require? Would this information be most useful in the context of the
description of the registrant's business, disclosure about trends and
developments affecting results of operations, or in a discussion of
risk and risk management? What would be the challenges of requiring
disclosure of this information?
---------------------------------------------------------------------------

    \227\ See, e.g., Deloitte, Deloitte's 2014 Global Outsourcing
and Insourcing Survey (2014), available at http://www2.deloitte.com/content/dam/Deloitte/us/Documents/strategy/us-2014-global-outsourcing-insourcing-survey-report-123114.pdf (noting a
significant rise in offshoring in the last two decades but also a
small but growing reversal where companies that had previously
offshored functions are bringing them back to their home country);
Here, there and everywhere, Economist, Jan. 19, 2013 (discussing
offshoring trends in the last several decades, but also noting such
trends are ``maturing, tailing off and to some extent being
reversed'').
---------------------------------------------------------------------------

6. Description of Property (Item 102)
    Item 102 of Regulation S-K requires disclosure of the location and
general character of the principal plants, mines and other materially
important physical properties of the registrant and its subsidiaries.
Item 102 also requires registrants to identify the segments, as
reported in the financial statements, that use the properties
described. Instruction 1 states that registrants must disclose such
information as reasonably will inform investors as to the suitability,
adequacy, productive capacity and extent of utilization of the
facilities by the registrant.\228\ Instruction 2 provides that, in
determining whether properties should be described, registrants should
take into account both quantitative and qualitative factors.\229\
---------------------------------------------------------------------------

    \228\ Detailed descriptions of the physical characteristics of
individual properties or legal descriptions by metes and bounds are
not required. See Instruction 1 to Item 102.
    \229\ Disclosure specific to the mining industry in Item 102--
Instructions 3, 5 and 7 refer to the mining industry--is outside of
the scope of this release. Commission staff is undertaking a
separate review of disclosure requirements for mining activities.
Instructions 4, 6 and 8 apply to the oil and gas industry.
Disclosure specific to the oil and gas industry was considered in
2008 and is also outside of the scope of this release. See Oil and
Gas Release. Instruction 9 applies to the real estate industry. For
a general discussion of Industry Guides, see Section IV.E.

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

a. Comments Received
    S-K Study. One commenter recommended that property disclosure
should not be required for entities where physical plant or properties
are not a significant element of enterprise value.\230\
---------------------------------------------------------------------------

    \230\ See Ernst & Young 1.
---------------------------------------------------------------------------

    Disclosure Effectiveness Initiative. Two commenters noted that if
material to a registrant's business, MD&A would require a discussion of
the importance of a property or facility and, in these instances, Item
102 may result in immaterial or duplicative disclosure.\231\ One
commenter recommended eliminating Item 102 disclosure, stating that
disclosure of physical properties does not, in most cases, provide
investors meaningful information, particularly for registrants not
engaged in manufacturing.\232\ Another commenter cautioned against
disclosing only material properties and eliminating requirements to
list locations, capacity and ownership.\233\ This commenter stated that
investors need a complete understanding of the scope of a registrant's
operations and assets in order to evaluate the scope of its risks and
opportunities. One commenter noted different triggers for disclosure in
Item 102 such as the item's reference to ``materially'' important
physical properties and ``major'' encumbrance. This commenter
recommended a Commission study to determine whether these varied
formulations should be harmonized to lessen ambiguity on their
application.\234\
---------------------------------------------------------------------------

    \231\ See CCMC; SCSGP.
    \232\ See Shearman.
    \233\ See US SIF 1.
    \234\ See ABA 2.
---------------------------------------------------------------------------

b. Discussion
    Since 1935, we have required disclosure similar to that required
under Item 102.\235\ The predecessor to Item 102 called for a brief
description of the general character and location of ``principal plants
and other important units'' of the registrant and its subsidiaries and,
for property not held in fee, a description of how the property was
held.\236\ In 1977, a similar requirement was one of two original
requirements in Regulation S-K and additionally, required registrants
to identify the segments that use the properties described.\237\
---------------------------------------------------------------------------

    \235\ See Release No. 33-276 (January 14, 1935) [not published
in the Federal Register].
    \236\ Id.
    \237\ See 1977 Regulation S-K Adopting Release.
---------------------------------------------------------------------------

    In 1996, the Task Force on Disclosure Simplification recommended
the Commission revise Item 102 to more effectively elicit disclosure of
material facts about a registrant's principal properties, rather than
lists of properties and their immaterial characteristics.\238\ The S-K
Study recommended reviewing Item 102 for continuing relevance given
that many businesses no longer require or depend on physical
locations.\239\ For businesses that do have material properties, the S-
K Study suggested refocusing disclosure on the significance of the
property to the business and any trends or uncertainties in connection
with that property, rather than requiring a list of locations, capacity
and ownership.\240\
---------------------------------------------------------------------------

    \238\ See Task Force Report.
    \239\ See S-K Study at 99-100.
    \240\ See id.
---------------------------------------------------------------------------

    In response to Item 102, registrants typically disclose information
about their headquarters such as the location, size and whether they
own or lease the property, as well as information about other
properties material to the business. In addition to this disclosure,
some registrants cross-reference to the discussion in the notes to the
financial statements such as to the note on purchase and lease
commitments or to the note on property, plant and equipment.
    Registrants in certain industries may provide more specific
disclosures. For example, registrants with retail stores often disclose
the number of their stores, location, size and lease termination dates.
Registrants in the hotel and lodging industry tend to disclose the
location and number of rooms at each of their properties. Some
registrants with casino operations disclose the number of table games
and slot machines at each location. Registrants in the restaurant
industry tend to disclose the number of their restaurants, location and
whether they are registrant-operated or franchisee-operated stores. In
the paper mill or paper production industry, registrants typically
provide tabular disclosure for facilities including their geographic
location and related products or use. By contrast, some registrants,
such as those that provide services or information technology, may not
have material physical properties and tend to disclose information
about their corporate headquarters, office space and other facilities.
c. Request for Comment
    60. Should we retain or eliminate Item 102? Why or why not? How
could Item 102 be improved?
    61. Would any additional disclosure about a registrant's properties
be important to investors? If so, what additional disclosure would be
important? What would be the challenges to registrants of requiring
disclosure of any such additional information, and what would be the
benefits to investors?
    62. For registrants that may not have material physical properties,
is the disclosure that registrants typically provide about their
corporate headquarters, office space and other facilities important to
investors?
    63. Should we require property disclosure only for registrants in
certain industries? If so, how should we identify these industries?
    64. Should the disclosure requirements focus instead on the risks
to a registrant's business resulting from the availability and cost of
properties it needs for its operations?
    65. What types of investors or audiences are most likely to value
the information required by Item 102?
    66. What is the cost of providing the disclosure required by Item
102, including the administrative and compliance costs of preparing and
disseminating this disclosure? How would these costs change if we made
any of the changes contemplated here? Please provide quantified
estimates where possible and include only those costs associated with
providing disclosure under Item 102.

