3.1 Management’s Discussion and Analysis

Regulation S-K, Item 303, specifies the information that a registrant is required to provide when discussing its financial condition and results of operations in MD&A. MD&A is one of the leading sources of SEC staff comments, many of which focus on the results of operations section. While the SEC staff’s comments have addressed various topics of MD&A, they have continued to focus on greater transparency in registrants’ disclosures about (1) material trends and uncertainties that affect results of operations, (2) liquidity and capital resources, and (3) estimates in critical accounting policies. In addition, the SEC staff’s comments have focused on the macroeconomic effects of inflationary conditions, rising interest rates, geopolitical conflicts, and supply-chain disruptions on items (1) through (3).

On November 19, 2020, the SEC issued a final rule that updated the requirements for MD&A in Regulation S-K, Item 303. Among the changes were:

Providing a concise disclosure objective for MD&A.
Codifying the requirements in SEC Interpretive Release No. 33-8350 and SEC Interpretive Release No. 33-6835, which provided the Commission’s views on MD&A disclosures.
Requiring the disclosure of (1) any known trends or uncertainties that have had or are reasonably likely to have a material impact on revenues or income and (2) any known events that are “reasonably likely to cause a material change in the relationship between costs and revenues (such as known or reasonably likely future increases in costs . . . )” (emphasis added).
Requiring a registrant to discuss (1) certain factors (e.g., changes in prices or volume) that led to material changes from period to period in net sales or revenues in the statement of comprehensive income and (2) the underlying reasons for material changes in quantitative and qualitative terms in situations in which one or more line items in the financial statements reflect material changes from period to period (including those in which material changes within a line item offset one another).
Eliminating (1) the inflation and price changes discussion from the results of operations (although under the principles-based disclosure framework, a registrant must still disclose the impact of inflation and price changes if such conditions are part of a known trend or uncertainty that has had, or is reasonably likely to have, a material impact on revenues or income), (2) the separately captioned off-balance-sheet-arrangements section (although a registrant must disclose material off-balance-sheet arrangements as part of the Liquidity and Capital Resources discussion), and (3) the contractual obligation table (although a registrant must provide an analysis of “material cash requirements from known contractual and other obligations”).

Item 303 requires disclosure of “any known trends or uncertainties that have had or that are reasonably likely to have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.” Early-warning disclosures give investors insight into (1) when charges may be incurred in the future, including possible charges related to contingencies, restructuring activities, impairment of goodwill or other long-lived assets, or the settlement of uncertain tax positions; (2) when revenue growth or profit margins may not be sustainable because of underlying economic conditions; or (3) when the registrant will be unable to comply with debt covenants. Accordingly, such disclosures may alert investors to the underlying conditions and risks that the company faces before a material charge or decline in performance is reported. See Sections 2.3.1, 2.11.1.1, and 6.3.3.7 for more information.

The SEC staff has frequently reminded registrants that it is also looking for improvement in disclosures that help the reader understand the company’s big-picture tax situation and the trends and uncertainties associated with changes in income tax. See Section 2.12 for more information.

In addition, the SEC staff continues to stress that registrants should focus on providing disclosures that are material and relevant to their operations. Further, the staff continues to recommend that registrants consider including an executive overview section in MD&A that contains a balanced discussion of the key drivers, challenges, and risks that affect results of operations and liquidity.

3.1.1 Omitting Discussion of the Earliest Year From MD&A

Example of an SEC Comment

You have omitted a discussion and analysis of changes in operating expenses between [fiscal year 2] and [fiscal year 1]. In future filings, please provide a complete discussion and analysis of operating results for each period presented, or identify the location in the prior filing where the omitted discussion may be found in accordance with Instruction 1 to Item 303(a) of Regulation S-K.

