Outside Publication

When Rules Collide – Leidos, the Supreme Court, and the Risk to the MD&A, BNA Securities Regulation & Law Report

September 25, 2017

The Supreme Court is poised to decide whether subitem (a)(3)(ii) of Item 303 of Regulation S-K, Management’s Discussion and Analysis of Financial Condition and Results of Operations, 17 C.F.R. § 229.303 (‘‘MD&A’’ or ‘‘Item 303’’),creates a duty to disclose that is actionable by private plaintiffs under Rule 10b-5, 17 CFR § 240.10b-5, adopted pursuant to Section 10(b) of the Securities Exchange Act of 1934 (the ‘‘Exchange Act’’), 15 USC § 78j(b). If the Court concludes that Item 303 creates such a duty, the Court will likely also address other conditions to Rule 10b-5 liability, such as materiality and scienter.

The vehicle for that decision will be the Supreme Court’s review of Indiana Public Retirement System v. SAIC, Inc., 818 F.3d 85 (2d Cir. 2016). (Because of a corporate name change, we refer to both the defendant company and the Second Circuit’s decision as ‘‘Leidos.’’) In Leidos, the Second Circuit broke with the Third and Ninth Circuits and held that a public company that omits a disclosure required by Item 303 violates a duty to disclose under Rule 10b-5. In resolving this conflict between the circuits with respect to Item 303(a)(3)(ii), the Court’s decision will also likely affect whether Rule 10b-5 would apply to a violation of every other sub-item of Item 303 as well as every one of the disclosure requirements adopted by the Securities and Exchange Commission (the ‘‘SEC’’ or the ‘‘Commission’’) under Sections 13(a) and 15(d) and perhaps Section 14(a) of the Exchange Act, which would usher in a new era of litigation under Rule 10b-5.

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