The SEC Marches Forward with its Disclosure Effectiveness Program

By George Wilson

Despite the disruption caused by COVID-19, the SEC has continued to move forward with its disclosure effectiveness program.  Along with its Final Rules in March which amended the definition of accelerated filer and the requirements of guarantor/guarantee financial statements, the SEC has now updated its guidance for information about business acquisitions and dispositions.


On May 20, 2020, the SEC adopted a Final Rule updating the 30-year-old requirements for financial statements and proforma information about acquisitions and dispositions.  The changes include an update to the significant subsidiary test in Regulation S-X Rule 1.02(w) and changes to S-X Rule 3.05’s requirements for the periods for financial statements to be presented for acquired businesses.


The changes to the significant subsidiary tests in Rule 1-02(w), which is also in Securities Act Rule 405 and Exchange Act Rule 12b-2, include:

  • “revising the investment test to compare the investments in and advances to the acquired or disposed business to the company’s aggregate worldwide market value if available;
  • revising the income test by adding a revenue component;
  • expanding the use of pro forma financial information in measuring significance; and
  • conforming, to the extent applicable, the significance threshold and tests for disposed businesses to those used for acquired businesses.”


The revisions to Rule 3.05 reduce the maximum number of periods financial statements of an acquired business may be required to two years.


The Final Rule also changes the requirements for proforma financial information to provide for three kinds of proforma adjustments:


  • “Transaction Accounting Adjustments” reflecting the application of required accounting;
  • “Autonomous Entity Adjustments” to present the company as an autonomous entity if it was previously part of another entity; and
  • optional “Management’s Adjustments” depicting synergies and dis-synergies.


“Management’s Adjustments” may be presented if, in management’s opinion, such adjustments would “enhance an understanding of the pro forma effects of the transaction and certain conditions related to the basis and the form of presentation are met.”


The Final Rule includes a number of related changes and you can read all the details here.


As always, your thoughts and comments are welcome!

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