B. Company Performance, Financial Information and Future Prospects

    Financial information is essential to understanding a registrant's
performance, financial condition and future prospects. The Commission
has long recognized the need for a narrative explanation of the
financial statements, as a numerical presentation and accompanying
footnotes alone may be insufficient for an investor to assess the
quality of the earnings and the likelihood that past performance is
indicative of future performance.\241\
---------------------------------------------------------------------------

    \241\ See, e.g., 1989 MD&A Interpretive Release.
---------------------------------------------------------------------------

    Regulation S-X requires companies to provide annual and quarterly
financial statements,\242\ while several items in Regulation S-K
require additional disclosure about a registrant's financial condition
and results of operations:
---------------------------------------------------------------------------

    \242\ Articles 3, 8 and 10 of Regulation S-X [17 CFR 210.3,
210.8 and 210.10].
---------------------------------------------------------------------------

     Item 301 requires disclosure of selected financial data;

     Item 302(a) requires disclosure of selected quarterly
financial data; \243\ and
---------------------------------------------------------------------------

    \243\ The staff is separately considering Item 302(b), which
requires certain disclosures of oil and gas activities, as part of
its work to develop recommendations for the Commission for potential
changes to update or simplify certain disclosure requirements. For a
description of this project, see Section I.
---------------------------------------------------------------------------

     Item 303 requires disclosure of management's discussion
and analysis of financial condition and results of operations.
    We are reviewing these disclosure requirements to determine whether
they continue to provide investors with information that is important
to evaluating a registrant's performance, financial condition and
prospects for the future and what, if any, aspects of the disclosure
requirements are duplicative. We are seeking public input on whether we
should consider any new disclosure requirements and whether we should
eliminate or modify any existing disclosure requirement related to such
matters.
1. Selected Financial Data (Item 301)
    Item 301 requires registrants to disclose selected financial data
that highlight significant trends in the registrant's financial
condition and results of operations.\244\ Disclosure must be provided
in comparative columnar form for each of the registrant's last five
fiscal years and any additional fiscal years necessary to keep the
information from being misleading. Instruction 2 to Item 301 lists
specific items that must be included, subject to appropriate variation
to conform to the nature of the registrant's business, and provides
that registrants may include additional items they believe would
enhance an understanding of and would highlight other trends in their
financial condition and results of operations.\245\ Registrants must
include selected financial data in their annual reports but this is not
a requirement for quarterly reports.
---------------------------------------------------------------------------

    \244\ Item 301 of Regulation S-K [17 CFR 229.301].
    \245\ Instruction 2 to Item 301 of Regulation S-K lists the
following items that must be included in the table of financial
data: net sales or operating revenues; income (loss) from continuing
operations; income (loss) from continuing operations per common
share; total assets; long-term obligations and redeemable preferred
stock (including long-term debt, capital leases, and redeemable
preferred stock); and cash dividends declared per common share.
---------------------------------------------------------------------------

a. Comments Received
    S-K Study. None.
    Disclosure Effectiveness Initiative. Two commenters suggested
eliminating Item 301.\246\ One of these commenters noted that readers
can discern trends from a registrant's financial statements and
MD&A,\247\ while the other commenter stated the information required by
this item can be readily obtained from sources other than Commission
filings.\248\
---------------------------------------------------------------------------

    \246\ See Shearman; SCSGP.
    \247\ See Shearman.
    \248\ See SCSGP.
---------------------------------------------------------------------------

    Two commenters suggested revising Item 301 to allow registrants to
omit the earliest two of the last five fiscal years where the
information cannot be provided without unreasonable cost or
expense.\249\ One of these commenters suggested limiting the required
disclosure to the last three fiscal years, unless all five years are
necessary to illustrate a material trend in the registrant's
business.\250\ The other commenter also noted challenges to registrants
in recasting annual periods prior to those presented in the financial
statements to reflect a retrospective accounting change and suggested
allowing registrants to present a retrospective accounting change only
for the periods presented in the financial statements if the earlier
periods cannot be recast without unreasonable effort and cost.\251\ To
inform investors why this information is unavailable, this commenter
suggested ``clear disclosure about the unreasonable effort'' that would
be required to recast these earliest periods.\252\
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    \249\ See ABA 2 (stating this accommodation should be allowed
where the information is unavailable or not obtainable without
unreasonable cost or expense as long as information (qualitative
and, if reasonably available without unreasonable cost or expense,
quantitative) about a material trend is otherwise provided for such
two fiscal years) and Ernst & Young 2 (noting Item 3.A of Form 20-F
provides this accommodation for foreign private issuers and that
EGCs are also allowed a similar accommodation).
    \250\ See ABA 2.
    \251\ See Ernst & Young 2.
    \252\ Id.
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b. Five-Year Trend Data (Instruction 1)
i. Discussion
    Item 301 is intended to provide selected financial data in a
convenient and readable format that highlights significant trends in
the registrant's financial condition and results of operations.\253\ In
adopting this requirement, the Commission stated that Item 301 was
relevant primarily where it related to trends in the registrant's
continuing operations.\254\ When adopted, this item replaced a previous
requirement that called for a summary of operations.\255\
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    \253\ Instruction 1 to Item 301 [17 CFR 229.301]. See also 1980
Form 10-K Adopting Release.
    \254\ See 1980 Form 10-K Adopting Release. See also 1980 Form
10-K Proposing Release.
    \255\ See 1980 Form 10-K Adopting Release. While the item in its
current form was not adopted until 1980, the concept of providing a
five-year presentation of certain significant line items was
suggested as early as 1967. See Wheat Report at 338-39 (recommending
that the Commission require registrants to provide a five-year
earnings summary annually).
    In October 1970, the Commission expanded Form 10-K to include
``Item 2--Summary of Operations,'' which required registrants to
furnish in comparative columnar form a five-year summary of
operations and any additional fiscal years necessary to keep the
summary from being misleading. See Annual Reports by Certain
Companies Having Registered Securities, Release No. 34-9000 (Oct.
21, 1970) [35 FR 16919 (Nov. 3, 1970)] (``1970 Revised Form 10-K
Adopting Release'').
---------------------------------------------------------------------------

