Under the leadership of Chairman Jay Clayton, the Securities and Exchange Commission has taken a tactful approach to review regulations and statutes for their efficiency in a marketplace that is constantly evolving, innovating and incorporating new technologies to help investors successfully plan for their long-term interests. At the heart of many of Chairman Clayton’s initiatives has been reducing regulatory barriers and encourage more private companies and retail investors to seek the capital markets.
On Dec. 28, 2018, the SEC published an advance notice on proposed rulemaking in the Federal Register to request public input on how best to balance investor protection and the need for quarterly disclosure of financial reporting. This comes on the heels of President Trump asking SEC Chairman Jay Clayton to review the process, of which the SEC agreed to continue to “study public company reporting requirements, including the frequency of reporting.”
Specially, the solicitation of comments asks investors and businesses alike to evaluate the need for multiple disclosures of quarterly filings, known as Form 10-Q, in conjunction with yearly financial disclosures on Form 10-K and earnings reports on Form 8-K. Among the multiple businesses and investors who provided comments, there is support for the SEC to review and consider adopting new reporting guidelines that would amend the current quarterly standard and adopt a tri-annual, or even a biannual reporting structure.
As some of the comments submitted to the SEC suggest, switching from quarterly to tri-annual, or even a biannual reporting basis, could help promote long-term investing, instead of a “short-termism” trading mentality. Proponents of the proposal note that shifting to a model that decreases the reporting frequency will save costs for public companies, particularly small cap companies, as the reports are time consuming, expensive, and repetitive as there are already multiple other forms of reporting to the SEC. Those opposed to shifting to a less-frequent reporting system believe that the lack of quarterly reports leaves investors in the dark and lacks transparency for disclosing company performance. However, as has been the case particularly among technology businesses have operated at a loss for multiple quarters or years after going public and using their earned capital to reinvest back into the business before turning a profit. Had some investors purely relied on Form 10-Q reporting, discounted the products or services made and the business’s management team, these investors could have been left out of valuable growth opportunities.
Since the healthcare crisis created uncertainty beginning in March, over 850 companies have pulled quarterly guidance, as noted by CNBC. Because of the uncertainty surrounded by the crisis, investors actually have not punished companies for not providing guidance during Q2 and Q3 of this year, with many companies opting not to providing guidance for a full year. For example, only 67 of the S&P 500 companies have resumed guidance. With this lack of guidance and the market returning to near pre-COVID levels, it has some institutional investors supporting the idea to eliminate the trend of quarterly guidance to encourage more long-term investment in the market as well.
Americans for Tax Reform lead the coalition letter encouraging the SEC to ease compliance burdens on public companies and promote policies to that encourage shareholders to invest for the long-term by moving toward tri-annual reporting and reviewing guidance structures.
Click here to review our letter.