Regulation S-K permits registrants that present three years of audited financial statements to omit discussion of the earliest year if such discussion was already included in any of the registrants’ prior EDGAR filings that required such information. Registrants electing to omit discussion of the earliest year must disclose, in the current filing, the location of such discussion in the prior filing. In addition, a registrant may use judgment in determining what type of presentation would most clearly communicate results and trends to investors. For example, in certain circumstances, a narrative discussion about specific periods on a stand-alone basis may be more meaningful than period-to-period comparisons. Registrants should consider the total mix of available information, including the impact of any recastable events (e.g., a discontinued operation or other retrospective accounting change) on the prior-period MD&A when determining whether to omit discussion of the earliest year and the most appropriate form of presentation. If a registrant concludes that it is necessary to discuss operations related to the earliest period presented, the registrant may limit the discussion to the information that has changed or has been determined to be significant to its operations or financial condition.

In January 2020, the SEC staff issued three Compliance and Disclosure Interpretations (C&DIs) on Regulation S-K related to the application of this accommodation. C&DI Questions 110.02 and 110.04 address the wording that is required to incorporate by reference the omitted discussion into a filing and registration statement, respectively. C&DI Question 110.03 states that a registrant is not permitted to omit discussion of the earliest year (i.e., discussion of the earliest year must either be included in the current disclosure or expressly incorporated into the current disclosure by reference) if such information is “necessary to an understanding of [the registrant’s] financial condition, changes in financial condition and results of operations.” The minutes of the June 25, 2019, CAQ SEC Regulations Committee joint meeting with the SEC staff indicate that in the staff’s view, circumstances in which a registrant should consider whether discussion of the earliest year is necessary to such an understanding include those involving retrospective changes to the financial statements, such as corrections of errors and changes in accounting principle.

3.1.2 Results of Operations

Examples of SEC Comments

You disclose you have been impacted by negative macroeconomic trends, including a condensed labor market, wage inflation, global supply chain issues and inflation affecting your revenues and underwriting. Please expand your disclosure to identify the principal factors contributing to these issues and clarify the resulting impact on you. Additionally, disclose any known trends or uncertainties regarding these issues that are reasonably likely to have a material impact on your cash flows, liquidity, capital resources, cash requirements, financial position, or results of operations. Refer to Item 303(b)(2)(ii) of Regulation S-K.
Please revise your disclosures to comply with Item 303 of Regulation S-K. In doing so, please be sure to describe the reasons for significant changes in revenues, expenses, cash flows and financial position. It is not sufficient to merely recite the information that is available on the face of the financial statements without describing the events, transactions and economic changes that materially affected the reported amounts.
We note that direct operating expenses increased significantly and in a higher proportion as compared to the percentage increase in revenue for each of your segments and on a consolidated basis. Please revise your disclosures in future filings to separately discuss direct operating expenses and to quantify and discuss factors responsible for changes pursuant to Item 303 of Regulation S-K. As part of your revised disclosure for direct operating expenses and for your existing expense discussion, please quantify each material component when a change is attributed to more than one factor. For example, you state that certain increases were “primarily” attributed to one factor, or “partially offset” by another [factor], or you cite several other factors responsible for the change. In your response, please provide us with an example of the disclosure to be included in future filings. Refer to SEC Release No. 33-8350.
In light of the material fluctuations in your income statement line items and the significant impact of the . . . acquisition, please revise to provide more informative disclosures pursuant to SEC Release No. 33-10890 and Item 303(b)(2)(iii) of Regulation S-K. More specifically, and in order for an investor to better understand the reasons of the fluctuations and to see the analysis through the eyes of management, please revise future filings to discuss the underlying reasons for material changes in quantitative and qualitative terms in all situations in which one or more line items in the financial statements reflect material changes from period to period, including those in which material changes within a line item offset one another. In this regard, when more than one factor is responsible for a change, quantify the impact of each in order to enable an investor to discern the relative contribution of each of multiple components to the total change. Lastly, disclose any known events that are reasonably likely to cause a material change in the relationship between costs and revenues. Also refer to the aforementioned Release for guidance on establishing the “reasonably likely” threshold.
We note from your first quarter earnings call . . . that the company experienced some price inflation. Please expand your discussion to identify the principal factors contributing to the inflationary pressures the company has experienced and clarify the resulting impact, if material, to the company. Also, please update your disclosure to identify actions planned or taken, if any, to mitigate inflationary pressures. Refer to Item 303(b)(2) of Regulation S-K.
You disclose here, and in your quarterly filing, that you are experiencing inflationary cost increases on raw materials. In future filings, please quantify and disclose the impact of the inflationary pressures you are experiencing on cost of products sold and gross margin and disclose and discuss actions planned or taken, if any, to mitigate inflationary pressures. In addition, in future annual and quarterly filings, please separately quantify and discuss the impact that changes in prices, changes in volumes, and acquisitions had on revenue during each period presented.
We note your risk factor here and throughout the filing related to supply constraints. We further note from your [press release] that you continue to encounter material constraints in most product areas and that [the financial guidance you provided for the following quarter was a wider than normal range reflecting] those supply challenges. Specify in future filings and in more detail whether these challenges have materially impacted your results of operations or capital resources and quantify, to the extent possible, how your sales, profits, and/or liquidity have been impacted.
We note your disclosure within MD&A that external factors such as supply chain uncertainties have caused your operating results to vary meaningfully. Please discuss in future filings whether supply chain disruptions materially affect your outlook or business goals. Specify whether these challenges have materially impacted your results of operations or capital resources and quantify, to the extent possible, how your sales, profits, and/or liquidity have been impacted. Also, please discuss known trends or uncertainties resulting from mitigation efforts undertaken, if any. Explain whether any mitigation efforts introduce new material risks, including those related to product quality, reliability, or regulatory approval of products.
We note your disclosure that gross profit as a percentage of net revenues is dependent upon a variety of factors, including changes in the relative sales mix among distribution channels, changes in the mix of products sold, pricing, the timing and level of promotional activities, foreign currency exchange rates, and fluctuations in product costs. Please revise your future filings to quantify the extent to which changes in gross profit, as well as changes in segment operating margins . . . were materially impacted by changes in volume, product mix, and price. In this regard, expand your disclosure to explain any increases/decreases in segment net revenues . . . resulting from changes in volume of products sold, changes in average unit retail, and to quantify the impact of each of these underlying drivers. See Item 303(b)(2)(iii) of Regulation S-K.
We note there are $[X] billion of long-term debt maturities due in [year Y] that are expected to be refinanced at higher interest rates. Please discuss the expected effects of this known trend or uncertainty on your future financial position, results of operations, and cash flows. See Item 303 of Regulation S-K.