    Most of the items required by Item 301 are also required in the
annual financial statements. Unlike the financial statements required
in a Form 10-K, however, Item 301 information covers each of the
registrant's last five fiscal years. Accordingly, Item 301 disclosure
for items such as net sales and income or loss from continuing
operations in the income statement \256\ and total assets and
redeemable preferred stock in the balance sheets,\257\ overlaps with
disclosure in the financial statements for the most recent three and
two years, respectively.\258\
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    \256\ Rule 5-03 of Regulation S-X [17 CFR 210.5-03].
    \257\ Rule 5-02 of Regulation S-X [17 CFR 210.5-02].
    \258\ SRCs are not subject to the requirements of Item 301. Item
301(c) of Regulation S-K [17 CFR 229.301(c)].
---------------------------------------------------------------------------

    Earlier years required to be disclosed under Item 301 are typically
available in prior annual reports. When the precursor to Item 301 was
adopted in 1970, prior annual reports were not readily accessible.\259\
Today, these reports can be readily accessed through EDGAR and other
public sources, including company Web sites.
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    \259\ Before adopting the precursor to Item 301, the Commission
implemented a microfiche system in 1968 that supplemented its hard
copy reproduction service and was intended to ``facilitate wider,
more economical and more rapid distribution'' of Exchange Act
reports. See Wheat Report at 313.
---------------------------------------------------------------------------

    Despite some overlap with current and prior financial statements,
Item 301 disclosure can provide information that might not be available
to investors for all five years. Specifically, retrospective changes to
the annual financial statements would typically be reflected in the
selected financial data table across all five years instead of the
three years covered in the financial statements.\260\ For example, a
registrant that retrospectively revises its annual financial statements
to reflect discontinued operations typically may need to consider
whether it should adjust years four and five in its selected financial
data table in addition to the three most recent years covered in the
annual audited financial statements.

Item 301 disclosure reflecting the discontinued operations for these
earlier two years would not be available in either the current or prior
financial statements.
---------------------------------------------------------------------------

    \260\ See Division of Corporation Finance Financial Reporting
Manual, Section 1610.1.
---------------------------------------------------------------------------

ii. Request for Comment
    67. Is the Item 301 disclosure that is not otherwise available or
readily accessible important to investors? Are there benefits to having
the five-year information in one table?
    68. Should we retain, modify or eliminate Item 301? Why? Does it
achieve the goal of highlighting significant trends in a registrant's
financial condition and results of operation? Does it also achieve the
goal of providing selected financial data in a convenient and readable
format? How would the elimination of Item 301 affect investors? Would
elimination of this requirement increase costs to investors because
they would then need to obtain this information from prior filings?
    69. If we retain Item 301, should we modify this requirement and,
if so, how? Should we modify the item to require additional disclosure
and, if so, what additional disclosure would be important to investors
and why?
    70. Instruction 1 to Item 303(a) specifies that, where trend
information is relevant, reference to the five-year selected financial
data pursuant to Item 301 may be necessary.\261\ Despite this
instruction, registrants generally do not discuss or analyze trends
outside the three-year timeframe of Item 303. Does selected financial
data effectively highlight significant trends that are not described
elsewhere? If so, is five years an appropriate period or should we
modify the number of fiscal years required to be included in the
selected financial data? If selected financial data does not
effectively highlight significant trends that are not described
elsewhere, how could we modify our requirements to best achieve the
objective of highlighting significant trends in registrants' financial
condition and results of continuing operations?
---------------------------------------------------------------------------

    \261\ Instruction 1 to Item 303(a) of Regulation S-K [17 CFR
229.303(a)].
---------------------------------------------------------------------------

    71. EGCs are not required to present selected financial data for
any period prior to the earliest audited period presented in connection
with its first effective registration statement.\262\ Should we revise
Item 301 to provide a similar accommodation for all registrants? Why or
why not?
---------------------------------------------------------------------------

    \262\ Public Law 112-106, Sec. 102, 126 Stat. 306 (2012).
---------------------------------------------------------------------------

    72. Should we require Item 301 disclosure for the full five years
only in certain instances such as when a registrant revises its annual
financial statements or if information on the earliest two of the last
five years is available without unreasonable cost or expense?
    73. Currently, Item 301 disclosure is required in comparative
columnar form. If we continued to require this disclosure, should we
consider other presentation or format requirements?
    74. What types of investors or audiences are most likely to value
the information required by Item 301?
    75. What is the cost of providing the disclosure required by Item
301, including the administrative and compliance costs of preparing and
disseminating this disclosure? How would these costs change if we made
any of the changes contemplated here? Please provide quantified
estimates where possible and include only those costs associated with
providing disclosure under Item 301.
c. Items Included in Selected Financial Data (Instruction 2)
i. Discussion
    When proposing the requirement for selected financial data, the
Commission sought to strike a reasonable balance between specified
content and a flexible approach that permits registrants to select the
data that best indicates performance.\263\ The Commission noted that
commenters requested increased flexibility in the form and content of
this disclosure in response to an advanced notice of proposed
rulemaking.\264\ Accordingly, while Instruction 2 to Item 301, as
adopted, contains prescriptive requirements, such as disclosure of
total assets and income (loss) from continuing operations, it also
permits registrants the flexibility to include additional items they
believe would enhance an understanding of and would highlight other
trends in their financial condition and results of operations.\265\
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    \263\ See 1980 Form 10-K Proposing Release.
    \264\ See 1980 Form 10-K Proposing Release; see also Annual
Report Form, Release No. 34-15068 (Aug. 16, 1978) [43 FR 37460 (Aug.
23, 1978)].
    \265\ Instruction 2 to Item 301 of Regulation S-K [17 CFR
229.301].
---------------------------------------------------------------------------

