United States: SEC Posts Request For Comment On Earnings Releases And Quarterly Reports

Last Updated: December 20 2018
Article by Cydney Posner

Right before the SEC open meeting originally scheduled to discuss the issue, the SEC has posted a "request for comment soliciting input on the nature, content, and timing of earnings releases and quarterly reports made by reporting companies." (The matter has been deleted from tomorrow's agenda. According to the press release, the request for comment solicits "public input on how the Commission can reduce burdens on reporting companies associated with quarterly reporting while maintaining, and in some cases enhancing, disclosure effectiveness and investor protections. In addition, the Commission is seeking comment 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." The public comment period will be open for 90 days following publication of the Request in the Federal Register.

(Note that the SEC also adopted hedging policy disclosure rules and likewise removed that from tomorrow's agenda, but more on that tomorrow.)

The request for comment includes many, many thoughtful questions, and the ones below can only provide a limited flavor of some of the questions. The questions are generally focused around these broad topics:

  • "The nature and timing of disclosures that reporting 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." U.S. companies often issue earnings releases, but there is substantial variation in the items and methods of presentation, and some of the information, such as earnings guidance, does not appear in the Form 10-Q. The SEC asks a number of questions about the uses of the quarterly release and Form 10-Q, including whether there are benefits to investors and other market participants from having two sources of historical quarterly financial information, when only one is required. When much of the information is disclosed in the earnings release, "is the Form 10-Q still useful?" Does confusion arise from the two versions of the disclosure? If the frequency of reporting were reduced, how would a semiannual reporting model affect the use of earnings releases?
  • "How the Commission can promote efficiency in periodic reporting by reducing unnecessary duplication in the information that reporting companies disclose and how any such changes could affect capital formation, while enhancing, or at a minimum maintaining, appropriate investor protection." The SEC seeks ways to simplify the process for investors, who must evaluate and compare the 10-Q and the earnings release, while maintaining or enhancing the investor protection inherent in the disclosure and reducing company time and costs. For example, should there be a Supplemental Approach, under which earnings releases would be used "to satisfy the core disclosure requirements" of Form 10-Q? Under this Supplemental 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 not already presented in the Form 8-K or alternatively incorporate by reference disclosure from the Form 8-K earnings release into its Form 10-Q." Alternatively, how would a reduction in frequency of reporting affect the cost of capital or contractual requirements to provide reports on a quarterly basis? What about the impact on other users, such as investment advisors?
  • "Whether Commission rules should allow reporting companies, or certain classes of reporting companies, flexibility as to the frequency of their periodic reporting." The SEC has been looking at issues related to the frequency of interim reporting in connection with an earlier Concept Release, but is continuing to consider the issue and is requesting additional input on reporting frequency and alternate approaches. Ideally, alternatives should "appropriately address the informational needs of investors while reducing the costs and other burdens on registrants who provide that information." One possibility might be a flexible reporting frequency model that would be selected based on the needs of the company and its investors? Should it apply only to certain classes, such as smaller companies or companies in certain industries? How would that model affect accounting and auditing?
  • "How the existing periodic reporting system, earnings releases, and earnings guidance (either standing alone or in combination with other factors) may affect corporate decision making and strategic thinking, including whether these factors foster an inefficient outlook among reporting companies and market participants by focusing on short-term results." For example, the Request suggests, there has been encouragement by some market participants to move away from earnings guidance and "instead put more focus in Form 10-Qs on demonstrating progress made against the company's long-term strategic plan." Does the practice of providing quarterly forward-looking earnings guidance create short-termism and negatively affect the ability of companies to focus on long-term results?

SideBar

The reference may be to a WSJ op-ed by investor Warren Buffett and JPMorgan CEO Jamie Dimon advocating a move away from quarterly guidance, but reaffirming their support for quarterly reporting. (See this PubCo post.) In addition, a group of prominent CEOs of major public companies and institutional investors developed a list of "commonsense corporate governance principles," designed to generate a constructive dialogue about corporate governance at public companies. With regard to earnings guidance, the group maintained that a "company should not feel obligated to provide earnings guidance – and should determine whether providing earnings guidance for the company's shareholders does more harm than good. If a company does provide earnings guidance, the company should be realistic and avoid inflated projections. Making short-term decisions to beat guidance (or any performance benchmark) is likely to be value destructive in the long run." It's worth noting here that many smaller companies feel compelled to provide earnings guidance or risk loss of analyst coverage. With regard to quarterly reporting, the view of the group was that companies "should frame their required quarterly reporting in the broader context of their articulated strategy and provide an outlook, as appropriate, for trends and metrics that reflect progress (or not) on long-term goals." (See this PubCo post.)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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