I suspect that many readers of this blog have read any number of blog posts, articles, and other materials on the SEC’s proposal to make quarterly reporting optional. (I myself have previously written two posts – here and here – on the subject.) Many of these materials point out the potential benefits and risks of switching to semiannual reporting, and the guidance they offer is generally sound. However, to the extent that these materials urge companies to decide sooner rather than later which way to go, I beg to differ. In fact, while thinking about what to do is fine, I think companies would be wise to hold off making any decisions until final rules are adopted.
I base this recommendation on the many requests for comment and other “fine print” included in the proposing release, because the SEC’s decisions on the subjects raised in those items could significantly impact a company’s decision. Some examples follow:
- The release seems to afford companies a great deal of flexibility as to whether and how a company might voluntarily report quarterly financial information if it opts for semiannual reporting. So far, so good. However, footnote 86 points out that “[i]f the quarterly financial information is presented in the financial statements, [it] would be subject to review by an auditor.” Perhaps not a big deal, but that’s one potential cost saving down the tube.
- A similar concern arises with respect to companies that opt for semiannual reporting but plan to continue to issue quarterly earnings announcements – which seems like something many companies may want to consider. The release throws a potential major wrench into this approach when it asks whether the Form 8-K requirements should be amended “so that Item 2.02 Form 8-K submissions are ‘filed,’ not ‘furnished’, for semiannual filers thereby subjecting the earnings release to additional liability provisions, such as Exchange Act Section 18 (and Securities Act Section 11 if incorporated into a Securities Act registration statement)” (emphasis added)? The flexibility that the release otherwise offers would be largely eliminated if this is how the rules come out. Perhaps in recognition of this, the release asks whether the “requirements for semiannual filers to file (not furnish) earnings releases [would] discourage semiannual filers from issuing earnings releases” or “have an impact on companies’ decisions about whether to quarterly or semiannual reporting?” Does the SEC really need to ask?
- The release asks whether “…the option for semiannual reporting [should] be available only for Exchange Act reporting companies that satisfy certain criteria? If so, what criteria should be imposed and why?” My hunch is that the imposition of such criteria is unlikely, but if I’m wrong, any number of companies might have to change their minds. Moreover, any such criteria could make it harder or even impossible for the companies most likely to opt for semiannual reporting to do so.
- Another request for comment asks whether, “[a]s an alternative [to] semiannual reporting… should we instead revise the disclosure requirements of Form 10-Q to reduce the burden on reporting companies of filing this form”? In other words, would all the thought given to switching to semiannual reporting turn out to have been a total waste of time?
As noted, these are just some of the issues that companies will need to consider in determining whether to switch to semiannual reporting, and I’m not sure how a company will be able to make that determination until the final rules are issued. Hopefully, the SEC will provide for a lengthy transition period before the final rules take effect so that companies can take the time necessary to make the decision that’s right for them.