On December 18, 2018, the SEC issued a request for public comment soliciting input on the nature, content and timing of earnings releases and quarterly reports of companies that are obligated to file reports with the SEC as well as the relationship between the periodic reports that reporting companies must provide and the earnings releases that they choose to distribute. With this request for comment, the SEC is seeking to continue the ongoing dialogue about whether the current reporting regime and practices of reporting companies is overly burdensome or contributing to “short-termism”.
Commenting on the matter, SEC Chairman, Jay Clayton, said “[t]here is ongoing public debate regarding the effects of mandated quarterly reports and the prevalence of optional quarterly guidance.” “Our markets thirst for high-quality, timely information regarding company performance and material corporate events. We recognize the importance of this information to well-functioning and fair capital markets. We also recognize the need for companies and investors to plan for the long term. Our rules should reflect these realities. I look forward to receiving thoughtful comments as we think about ways to encourage long-term investment in our country.”
What Input is the SEC Seeking?
The request for public comment seeks public input on whether the SEC’s rules should provide reporting companies, or certain classes of reporting companies, with flexibility as to the frequency of their reporting, including whether companies should be required to file reports on a semi-annual basis rather than quarterly as is currently the case. Among other topics, the SEC is seeking input on whether quarterly earnings releases provide benefits to investors, companies or the marketplace separate and apart from the Form 10-Q, whether it is the earnings release or the Form 10-Q that is the primary document that investors rely on and what key differences are there between the financial information included in an earnings release as compared to the Form 10-Q.
The SEC is also seeking comment on how the existing periodic reporting system, earnings releases and earnings guidance, standing 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 registrants and market participants by focusing on short-term results. The SEC has asked respondents whether providing quarterly forward-looking earnings guidance creates an undue focus on short-term financial results negatively affecting the ability of companies to focus on long-term results.
In seeking public comment, the SEC noted that the European Union and other foreign jurisdictions, like the United Kingdom, have eliminated quarterly reporting requirements and placed a greater emphasis on annual or half-yearly reports under certain circumstances. The SEC noted that in the United Kingdom there appeared to be no significant difference between the levels of corporate investment of the U.K. companies that stopped quarterly reporting and those that continued with quarterly reporting.
It will be interesting to see how this discussion plays out and whether there will be meaningful changes to the SEC reporting requirements for public companies in the coming years, including whether companies will migrate to less frequent reporting if the SEC makes quarterly reporting voluntary. Another area to watch will be the potential impact of any changes to the quarterly reporting regime on companies that regularly issue securities in take-downs from shelf registration statements and whether those companies would gravitate toward less frequent reporting if they had to separately supplement the disclosure in their registration statements without the benefit of the forward incorporation by reference that is accomplished currently with quarterly reporting. No matter the outcome, it is encouraging that the SEC and the relevant stakeholders in this area continue to engage in a dialogue about the structure and relative value of the current reporting regime and the disconnect many believe exists between the short-term focus of the current structure and the focus of most shareholders on long-term value creation.