SEC Solicits Comment on Potential Shift from Quarterly to Semi-Annual Reporting And Other Aspects of Interim Reporting
The U.S. Securities and Exchange Commission (the “SEC”) is soliciting comments from the public on the frequency of interim reporting by domestic U.S. reporting companies, the relationship between the earnings release and quarterly report, the timing of filing earnings releases and the content of earnings releases and quarterly reports. Among other things, the SEC is soliciting comment on
- whether the SEC should consider requiring domestic U.S. reporting companies to provide financial information on a semi-annual basis rather than on a quarterly basis as currently required;
- whether a company’s earnings release should become its core disclosure document with the quarterly report providing only supplemental information;
- whether the SEC should adopt rules addressing the time lag between the filing of an earnings release and the filing of the quarterly report for the same period;
- whether the SEC should adopt rules discouraging the practice of including information in an earnings release which is not included in the quarterly report; and
- whether companies should be required to file or furnish earnings guidance with the SEC.
Frequency of Interim Reporting
Publicly reporting U.S. domestic registrants are currently required to file quarterly reports on Form 10-Q with the SEC which include unaudited quarterly and year-to-date financial statements and a Management’s Discussion and Analysis of such financial statements. Some other major exchanges, including in Canada, Hong Kong and Japan, also require quarterly reporting, but the EU and the UK have moved away from mandating quarterly financial reporting.
The SEC is soliciting comment on whether it should move from a quarterly to a semi-annual financial reporting model for all companies or for certain classes of companies based on their size or industry. The SEC is also soliciting comment with respect to a flexible model in which companies can choose how frequently they want to report their financial information. If it ultimately elects to move to a semi-annual reporting structure, the SEC asked whether it should add additional Form 8-K requirements or triggering events, and whether the less frequent reporting would have an effect on a company’s ability to make public offerings, which typically incorporate by reference the latest quarterly report in order to include the most up to date information in the offering document.
Earnings Release as Core Disclosure Document
Many reporting companies issue an earnings release prior to, or concurrently with, the filing of their Form 10-Q, even though earnings releases are not required by SEC rules. Earnings releases frequently feature a subset of the information included in the Form 10-Q, focusing on the financial highlights for the quarter. The SEC is soliciting comment on whether reporting companies should have the option to make the disclosure in their earnings release satisfy the core disclosure requirements of their Form 10-Q. In this structure, the Form 10-Q would merely serve to provide supplemental disclosure. A company might use its Form 10-Q to supplement its earnings release with additional material information required by the Form 10-Q or, alternatively, incorporate by reference information from the earnings release into the Form 10-Q. For example, a reporting company could present its income statement in the earnings release and then include its balance sheet, statement of stockholders’ equity, statement of cash flows, and related notes in the Form 10-Q. If this approach is adopted, the SEC asked whether the earnings release should be subject to any degree of auditor review (which is currently not required).
Timing of Filing Earnings Release
The SEC request for comment observes that many reporting companies issue earnings releases prior to the filing of the Form 10-Q while other reporting companies issue earnings releases simultaneously with the filing of the Form 10-Q. The SEC asks whether it should take any action to address this time lag, and whether investors are in any way harmed if a reporting company conducts its earnings call before it files the related Form 10-Q. The SEC also asked to what extent auditors are involved in earnings release preparation and whether auditor involvement is a cause of the time lapse some companies face between filing their earnings release and their quarterly report.
Content of Earnings Release and Form 10-Q
Some companies include information in their earnings releases that is not included in the Form 10-Q. The SEC is soliciting comment on whether it should seek to discourage the practice of including information in the earnings release that differs from the information provided in the Form 10-Q. The SEC is also asking whether any quarterly disclosure requirements should be eliminated, or whether any disclosure items in the Form 10-Q should be eliminated so long as the required information is published elsewhere (for instance, on the reporting company’s website).
Some companies include earnings guidance in their earnings releases but omit the guidance from their Form 10-Q. The SEC is soliciting comment on whether earnings guidance should be filed with or furnished to the SEC.
Foreign Private Issuers
The SEC’s solicitation of comment does not specifically address reporting by foreign private issuers. Under current SEC rules, foreign private issuers are not required to file quarterly or semi-annual reports, but are required to file annual reports. In addition, a foreign private issuer is required to furnish reports on Form 6-K which include information which (1) it makes or is required to make public pursuant to the law of the jurisdiction of its domicile or organization, (2) it files or is required to file with a stock exchange on which its securities are traded and which was made public by that exchange or (3) it distributes or is required to distribute to its security holders. Also, the New York Stock Exchange and Nasdaq require foreign private issuers to provide certain financial information on semi-annual reports.
Comments in response to the SEC’s release are due 90 days after the SEC release soliciting comments is published in the U.S. Federal Register. Once the comment period is completed, the SEC will evaluate the comments received and then decide whether to propose new rules. Any such proposed rules would be subject to a comment period before final rules are adopted. Accordingly, we expect it will be some time before any changes to the process of interim reporting are specifically proposed and ultimately adopted.
The authors wish to thank Jeremy Barr for his assistance in the preparation of this alert.