Society urges SEC to consider semi-annual reporting option

May 03, 2019
Responding to consultation on earnings releases and quarterly reports

The Society for Corporate Governance has urged the SEC to maintain flexibility in companies’ approaches to earnings releases – and to take a close look at allowing issuers to report twice a year.

The society was responding to an SEC request for feedback on the ‘nature, content and timing’ of earnings releases and quarterly reports. Specifically, the commission is looking for input on how it can ‘reduce burdens on reporting companies associated with quarterly reporting while maintaining – and in some cases enhancing – disclosure effectiveness and investor protections.’

The commission is also looking for feedback on how the existing periodic reporting system, earnings releases and earnings guidance, alone or in combination with other factors, may foster an ‘overly short-term focus’ by managers and other market participants. US President Donald Trump last year asked the SEC to look into allowing US companies to report on a semi-annual basis.

The society ‘encourage[s] the SEC to seriously consider allowing public companies to adopt semi-annual reporting in their discretion,’ writes James Martin, senior vice president and general counsel at the society, in a letter to the commission. ‘A company could rationally conclude that semi-annual reporting satisfies investor needs, frees up board and management to focus more on strategy and execution and that, should material developments occur, the company could timely communicate such developments on a current report on Form 8K.’ 

In preparing its submission, the society polled members about various issues involved in the consultation, with more than 200 responding. Almost half (45 percent) of emerging-growth company and smaller reporting company respondents say they should be allowed to choose semi-annual reporting. Twenty-two percent say this should not be an option, and roughly one third are unsure.

Martin points to the UK as an example, stating that it suggests many companies in the US would continue with quarterly reporting, although recent studies indicate that over time more would switch to a semi-annual schedule.

More generally, he writes, ‘[a]s the commission considers what, if any, reforms may be appropriate to the quarterly reporting system, we urge the SEC to recognize that current earnings release practices of public companies are largely the product of private ordering that reflects a balancing of investor demands for information and companies’ messaging priorities.

‘Preserving flexibility for companies to communicate in the manner best befitting their unique circumstances is critical to arriving at a regulatory balance that protects investors and enhances the operating environment for public companies and the capital markets alike.’

Among those taking part in the society poll, almost two thirds (64 percent) say they issue an earnings release before they file Form 10Q, while roughly one third (32 percent) issue their earnings release and file Form 10Q at the same time.

Of those that issue quarterly earnings releases, 95 percent do so ‘because earnings releases are market/industry practice/standard’, 86 percent do so ‘to be responsive to investor and analyst needs or demands’ and 47 percent do so ‘because the release format allows the company greater flexibility in messaging.'

‘The variation in practice, contrasted with the consistency in underlying rationale for issuing quarterly earnings releases, underscores the need for flexibility,’ Martin writes. He adds that the society believes issuers should continue to have the option to provide forward-looking earnings guidance, particularly given market practices and investor demand.

The SEC’s consultation has attracted a mix of opinions. The Council of Institutional Investors (CII) in its letter supported the existing quarterly reporting model, although it expressed concern that quarterly guidance can lead to short-termism and ‘making the numbers.’

Filing Form 10Q is a system that benefits investors, companies and other market participants, according to CII. ‘[T]he requirement to report historical earnings on a quarterly basis is a key element of the timely and accurate information flow that underpins the quality and efficiency of our capital markets,’ CII general counsel Jeffrey Mahoney wrote. ‘The requirement helps ensure important information is promptly and transparently provided to the marketplace, allowing investors to assess concrete progress against strategic goals.’

On the other hand, forward-looking guidance, which by nature is predictive and speculative, is very different from reporting on what has already taken place, Mahoney wrote. Less frequent reporting of actual performance would likely result in greater share price volatility – and more intense investor focus on short-term share price fluctuations – as investors would have longer periods during which to guess how the company is doing, according to CII.

Among other commenters responding to the SEC, attorneys at Sullivan & Cromwell said the commission should avoid imposing additional rigid regulatory restrictions on quarterly earnings disclosure practices.

Meanwhile, attorneys with Cleary Gottlieb Steen & Hamilton urged the SEC to focus its efforts on reducing the burdens of Form 10Q where that can be done without weakening investor protections. ‘This would make it easier for issuers to reduce the delay between publishing the earnings release and filing the Form 10Q, and to align the content of the earnings release and the report,’ they wrote.

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