The SEC staff frequently comments on how a registrant can improve its discussion and analysis of known trends, demands, commitments, events, and uncertainties and their impact on the results of operations. Such discussion and analysis are crucial to a financial statement user’s understanding of the quality of, and potential variability in, a company’s earnings and cash flows as well as the extent to which reported results indicate future performance. A determination of the appropriate disclosure generally should include (1) consideration of financial, operational, and other information; (2) identification of known trends and uncertainties; and (3) an assessment of whether these trends and uncertainties will have, or are reasonably likely to have, a material impact on the company’s financial condition and operating performance.

Under Regulation S-K, Item 303, registrants are required to disclose in MD&A material known trends or uncertainties that may affect future performance (whether favorable or unfavorable). Registrants are commonly asked to (1) quantify components of overall changes in financial statement line items and (2) enhance their analysis of the underlying factors that cause such changes or the reasons for the components affecting the overall change — including an analysis of changes at the segment level because such an analysis is often meaningful in MD&A. The SEC staff has suggested that in addition to discussing how volume and product mix affect their results of operations, registrants should consider explaining other potential influences, such as pricing changes, acquisitions, new contracts, inflation, and foreign exchange rates.

The SEC staff has also encouraged registrants to:

Use appropriate metrics to help them “tell their story” — including those that may be common to their industry (e.g., same-store sales, average subscribers). However, the SEC staff distinguishes such metrics from non-GAAP measures that are adjusted GAAP measures. See Section 3.4.9 for additional information.
Present changes in a tabular format (e.g., a table that summarizes year-over-year changes).