    For registrants that provide additional items in their selected
financial data, disclosure varies. Financial institutions commonly
provide additional metrics that may include return on average assets
and capital ratios. Registrants in the telecommunications industry may
include the number of subscribers while retailers may include the
number of stores or average store size. While such information is not
required under U.S. GAAP, it is not considered a ``non-GAAP financial
measure'' such that reconciliation under Item 10(e) of Regulation S-K
would be required.\266\ Additionally, some registrants include non-GAAP
financial measures in their Item 301 disclosures.
---------------------------------------------------------------------------

    \266\ Item 10(e)(4) states that, for purposes of paragraph (e),
non-GAAP financial measures exclude operating and other statistical
measures; and ratios or statistical measures calculated using
exclusively one or both of (i) financial measures calculated in
accordance with GAAP, and (ii) operating measures or other measures
that are not non-GAAP financial measures. [17 CFR 229.10(e)(4)]. See
also Conditions for Use of Non-GAAP Financial Measures, Release No.
33-8176 (Jan. 22, 2003) [68 FR 4819 (Jan. 30, 2003)] (``Non-GAAP
Measures Release'') (stating that operating and other statistical
measures such as unit sales, numbers of employees, numbers of
subscribers, or numbers of advertisers are not non-GAAP financial
measures).
---------------------------------------------------------------------------

ii. Request for Comment
    76. Does Instruction 2 provide a reasonable balance between
specified content and a flexible approach that permits registrants to
select the data that best indicates performance? Why or why not? If
not, how should we modify Instruction 2? For example, should we modify
Instruction 2 to be more prescriptive or provide for a more flexible
approach? If a flexible approach should be used, should we require
registrants to disclose their reasons for the items it included?
    77. Should we require auditor involvement (e.g., audit, review or
specified procedures) for this disclosure, and if so, what should the
nature of the involvement be? What would be the benefits and costs to
registrants and to investors?
    78. What is the impact of listing specific items of disclosure in
Instruction 2? Do registrants view the items listed in Instruction 2 as
a checklist? Should additional items be considered?
2. Supplementary Financial Information (Item 302)
    Item 302(a)(1) requires certain registrants to disclose quarterly
financial data of selected operating results \267\ and Item 302(a)(2)
requires

disclosure of variances in these results from amounts previously
reported.\268\ 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. Under Item 302(a)(3), registrants must
describe the effect of any disposals of segments of a business and
extraordinary, unusual or infrequently occurring items recognized in
each quarter, as well as the aggregate effect and the nature of year-
end or other adjustments that are material to the results of that
quarter.\269\ If a registrant's financial statements have been reported
on by an accountant, Item 302(a)(4) requires that accountant to follow
appropriate professional standards and procedures regarding the data
required by Item 302(a).\270\
---------------------------------------------------------------------------

    \267\ Item 302(a)(1) of Regulation S-K [17 CFR 229.302(a)(1)].
Item 302(a)(1) specifies disclosure of net sales, gross profit (net
sales less costs and expenses associated directly with or allocated
to products sold or services rendered), income (loss) before
extraordinary items and cumulative effect of a change in accounting,
per share data based upon such income (loss), net income (loss) and
net income (loss) attributable to the registrant, for each full
quarter 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.
    The staff is separately considering Item 302(b), which requires
certain disclosures of oil and gas activities, as part of its work
to develop recommendations for the Commission for potential changes
to update or simplify certain disclosure requirements. For a
description of this project, see Section 0.
    \268\ Item 302(a)(2) of Regulation S-K [17 CFR 229.302(a)(2)].
When disclosure in Item 302(a) varies from amounts previously
reported on the Form 10-Q filed for any quarter, such as if a
combination between entities under common control occurs or where an
error is corrected, the registrant must disclose a reconciliation of
the amounts given with those previously reported and describe the
reason for the difference.
    \269\ Item 302(a)(3) of Regulation S-K [17 CFR 229.302(a)(3)].
The requirement applies to items recognized in each full quarter
within the two most recent fiscal years and any subsequent interim
period for which financial statements are included or are required
to be included.
    \270\ Item 302(a)(4) of Regulation S-K [17 CFR 229.302(a)(4)].
---------------------------------------------------------------------------

a. Comments Received
    S-K Study. None.
    Disclosure Effectiveness Initiative. One commenter recommended
eliminating Item 302(a)(1), stating that this disclosure has been
previously reported.\271\
---------------------------------------------------------------------------

    \271\ See letter from Gregg L. Nelson, VP Accounting Policy &
Financial Reporting, IBM Corporation (Aug. 7, 2014) (``IBM'').
---------------------------------------------------------------------------

b. Discussion
    A few years after adopting Form 10-Q, in 1974, the Commission noted
that quarterly data was still being ``reported on an extremely
abbreviated basis and annual financial statements [had] generally been
presented without regard for or disclosure of trends occurring within a
year.'' \272\ To help remedy this information deficiency, the
Commission adopted the precursor to Item 302(a), Rule 3-16(t) of
Regulation S-X. This rule required, for certain registrants, disclosure
of selected quarterly financial data in the notes to the annual
financial statements.\273\
---------------------------------------------------------------------------

    \272\ See Interim Financial Data; Proposals to Increase
Disclosure, Release No. 34-11142 (Dec. 19, 1974) [40 FR 1079 (Jan.
6, 1975)] (``Proposals to Increase Disclosure of Interim Results by
Registrants'') at 1080.
    \273\ See Interim Financial Reporting: Increased Disclosures,
Release No. 33-5611 (Sept. 10, 1975) [40 FR 46107 (Oct. 6, 1975)]
(``1975 Interim Financial Reporting Release''). Rule 3-16(t) of
Regulation S-X required disclosure in a note to the financial
statements of net sales, gross profit, income before extraordinary
items and cumulative effect of a change in accounting, per share
data based upon such income, net income for each full quarter within
the two most recent fiscal years and any subsequent interim period
for which income statements are presented. It also required
registrants to describe the effect of any disposals of segments of a
business and extraordinary, unusual or infrequently occurring items
recognized in each quarter, as well as the aggregate effect and the
nature of year-end or other adjustments which are material to the
results of that quarter. Furthermore, it required a reconciliation
of amounts previously reported on Form 10-Q to the quarterly data
included in the note to financial statements if the amounts differ.
See id.
---------------------------------------------------------------------------

