On December 18, 2018, the U.S. Securities and Exchange Commission (SEC) issued a Request for Comment soliciting input from the public on the content and frequency of earnings releases and quarterly reports made by public companies. The Request for Comment seeks feedback as to how the SEC can reduce the burden on public companies associated with quarterly reporting while preserving the informational needs of investors.
The Request for Comment sets forth 46 specific groups of questions, which are listed on the Appendix attached to this Sidley Update. In general, the SEC is requesting comment on:
- The nature and timing of disclosures that public companies must provide in their quarterly Form 10-Q reports, including when the Form 10-Q disclosure requirements overlap with the disclosures such companies voluntarily provide to the public in earnings releases furnished on Form 8-K. In particular, the SEC is asking whether it should allow companies to use earnings releases to satisfy the core financial disclosure requirements of Form 10-Q. Under this approach, a company would use its Form 10-Q to supplement a Form 8-K earnings release with additional material information required by the Form 10-Q that was not included in the Form 8-K earnings release or, alternatively, incorporate by reference disclosure from the Form 8-K earnings release into the Form 10-Q.
- How the SEC can promote efficiency in periodic reporting by reducing unnecessary duplication in the information that public companies disclose and how any such changes could affect capital formation, while enhancing, or at least maintaining, appropriate investor protection.
- Whether SEC rules should allow all or certain categories of public companies flexibility as to the frequency of their periodic reporting. The SEC is also asking how a change in reporting frequency would impact other aspects of the SEC’s integrated disclosure regime, such as keeping Securities Act registration statements current to enable swift access to the capital markets.
- How the current periodic reporting system, earnings releases, and earnings guidance (either alone or in combination with other factors) may affect corporate decision-making and strategic thinking – positively or negatively – including whether these factors foster an inefficient outlook among public companies and market participants by focusing on short-term results.
The comment period will end 90 days after the Request for Comment is published in the Federal Register.
Nearly all large public companies supplement their required quarterly reports on Form 10-Q with earnings releases furnished on Form 8-K and conduct webcast earnings calls. Many of these companies also issue forward-looking earnings guidance.
Critics of the current quarterly reporting system argue that it inappropriately drives management to focus on short-term results rather than on long-term strategic goals. Earlier this year President Trump publicly expressed his support for semi-annual – rather than quarterly – reporting and requested that the SEC review the issue. In June 2018, Business Roundtable, the National Association of Corporate Directors and the National Investor Relations Institute each released statements urging companies to adopt longer-term strategies and stop issuing quarterly earnings per share guidance.
In a Concept Release on Regulation S-K disclosure requirements issued in April 2016, discussed in a previous Sidley Update, the SEC solicited public comment on the frequency of periodic reporting. Specifically, the SEC asked the following in the 2016 Concept Release:
- Do investors, registrants and the markets benefit from quarterly reporting?
- Does quarterly reporting help or hinder long-term decision making or influence management’s strategic goals and timelines?
- Should certain categories of registrants be permitted to file periodic reports on a less frequent basis (e.g., should smaller reporting companies be permitted to file semi-annually rather than quarterly) or be required to file on a more frequent basis (e.g., monthly)? If so, which categories and what disclosure should be required?
- Should the SEC reduce the level of disclosure required in quarterly reports for the first and third quarters?
The Request for Comment is intended to solicit comment that would add to the feedback received in response to the 2016 Concept Release. The SEC noted in the Request for Comment that the comments from the 2016 Concept Release regarding the frequency of periodic reporting were mixed, with some commenters suggesting that the SEC reconsider the content of quarterly reports rather than adjust the frequency.
Public companies should review the Request for Comment or the Appendix attached to this Sidley Update to determine whether they would like to provide input to the SEC on any of its requests for comment. Interested parties may submit comments here.