3.1.3 Liquidity and Capital Resources

Examples of SEC Comments

In future filings, including your quarterly reports, please revise to disclose whether you believe you have sufficient cash and other types of liquidity available to fund operations and meet your obligations on both a long-term and short-term basis. We would consider long-term to be greater than twelve months.
Your discussion of operating cash flows appears to be a recitation of changes disclosed on the consolidated statement of cash flows. Please revise and expand this discussion to include the primary drivers of, and other material factors necessary to understand, the company’s cash flows from operating activities. Refer to section IV.B of SEC Release 33-8350.
Your analysis of changes in operating cash flows references net income, noncash items and changes in operating assets and liabilities. Note that references to these items may not provide a sufficient basis to understand how operating cash actually was affected between periods. Your discussion should be a comparable analysis between periods that discusses factors that actually affected operating cash. . . . Also, your analysis should discuss the reasons underlying factors cited, particularly in regard to changes in operating assets and liabilities for which the impact on cash is not readily apparent. Refer to the introductory paragraph of section IV.B and paragraph B.1 of Release No. 33-8350 for guidance, and section 501.04 of the staff’s Codification of Financial Reporting Releases regarding quantification of variance factors. Please revise your disclosure as appropriate.
Please provide a more informative analysis and discussion of changes in operating, investing and financing cash flows for each period presented. In doing so, explain the underlying reasons and implications of material changes between periods to provide investors with an understanding of trends and variability in cash flows. Also provide an analysis of any known trends and uncertainties that will result in or that are reasonably likely to result in a material increase or decrease in your liquidity. Ensure your discussion and analysis is not merely a recitation of changes evident from the financial statements. Refer to Item 303(a) of Regulation S-K and Section IV.B of SEC Release No. 33-8350.
[Please] revise the MD&A in your Form 10-Q to address your capital needs for the next twelve months, the material uncertainties surrounding your liquidity, and the impact that those uncertainties could have on your business. Refer to Item 303 of Regulation S-K.
Please discuss your material cash requirements from known contractual and other obligations as of [your fiscal year-end], the anticipated source of funds needed to satisfy such cash requirements and the relevant time period for the related cash requirements in accordance with Item 303(b)(1) of Regulation S-K. In this regard, we note you have purchase obligations relating to take-or-pay contracts of approximately $[X] million as of [your fiscal year-end]. For further guidance refer to Instruction 4 to Item 303(b) of Regulation S-K.
Please disclose a table summarizing your total available sources of liquidity, by type of borrowing capacity, showing total borrowing capacity less borrowings outstanding to arrive at remaining capacity, then adding in other sources of liquidity such as cash, securities, etc. to arrive at total available liquidity, or tell us where this information is disclosed in the aggregate.

The SEC staff frequently requests more meaningful analysis in a registrant’s MD&A of material cash requirements, historical sources and uses of cash, and material trends and uncertainties so that investors can understand the registrant’s ability to generate cash and meet cash requirements. The requirement to provide such analysis was clarified in the SEC’s November 19, 2020, final rule.

Registrants must disclose (1) material cash requirements as of the end of the latest fiscal period, (2) the anticipated source of funds needed to satisfy those cash requirements, and (3) the general purpose of such requirements. Material cash requirements are intended to encompass capital expenditures as well as expenditures for human capital, intellectual property, contractual obligations, off-balance-sheet arrangements, and other such requirements. While registrants are no longer required to present contractual obligations in tabular form, they must provide an analysis of material cash requirements arising from known contractual and other obligations.

In addition, rather than repeating items that are reported in the statement of cash flows, registrants should (1) concentrate on disclosing the primary drivers of cash flows and the reasons for material changes in specific items underlying the major captions reported in their financial statements and (2) disclose significant developments in liquidity or capital resources that occur after the balance sheet date.

The SEC staff has noted that it is important for registrants to “accurately and comprehensively explain [their] liquidity story” and has advised registrants to consider including discussions of key liquidity indicators, such as leverage ratios and other metrics that management uses to track liquidity.1 In addition, the SEC staff has indicated that MD&A disclosures should take into account how the following factors, among others, affect a registrant’s liquidity:

Any changes in leverage strategies.
Any strains on liquidity caused by changes in availability of previously reliable funding.
Sources and uses of funds.
Intraperiod debt levels.
Restrictions on cash flows between the registrant (i.e., the parent) and its subsidiaries. See Section 2.4.1 for more information.
The impact of liquidity on debt covenants and ratios.