    The Commission recognized that numerous commenters opposed the
requirements, suggesting that interim results are materially affected
by random events and that including such data in annual financial
statements would lend them an appearance of reliability that could be
misleading.\274\ The Commission nevertheless adopted the disclosure
requirement, stating its belief that this disclosure would ``materially
assist investors in understanding the pattern of corporate activities
throughout a fiscal period'' by disclosing trends over segments of time
that are sufficiently short to reflect business turning points.\275\ By
contrast, the Commission stated that annual periods ``may obscure such
turning points and may reflect a pattern of stability and growth which
is not consistent with business reality.'' \276\ The Commission also
noted that quarterly data would reflect seasonal patterns. Recognizing
the costs of providing quarterly data, the Commission provided an
exemption for smaller registrants and registrants whose shares were not
actively traded.\277\ Because the selected quarterly financial data was
unaudited, and recognizing that information contained within the
financial statements should be audited, the Commission moved the
requirement to Regulation S-K in 1980.\278\
---------------------------------------------------------------------------

    \274\ Id.
    \275\ Id. at 46107.
    \276\ Id. at 46108.
    \277\ See id. at 46107 (``The Commission believes that the
greatest investor need for these data exists in the case of such
companies whose activities are most closely followed by analysts and
investors. Accordingly, registrants whose shares are not actively
traded or whose size is below certain limits have been exempted from
this rule at the present time.'').
    See also Audit Committee Disclosure, Release No. 34-42266 (Dec.
22, 1999) [64 FR 73389 (Dec. 30, 1999)] (summarizing the
requirements for application of Item 302(a) that had been in effect
since 1980). The requirements only applied to registrants who met
certain tests, including but not limited to: (1) Two of the three
following requirements: (a) Shares outstanding have a market value
of at least $2.5 million; (b) the minimum bid price is at least $5
per share; or (c) the registrant has at least $2.5 million of
capital, surplus, and undivided profits; and (2) the registrant and
its subsidiaries: (a) Have had net income after taxes but before
extraordinary items and the cumulative effect of a change in
accounting of at least $250,000 for each of the last three fiscal
years; or (b) had total assets of at least $200 million for the last
fiscal year end. See id.
    \278\ See General Revision of Regulation S-X, Release No. 33-
6233 (Sept. 2, 1980) [45 FR 63660 (Sept. 25, 1980)]. See also
General Revision of Regulation S-X, Release No. 33-6178 (Jan. 15,
1980) [45 FR 5943 (Jan. 24, 1980)] at 5945 (``Based upon the premise
that information contained within the financial statements should be
audited, the proposed rules would remove from [Regulation] S-X the
requirement relating to unaudited information concerning selected
quarterly financial data and place this requirement under Regulation
S-K.'').
---------------------------------------------------------------------------

    While most of the disclosure required by Item 302(a) is required in
prior quarterly reports, Item 302(a)(1) also requires a separate
presentation of certain items for a registrant's fourth quarter, which
is not otherwise required. Although there is no similar requirement for
disclosing the fourth fiscal quarter, U.S. GAAP typically allows
investors to infer fourth quarter data by requiring disclosure of
disposals of components of an entity and unusual or infrequently
occurring items recognized in the fourth quarter.\279\
---------------------------------------------------------------------------

    \279\ ASC 270-10-50-2 requires the disclosure of certain
information if interim data and disclosures are not separately
reported for the fourth quarter. This information includes
``disposals of components of an entity and unusual, or infrequently
occurring items recognized in the fourth quarter, as well as the
aggregate effect of year-end adjustments that are material to the
results of that quarter.''
---------------------------------------------------------------------------

    Additionally, as Item 302(a)(2) requires disclosure of variances in
results from amounts previously reported for the two most recent fiscal
years, the effect of a retrospective change in any quarter for which a
Form 10-Q was filed in the more recent of the two fiscal years will be
disclosed in the selected quarterly data. Absent Item 302(a)(2), this
variance would not be disclosed until the following year in the
corresponding fiscal quarter in which the retrospective change
occurred. Disclosure in the Form 10-Q for this corresponding fiscal
quarter would not include the effects of this change in the earliest of
the two years presented in the Form 10-K, as this Form 10-Q would be
limited to the current and prior-year interim periods.
c. Request for Comment
    79. Should we retain or eliminate Item 302(a)? Why? If we retain
Item

302(a), should we modify the item and, if so, how? For example, should
we modify the item to require additional disclosure and, if so, what
additional disclosure would be important to investors and why?
    80. Is fourth quarter information, which is required under Item
302(a) but not in the annual financial statements, important to
investors? Do the other instances where disclosure required by Item
302(a) is not duplicative of previously provided disclosure merit
retaining the item? Why or why not?
    81. The disclosure required by Item 302(a) was originally intended
to help investors understand the pattern of corporate activities
throughout a fiscal period by disclosing trends over segments of time
that are sufficiently short to reflect business turning points.\280\
Does this objective remain important today? If so, does the item
achieve this objective? If the item does not achieve this objective,
how could we modify it to do so?
---------------------------------------------------------------------------

    \280\ See Interim Reporting Amendments Release.
---------------------------------------------------------------------------

    82. Should we require auditor involvement (e.g., audit, review or
specified procedures) on the reliability of the disclosure, and if so,
what should the nature of the involvement be? What would be the
benefits and costs to registrants and to investors?
    83. Item 302(a) disclosure is commonly provided either as an
unaudited note to the financial statements in Form 10-K \281\ or
separately outside of the financial statements. To the extent a
registrant's Item 302(a) disclosure is provided in the notes to the
financial statements, it must be tagged as XBRL data. Registrants'
financial statements and footnotes presented in quarterly reports must
also be tagged in XBRL.\282\ Given some of Item 302(a) disclosure is
available in prior quarterly reports and also tagged in XBRL, do
investors use the disclosure required by Item 302(a)?
---------------------------------------------------------------------------

