Thursday, December 11, 2014

Former Corp Fin Director Offers Views on MD&A

[This story previously appeared in Securities Regulation Daily.]

By Amanda Maine, J.D.

Brian Lane, a partner at Gibson Dunn and a former director of the SEC’s Division of Corporation Finance, participated in a panel on Management’s Discussion and Analysis (MD&A) this year’s AICPA conference on SEC and PCAOB developments.

Good MD&A examples. Lane singled out several Forms 10-Q of various companies which he believed are worthy of emulation. He drew attention to the 10-Q of Brown-Forman Corporation, which was represented on the panel by its vice president and corporate controller, Laura J. Phillips. He praised Brown-Forman’s 10-Q for its use of a “market highlight” section, which provided supplemental information for the company’s largest markets.

Lane also noted that the 10-Q of energy company AES Corporation includes a strategy section, which he advised was helpful to investors because such sections are usually only seen in prospectuses. He also praised AES’s disclosure of “key performance indicators” such as employee and contractor lost time rates.

In addition, Lane drew attention to the 10-Qs of GE and Google. GE’s MD&A makes good use of bullet points, and in Lane’s view, “when you want to create readability, bullet lists are king.” He also praised Google for including as a lead-in to its MD&A a discussion about “Trends in Our Businesses.”

Need for simplification. Fellow panelist John G. Morriss, managing director at TIAA-CREF, noted that the length of company documents has “exploded,” yet it has not correlated with investor understanding of those documents. Lane called for more simplification of MD&A disclosures, noting that the Division of Corporation Finance has not undertaken a project to simplify documentation since 1995. Most issuers’ 10-Qs get bigger every year, Lane stated. Despite calls for more streamlined disclosure, Lane observed that various interest groups in the investor community have called for even more disclosures on issues such as carbon footprints and campaign donations.

Lane also encouraged FASB to do something to make footnotes to the financial statements more investor-friendly. The footnotes are getting more impenetrable every year, he said. They are drafted by accountants for accountants and not for investors, according to Lane.

Disclosure of trends. Lane advocated the disclosure of trends in MD&A, noting that SEC staff currently has a focus on trends. He has also noticed an uptick in clients inquiring about whether something is a trend. As an example, he cited Kodak’s disclosure that the use of film as a trend is decreasing. This is an obvious kind of disclosure, Lane said, but some trends are less obvious, especially those in foreign markets.

The staff in the Division of Corporation Finance has cited a number of trends it would like to see disclosed in MD&A, Lane said. These include trends about cybersecurity and about cash offshore, especially in low tax jurisdictions. He also warned that the phrase “partially offset” is one of the most popular phrases in filings with the SEC, and urged preparers to be sure to quantify what they record as “partially offset” in order to live up to good disclosure expectations.

Enforcement and MD&A. Lane also briefly addressed the SEC’s enforcement efforts regarding to MD&A. He noted that MD&A cases had been rare and that there had not been one in nearly ten years until recently. In August, Lane explained, the SEC brought a case against Bank of America about certain disclosures the company failed to make in its MD&A about residential mortgage-backed securities. Lane observed that this was a pure MD&A case where there was no fraud involved. Bank of America was fined $20 million, a hefty fine for a non-fraud case, Lane said.