Registrants should also consider whether they need to provide enhanced disclosures about:

Significant debt instruments, guarantees, and related covenants. See Section 2.4.2 for more information.
Effects on liquidity of material cash balances that are held.

3.1.4 Critical Accounting Estimates

Examples of SEC Comments

Please expand your disclosures to identify the number of reporting units where goodwill is allocated and tested for impairment. Additionally, please indicate whether the fair value substantially exceeds book value for all reporting units. If the fair value of any reporting unit does not substantially exceed book value, please identify the reporting unit and provide the following:
- the percentage by which fair value exceeded carrying value at the date of the most recent test;
- the amount of goodwill allocated to the reporting unit;
- a more detailed description of the methods and key assumptions used and how the key assumptions were determined;
- a discussion of the degree of uncertainty associated with the assumptions; and
- a description of potential events and/or changes in circumstances that could reasonably be expected to negatively affect the key assumptions.
Pursuant to SEC Release No. 33-10890, please revise for each critical accounting estimate (CAE), as defined in Item 303(b)(3) of Regulation S-K, to clearly discuss [(1)] why the CAE is subject to uncertainty, and to the extent the information is material and reasonably available, (2) how much the CAE or assumption (or both) has changed during the relevant period, and (3) the sensitivity of reported amounts to the methods, assumptions, and estimates underlying the CAE’s calculation. Please address any material changes or contracts . . . that may significantly affect any estimates. When revising, note that Instruction 3 to Item 303(b) states that disclosure of CAEs should “supplement, but not duplicate, the description of accounting policies or other disclosures in the notes to the financial statements.” Please provide us with an example of your disclosure to be included in future filings based on current information and estimates.
The disclosures of your critical accounting policies and estimates appear to be a repetition of certain of your significant accounting policies. Please revise your disclosures to address the material implications of the uncertainties that are associated with the methods, assumptions and estimates underlying your critical accounting estimates. Your expanded disclosure should address the risk related to using different assumptions and analyze their sensitivity to change based on outcomes that are deemed reasonably likely to occur. For additional guidance, refer to Item 303(b)(3) of Regulation S-K and the related Instruction 3 to paragraph (b) of Item 303.
Please enhance your disclosures to provide qualitative and quantitative information necessary to understand the estimation uncertainty and the impact your critical accounting estimates have had or are reasonably likely to have on your financial condition and results of operations. In addition, discuss how much each estimate and/or assumption has changed over a relevant period and the sensitivity of reported amounts to the underlying methods, assumptions and estimates used. The disclosures should supplement, not duplicate, the description of accounting policies or other disclosures in the notes to the financial statements. Refer to Item 303(b)(3) of Regulation S-K and SEC Release No. 33-8350.
We note your discussion of critical accounting estimates that are more significantly affected by judgments and estimates. Please quantify and provide an analysis of the impact of critical accounting estimates on your financial position and results of operations for the periods presented, including the effect of changes in critical accounting estimates between periods to the extent such changes had a significant effect on your financial position or operating results. In addition, please revise to include a qualitative and quantitative analysis of the sensitivity of reported results to changes in assumptions, judgments, and estimates when reasonably likely changes in assumptions, judgments and estimates would have a material effect on your financial condition or operating performance. Refer to Item 303(b)(3) of Regulation S-K.

The critical accounting estimates section of MD&A is intended to highlight only those financial statement items that require significant management estimates and judgment. When reviewing the section, the SEC staff has frequently focused on the estimates that management used in valuations (e.g., estimates used in the valuation of (1) pension assets; (2) impairment of long-lived assets; (3) income taxes, including DTAs and uncertain tax positions; and (4) fair value determinations). Registrants should not simply copy their accounting policy disclosures from the footnotes to the financial statements. Instead, the SEC staff expects discussion and analysis of material uncertainties associated with assumptions underlying each critical accounting estimate.

