Companies may get a better idea this year of potential changes to how and when they report earnings, after the SEC called for feedback on the existing regulatory framework.
The agency last month published a request for comment on the ‘nature, content and timing’ of earnings releases and quarterly reports made by reporting companies. The SEC wants 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,’ officials wrote in a statement.
The commission also wants 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 SEC’s action follows a request from President Donald Trump in August that the regulator study the possibility of allowing US companies to report on a semi-annual basis.
The issue is likely to prompt wide-ranging debate. The SEC received thousands of comment letters after it published a concept release in April 2016 seeking input on modernizing certain business and financial disclosure requirements under Regulation S-K. According to the agency, it ‘received a range of comments on reporting frequency and the quarterly reporting process generally.’
At the time of Trump’s request, the Council of Institutional Investors (CII) said it believed public companies should continue to report quarterly on their financial performance. ‘Investors and other stakeholders benefit when regulations ensure that important information is promptly and transparently provided to the marketplace,’ said Amy Borrus, CII’s deputy director, in a statement in August. ‘Investors need timely, accurate financial information to make informed investment decisions.’
CII said it believed public companies should have flexibility on whether and how often to issue earnings guidance. It noted that it backed a June 7 initiative by the Business Roundtable to encourage companies to focus more on long-term performance by shifting away from providing quarterly earnings per share guidance and potentially dropping such guidance in the future.
‘There is an ongoing debate regarding the effects of mandated quarterly reports and the prevalence of optional quarterly guidance,’ said SEC chair Jay Clayton in announcing the request for comment. ‘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.’
Specifically, the new initiative asks for feedback on:
- The nature and timing of disclosures that reporting companies must provide in their quarterly Form 10Q reports, including when the Form 10Q disclosure requirements overlap with the disclosures such companies voluntarily provide to the public in earnings releases furnished on Form 8K
- How the SEC can promote efficiency in periodic reporting by reducing unnecessary duplication in the information companies disclose and how any such changes could affect capital formation
- Whether SEC rules should grant reporting companies, or certain types of reporting companies, flexibility in the frequency of their periodic reporting
- How the existing periodic reporting system, earnings releases and earnings guidance may affect corporate decision-making and strategic thinking, including whether these factors promote an inefficient outlook at reporting companies and market participants by focusing on short-term results.