    \281\ This may be due to the fact that the requirements to
provide annual financial statements and Item 302 disclosure are both
in Item 8(a) of Form 10-K [17 CFR 249.310].
    \282\ Rule 405 of Regulation S-T [17 CFR 232.405]. See also
Interactive Data Release.
---------------------------------------------------------------------------

    84. What types of investors or audiences are most likely to value
the information required by Item 302?
    85. What is the cost of providing the disclosure required by Item
302, including the administrative and compliance costs of preparing and
disseminating this disclosure? How would these costs change if we made
any of the changes contemplated here? Please provide quantified
estimates where possible and include only those costs associated with
providing disclosure under Item 302.
    86. Would costs to investors increase if Item 302 was eliminated
and if so, how?
    87. What are the benefits of providing the disclosure required by
Item 302? How could the benefits change if we made any of the changes
contemplated here? Please provide quantified or qualitative estimates
where possible relating to disclosure under Item 302.
3. Content and Focus of MD&A (Item 303--Generally)
    Item 303 of Regulation S-K requires disclosure of information
relevant to assessing a registrant's financial condition, changes in
financial condition and results of operations.\283\ Item 303(a)
contains three core components that registrants must analyze in their
MD&A disclosures: Liquidity, capital resources, and results of
operations.\284\ Item 303(a) also requires disclosure of off-balance
sheet arrangements and contractual obligations.\285\
---------------------------------------------------------------------------

    \283\ Instruction 2 to Item 303(a) of Regulation S-K [17 CFR
229.303(a)].
    \284\ Item 303(a)(1), (a)(2) and (a)(3) of Regulation S-K [17
CFR 229.303(a)(1), (a)(2) and (a)(3)].
    \285\ Item 303(a)(4) and (a)(5) of Regulation S-K [17 CFR
229.303(a)(4) and (a)(5)].
    See also Disclosure in Management's Discussion and Analysis
About Off-Balance Sheet Arrangements and Aggregate Contractual
Obligations, Release No. 33-8182 (Jan. 28, 2003) [68 FR 5982 (Feb.
5, 2003)] (``Off-Balance Sheet and Contractual Obligations Adopting
Release'').
---------------------------------------------------------------------------

    Overall, these MD&A requirements are intended to satisfy three
principal objectives:
     Provide a narrative explanation of a registrant's
financial statements that enables investors to see the registrant
through the eyes of management;
     enhance the overall financial disclosure and provide the
context within which financial information should be analyzed; and
     provide information about the quality of, and potential
variability of, a registrant's earnings and cash flow, so investors can
ascertain the likelihood that past performance is indicative of future
performance.\286\
---------------------------------------------------------------------------

    \286\ See 2003 MD&A Interpretive Release.
---------------------------------------------------------------------------

    The Commission has provided substantial guidance in the past
intended to improve the quality of MD&A disclosures.\287\ Much of this
guidance has focused on the following topics:
---------------------------------------------------------------------------

    \287\ See, e.g., Commission Guidance on Presentation of
Liquidity and Capital Resources Disclosures in Management's
Discussion and Analysis, Release No. 33-9144 (Sept. 17, 2010) [75 FR
59894 (Sept. 28, 2010)] (``2010 Liquidity and Capital Resources
Interpretive Release''); 2003 MD&A Interpretive Release; Commission
Statement About Management's Discussion and Analysis of Financial
Condition and Results of Operations, Release No. 33-8056 (Jan. 22,
2002) [67 FR 3746 (Jan. 25, 2002)] (``2002 Commission Statement
about MD&A''); 1989 MD&A Interpretive Release.
---------------------------------------------------------------------------

     Quality and focus of analysis;
     forward-looking information; and
     use of key performance indicators.\288\

    \288\ See generally 2003 MD&A Interpretive Release (addressing
each of these topics throughout).

To help achieve the principal objectives of MD&A, and before evaluating
specific subsections of Item 303(a), we seek public input on these
topics and how we could improve the overall quality of MD&A disclosure.
a. Comments Received
    S-K Study. None.
    Disclosure Effectiveness Initiative. One commenter stated that MD&A
requirements are too principles-based.\289\ Another commenter stated
that MD&A's principles-based approach results in disclosure that is
``among the most meaningful disclosure contained in periodic reports.''
\290\ Another commenter recommended reexamining MD&A to, among other
things, reinforce the guiding principle of materiality so that MD&A is
more useful for investors.\291\ One commenter recommended, in addition
to MD&A, adopting a rule requiring registrants to provide an overview
of their performance in the most recent year as well as expectations
and concerns for the coming year, similar to what a CEO might report to
the Board of Directors.\292\ This commenter suggested placing the
disclosure at the beginning of annual reports on Forms 10-K and 20-F.
One commenter stated there should be ``greater clarity'' between the
type of forward-looking information required in MD&A versus the
``future-oriented'' information that the Financial Accounting Standards
Board (``FASB'') believes is appropriate.\293\
---------------------------------------------------------------------------

    \289\ See CFA Institute. This commenter also stated that
disclosure effectiveness efforts should prioritize improving
financial statement presentation and enhancing challenging
disclosures, such as estimates, judgments, and choices; risks and
uncertainties; off-balance sheet items; commitments and
contingencies; intangible assets; and going concern issues.
    \290\ See Shearman.
    \291\ See CCMC.
    \292\ See letter from Committee on Financial Reporting, New York
City Bar (Sept. 3, 2014) (``NYC Bar'').
    \293\ See SCSGP.
---------------------------------------------------------------------------

    One commenter suggested consolidating Commission and staff guidance
on MD&A, stating that consolidation would reduce the time and effort
necessary to identify and read all applicable sources and improve the

quality of MD&A disclosure.\294\ This commenter recommended
consolidating all applicable guidance in a single, electronically-
accessible location with hyperlinks to relevant sources, or
alternatively, revising Item 303 to codify prior staff guidance.\295\
This commenter also recommended adding instructions throughout Item 303
indicating that, to the extent disclosure in response to the item is
included in the notes to the financial statements, registrants should
use cross-references to avoid duplicative disclosure.\296\
---------------------------------------------------------------------------