To provide comprehensive and meaningful disclosures, management should consider disclosing the following items in the critical accounting policies section of MD&A:

The method(s) used to determine critical accounting estimates.
The accuracy of past estimates or assumptions.
The extent to which the estimates or assumptions have changed.
The drivers that affect variability.
Which estimates or assumptions are reasonably likely to change in the future.

In addition, registrants should consider providing greater insight into the quality and variability of information regarding financial condition and operating performance by including an analysis of the sensitivity of estimates to changes on the basis of outcomes that are reasonably likely to occur and that would have a material effect. The sensitivity analysis should be quantitative if it is reasonable for registrants to obtain such information.

3.1.5 Climate Change

In February 2021, then SEC Acting Chair Allison Herren Lee issued a statement directing the Division to increase its focus on climate-related disclosures when reviewing public-company filings, including assessing the extent to which public companies have provided information that is consistent with the SEC’s 2010 interpretive release on climate-change disclosures (the “2010 interpretive release”).

In a manner consistent with this directive, on September 22, 2021, the SEC released a sample letter that (1) highlights the guidance addressed in the 2010 interpretive release and (2) provides the types of comments that the SEC staff may issue to registrants regarding climate-related disclosures (primarily focusing on disclosures in the business, risk factors, and MD&A sections of filings).

On March 6, 2024, the SEC issued a final rule requiring registrants to provide climate-related disclosures in their annual reports and registration statements, including those for IPOs, beginning with annual reports for the year ending December 31, 2025, for calendar-year-end large accelerated filers. On April 4, 2024, the SEC voluntarily stayed the effective date of the final rule pending judicial review of petitions challenging it, which were consolidated for review by the U.S. Court of Appeals for the Eighth Circuit. On March 27, 2025, with the change of presidential administration, the SEC staff sent the court a letter that an SEC press release describes as “stating that the Commission withdraws its defense of the [final rule] and that Commission counsel are no longer authorized to advance the arguments in the brief the Commission had filed.” On September 12, 2025, the court entered an order whereby the petitions for review will be held in abeyance until the SEC reconsiders the final rule and determines whether it will be rescinded, repealed, modified, or defended in litigation. Since the outcome and timeline of the litigation, including the SEC’s response to the court order, are unknown, the status of the final rule remains uncertain.

Connecting the Dots

Although the trajectory of the SEC’s final rule on climate-related disclosures changed upon the change of presidential administration in 2025, registrants should still consider climate-related matters and their impact on current operations, or potential impact on future operations, when evaluating MD&A disclosure requirements. Specifically, registrants are required to disclose climate-related matters in MD&A if those matters meet the criteria of Regulation S-K, Item 303(b)(2)(ii), which requires disclosure of “any known trends or uncertainties that have had or that are reasonably likely to have” a material impact on revenues or income. Under the “reasonably likely” requirement, a registrant should disclose a known trend or uncertainty if it (1) is reasonably likely to occur and (2) would be material to the registrant if it did occur. In addition, registrants should consider whether climate-related matters represent a relevant risk factor requiring disclosure under Regulation S-K, Item 105. See Section 3.3 for more information.

3.1.6 Market Risks

Examples of SEC Comments

We note your disclosure . . . that indicates you monitor interest rate risk using a simulation technique that takes into account prepayment speeds on amortizing financial instruments, loan and deposit volumes and rates, borrowings, derivative positions and non-maturity deposit assumptions and capital requirements. Please revise future filings . . . to fully describe and define the various identified inputs and assumptions supporting your market risk presentations and sensitivity disclosures. In addition, provide a discussion of how any assumptions have changed from period to period, including any changes to the data source used or significant changes in the actual assumption itself. See Item 305(a)(1)(ii)(B) of Regulation S-K.
We note your disclosures surrounding interest rate risk, which includes a sensitivity analysis that a hypothetical, immediate 100 basis point increase in market interest rates has on your net interest income. We also note that your . . . quarterly reports do not present tabular or expanded narrative disclosure under Quantitative and Qualitative Disclosures about Market Risk. Please further expand your sensitivity analysis disclosures, in future filings, to present additional quantitative information that expresses an impact [on] your net interest income resulting from additional selected hypothetical changes in interest rates (e.g., −100 basis point decrease, +/− 50 or +/− 200 basis point change, etc.). Additionally, revise future filings with interim period financial statements to include expanded tabular and more fulsome narrative disclosures regarding changes, to the extent material.
We note your disclosure regarding derivative contracts, and the tabular presentation showing your outstanding derivative positions . . . . Please provide a qualitative discussion of how derivatives are used to manage interest rate risk, including any changes in strategy during the periods presented. See Item 305(b)(1)(ii) of Regulation S-K. Additionally, consider disclosing quantitative information about the impact the use of derivatives had on managing your interest rate risk and clarify whether the disclosed outputs from your net interest simulation analysis and Economic Value of Equity modeling reflect the impact of the derivatives used to manage interest rate risk.
We note that you state that management uses Economic Value of Equity [(EVE)] to measure interest rate risk. However, you do not present any quantitative or qualitative analysis of your EVE during the period, nor the key assumptions that management uses to evaluate and manage exposure to this risk. Provide us with your analysis supporting your decision not to provide information related [to] this measure of market risk. Please refer to Item 305 of Regulation S-K. Also, revise your disclosure to address the key metrics management uses in evaluating EVE to manage your exposure to market risk, and explain any significant changes made as a result of monitoring EVE in reducing your exposure to market risk.
We . . . note that key assumptions in your interest rate sensitivity analysis include the projection of interest rate scenarios with rate floors, rates and balances of non-maturity client cash held on the balance sheet, prepayment speeds of mortgage-related investments, repricing of financial instruments, and reinvestment of matured or paid-down securities and loans. Please revise your disclosures in future filings to describe and define the various identified assumptions, whether you use proprietary or third-party data, how the data are used in your modeling and any unique facts and circumstances about them, such as how they have or may respond to unknown facts and circumstances, such as exogenous events. Additionally, please disclose changes in any assumptions used for any comparative period, including changes to the data source used or significant changes in the actual assumption itself due to, and for example, internal data, market conditions or significant changes in the judgments and determinations made by management as you refine your modeling over time. Please see Item 305(a)(1)(ii)(B) of Regulation S-K.

Registrants frequently receive requests from the SEC staff to provide information about their exposure to market risks, including risks related to interest rates, foreign currency exchange rates, commodity prices, and other relevant market risks. A registrant’s disclosures about such exposure should include both quantitative and qualitative information to help investors understand the nature and extent of the market risks that the registrant faces.

Regulation S-K, Item 305, requires registrants to provide quantitative and qualitative information about market risk (e.g., interest rate risk, foreign currency exchange rate risk, commodity price risk, equity price risk) associated with market-sensitive instruments, such as derivatives, debt, receivables, payables, and investments, as of the end of the latest fiscal year. Registrants have three options for presenting the disclosures: (1) tabular presentation of market-sensitive instruments and contract terms relevant to the determination of future cash flows; (2) a sensitivity analysis that assesses the potential loss in value, earnings, or cash flows from market-sensitive instruments as a result of hypothetical changes in interest rates or other market rates; or (3) a value-at-risk analysis that estimates the potential loss from market movements and specifies the likelihood of occurrence over a selected period. The SEC staff has issued Q&As that registrants can consider when preparing their market risk disclosures as part of their periodic reporting requirements.

Given the three disclosure alternatives for market risk disclosures, many registrants elect to use a sensitivity analysis. At the 2023 AICPA Conference, the SEC staff reminded registrants that if they use a sensitivity analysis, their disclosures should include (1) a description of the model, (2) the assumptions used, and (3) the inputs and parameters. Registrants should also consider disclosing assumptions related to future balance sheet composition, anticipated deposit withdrawals, and prepayments, as applicable.

Footnotes

Refer to Section 9210 of the FRM.