    \294\ See ABA 2. See also letter from Henry T. C. Hu (Oct. 7,
2015) (``Hu'') (referencing a ``bewildering stream of guidance of
varying degrees of formality and legal import'' since Item 303's
adoption in 1980).
    \295\ See ABA 2.
    \296\ See id. (specifying Items 303(a)(1), (a)(4), (a)(5) and
disclosure of critical accounting estimates).
---------------------------------------------------------------------------

b. Quality and Focus of Analysis
i. Discussion
    MD&A requires not only a discussion but also an analysis of known
material trends and uncertainties and should not reiterate financial
statement information in a narrative form.\297\ The Commission has
previously stated that a thorough analysis should assess both the
effects of known material trends and uncertainties and the reasons
underlying those effects.\298\ The Commission has also stated that, if
there is a reasonable likelihood that reported financial information is
not indicative of a registrant's future financial condition or future
operating performance, then registrants should disclose the underlying
reasons.\299\
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    \297\ See 2003 MD&A Interpretive Release.
    \298\ See id.
    \299\ See id. As an example, the Commission stated that if a
change in an estimate has a material favorable impact on earnings,
the change and the underlying reasons should be disclosed so that
readers do not incorrectly attribute the effect to operational
improvements.
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    The Commission has focused on improving the analysis in MD&A for
many years. For example, the 1989 MD&A Interpretive Release explained
that MD&A is intended to give investors an opportunity to look at a
registrant through the eyes of management by providing both a short and
long-term analysis of the business of the registrant.\300\ Despite Item
303(a)'s instruction to the contrary,\301\ many registrants simply
recite the amounts of changes from year to year which are readily
computable from their financial statements. In 2003 guidance, the
Commission added that such recitation of financial statements in
narrative form fails to provide the unique perspective available to
management that MD&A is meant to capture.\302\ An effective analysis of
known material trends, events, demands, commitments and uncertainties
should include an explanation of the underlying reasons or
implications, interrelationships between constituent elements, or the
relative significance of those matters.\303\
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    \300\ See 1989 MD&A Interpretive Release.
    \301\ Instruction 4 to Item 303(a) of Regulation S-K [17 CFR
229.303(a)].
    \302\ See 2003 MD&A Interpretive Release.
    \303\ See id.
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    Prior to 1980, Commission rules required registrants to provide a
summary of earnings, including a discussion of unusual conditions that
affected the appropriateness of the earnings presentations.\304\ The
rules also required registrants to discuss items of revenue or expense
that changed more than ten percent from the prior period or changed
more than two percent of the average net income or loss for the most
recent three years presented. In adding MD&A to Regulation S-K in 1980,
the Commission replaced the percentage thresholds with a principles-
based approach that primarily focused on materiality.\305\ The
Commission noted that the percentage tests applied without regard to
any concept of materiality or significance to the registrant's
business, resulting in meaningful discussion often being obscured by
information of little relevance.\306\
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    \304\ See Guidelines for Registration and Reporting, Release No.
33-5520 (Aug. 14, 1974) [39 FR 31894 (Sept. 3, 1974)] (``Guidelines
Adopting Release''). These guidelines, known as Guide 22, were the
precursor to MD&A that predated Regulation S-K. See infra note 344.
    \305\ See 1980 Form 10-K Adopting Release.
    \306\ See id. at 63636 (``The changes in Management's Discussion
and Analysis were proposed as the result of the Commission's
concerns that the disclosure elicited by the present requirement of
Guides 1 and 22 is not fulfilling originally contemplated
objectives. Instead, existing percentage tests are applied without
regard to any concept of materiality or significance to the
registrant's business. Accordingly, although some portions of the
resulting discussion may be meaningful, the meaningful discussion is
often obscured by the inclusion of material which is of little
relevance.''). The Commission also clarified that causes of material
changes in line items must be described only to the extent necessary
to an understanding of a company's business as a whole.
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    Commission guidance has continued to stress the importance of
materiality in MD&A and stated that disclosure should emphasize
material information and de-emphasize or, if appropriate, delete
immaterial information.\307\ The text of Item 303 ties several specific
requirements to materiality. For example, disclosure of known trends in
liquidity is required if such trends are reasonably likely to affect
liquidity ``in any material way.'' \308\ Commitments for capital
expenditures that are material must be described as of the end of the
latest fiscal period.\309\ Registrants also must describe certain
events, transactions, or economic changes that ``materially affected''
reported income from continuing operations.\310\
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    \307\ See 2003 MD&A Interpretive Release.
    \308\ Item 303(a)(1) of Regulation S-K [17 CFR 229.303(a)(1)].
    \309\ Item 303(a)(2) of Regulation S-K [17 CFR 229.303(a)(2)].
    \310\ Item 303(a)(3) of Regulation S-K [17 CFR 229.303(a)(3)].
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    In addition to emphasizing materiality, the Commission has also
recommended a ``layered approach'' as a way to improve the quality of
analysis in MD&A.\311\ A layered approach requires registrants to
present information in a manner that emphasizes, within the universe of
material information that is disclosed, the information and analysis
that is most important.\312\ While not required by Item 303, providing
an executive-level overview to MD&A may be one way of taking a layered
approach.
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    \311\ See 2003 MD&A Interpretive Release at 75059 (``While all
required information must of course be disclosed, companies should
consider using a `layered' approach. [. . .] This presentation would
assist readers in identifying more readily the most important
information. Using an overview or introduction is one example of a
layered approach.'').
    \312\ See id. For further discussion of layered disclosure, see
SectionV.F.
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    Executive-level overviews should discuss the most important matters
to MD&A, and the Commission has cautioned that this overview should not
be a duplicative layer of disclosure repeated elsewhere.\313\ Rather
than summarize information already disclosed, the executive overview
should provide a balanced, high-level discussion that identifies the
most important themes or other significant matters with which
management is concerned primarily in evaluating the registrant's
financial condition and operating results. The overview should provide
insight into material opportunities, challenges and risks, such as
those presented by known material trends and uncertainties, on which
the registrant's executives are most focused for both the short and
long term, as well as the actions they are taking to address these
opportunities, challenges and risks.\314\
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    \313\ See 2003 MD&A Interpretive Release.
    \314\ See id.
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ii. Request for Comment
    88. What requirements in Item 303 are important to investors? How
could Item 303 be improved?
    89. Do the current requirements of Item 303 result in disclosure
that

highlights the most significant aspects of the registrant's financial
condition and results of operations? Are there any requirements in Item
303(a) and (b) that result in immaterial disclosures that may obscure
significant information? If so, how? Should we consider a qualitative
or quantitative threshold rather than materiality for requiring MD&A
disclosure? If so, what threshold would be appropriate and why? Would
adopting a different standard impede the flexibility of analysis and
assessment under the current materiality standard? If so, how?
    90. There are various sources of Commission and Division guidance
on MD&A. These include Commission releases, sections of the Division's
Financial Reporting Manual and staff Compliance and Disclosure
Interpretations.\315\ Given the amount of Commission and staff guidance
on MD&A, should we consolidate guidance in a single source? If so,
which guidance remains helpful, and is there guidance that we should
not include in a consolidation? Would consolidation of this guidance
facilitate registrants' compliance with the item's requirements, or is
the existing form of this guidance sufficient?
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    \315\ See ABA 2 (providing a six-page exhibit illustrating the
various sources of guidance on MD&A).
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    91. Should we revise our rules to require registrants to provide an
executive-level overview? If so, should our rules prescribe the
information that must be covered? What would be the benefits and
challenges of prescribing the content of the overview and what content
should we require? For example, should we require an executive-level
overview to discuss the most significant accounting estimates and
judgments? Should any requirement for an executive-level overview be
limited to registrants of a certain size?
    92. If we were to require an executive-level overview, how could we
encourage registrants to provide an overview that does not simply
duplicate disclosure provided elsewhere?
    93. Are there other methods that registrants could employ or new
rules that we should consider that would result in more meaningful
analysis in MD&A?
    94. What types of investors or audiences are most likely to value
the information required by Item 303 and does the audience for
disclosure vary across the different parts of Item 303 disclosure? If
so, how? Would the manner of presentation affect how various types of
investors benefit from Item 303 disclosure?
    95. Should we require a different format or presentation of MD&A
such as a requirement for the discussion to be tagged or presented in a
structured manner?
    96. Should we require auditor involvement (e.g., audit, review or
specified procedures) regarding the reliability of MD&A disclosure, and
if so, what should the nature of the involvement be? What would be the
benefits and costs to registrants and to investors?
    97. What is the cost of providing the disclosure required by Item
303, including the administrative and compliance costs of preparing and
disseminating this disclosure? How would these costs change if we made
any of the changes contemplated here? Please provide quantified
estimates where possible and include only those costs associated with
providing disclosure under Item 303.
    98. What are the benefits of providing the disclosure required by
Item 303? How could the benefits change if we made any of the changes
contemplated here? Please provide quantified or qualitative estimates
where possible relating to disclosure under Item 303.
c. Forward-Looking Information
i. Discussion
    Discussion and analysis of known trends, demands, commitments,
events and uncertainties requires disclosure of forward-looking
information.\316\ This information is significant to understanding a
registrant's expected future performance. The Commission previously has
provided guidance relating to the standard for disclosure of forward-
looking information and encouraged registrants to provide such forward-
looking disclosure.\317\
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    \316\ For example, the following provisions in Item 303 require
disclosure of prospective information: Item 303(a)(1) (any known
trends or any known demands, commitments, events or uncertainties
that will result in or that are reasonably likely to result in the
registrant's liquidity increasing or decreasing in any material
way); Item 303(a)(2)(ii) (any known material trends in capital
resources and any expected material changes in the mix and relative
cost of capital resources); Item 303(a)(3)(ii) (any known trends or
uncertainties that the registrant reasonably expects will have a
material favorable or unfavorable impact on net sales or revenues or
income from continuing operations); and Instruction 3 to Item 303(a)
(descriptions and amounts of matters that would have an impact on
future operations and have not had an impact in the past and matters
that have had an impact on reported operations and are not expected
to have an impact upon future operations.).
    \317\ See 2003 MD&A Interpretive Release at 75059 (``In
addressing prospective financial condition and operating
performance, there are circumstances, particularly regarding known
material trends and uncertainties, where forward-looking information
is required to be disclosed. We also encourage companies to discuss
prospective matters and include forward-looking information in
circumstances where that information may not be required, but will
provide useful material information for investors that promotes
understanding.'').
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    In 1987, the Commission distinguished between required and optional
forward-looking disclosure: Required forward-looking disclosure is
based on currently known trends, events and uncertainties that are
reasonably expected to have material effects, while optional forward-
looking disclosure involves either anticipating a future trend or event
or anticipating a less predictable impact of a known event, trend or
uncertainty.\318\ In 1989, the Commission articulated a two-step test
(``two-step test'') for assessing when forward-looking disclosure is
required in MD&A:
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    \318\ Concept Release on Management's Discussion and Analysis of
Financial Condition and Operations, Release No. 33-6711 (Apr. 17,
1987) [52 FR 13715 (Apr. 24, 1987)].
     In 1989, the Commission also explained that the safe harbors of
Securities Act Rule 175(c) and Exchange Act Rule 3b-6(c) apply to
required statements concerning the future effect of known material
trends and uncertainties. See 1989 MD&A Interpretive Release.
    The Commission adopted the foregoing rules in 1979 to encourage
the disclosure of projections and forward-looking information as
recommended by the Sommer Report. See Safe Harbor Rule for
Projections, Release No. 33-6084 (June 25, 1979) [44 FR 38810 (July
2, 1979)].

    Where a trend, demand, commitment, event or uncertainty is
known, management must make two assessments:
    (1) Is the known trend, demand, commitment, event or uncertainty
likely to come to fruition? If management determines that it is not
reasonably likely to occur, no disclosure is required.
    (2) If management cannot make that determination, it must
evaluate objectively the consequences of the known trend, demand,
commitment, event or uncertainty, on the assumption that it will
come to fruition. Disclosure is then required unless management
determines that a material effect on the registrant's financial
condition or results of operations is not reasonably likely to
occur.\319\
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    \319\ See 1989 MD&A Interpretive Release at 22430.

For forward-looking information, the Commission distinguished the