Receiving less frequent finanical information worries investors of all stripes.
Investors do not like the U.S. Securities and Exchange Commission’s (SEC) week-old proposed rule on semiannual financial reporting. They really don’t like it.
A vast majority, 92%, of comment letters received by the SEC regarding the proposed rule opposed it. Only 6% favored the rule’s adoption, while 2% simply wanted additional details regarding how the rule would operate.
The proposed rule, a pet project of the Trump administration, is likely to be implemented, according to experts.
“There is a strong indication it will happen,” David Bartz, partner and co-head of capital markets and securities regulation at law firm K&L Gates, told Global Finance. “The administration has been looking into this. It’s something that SEC Chairman[Paul] Atkins has been a big proponent of. I think that it’s highly unlikely that it will become an official rule.”
Pros and Cons
The current proposal would permit public companies to elect semiannual reporting instead of the standard quarterly reporting. The SEC estimates that companies incur an average of $330,000 in compliance costs for three Form 10-Q quarterly reports. Alternatively, submitting one Form 10-S semiannual filing costs around $198,000. Savings could come from external professional fees, auditor reviews, data tagging costs, and investor engagement costs, according to a K&L Gates blog post.
The most common concern cited by the rule commentators, however, is a decrease in the amount of available financial information investors receive. This would lead to greater reliance on interim guidance, reduce the chance of finding corporate malfeasance, increase market volatility, and require the revamping of investment and trading strategies.
Material Disclosures
In markets that already have semiannual financial reporting, like the EU and Australia, companies must release material information promptly unless there is a specific business case not to, such as entering merger negotiations or procuring a contract that has not been finalized, said Marc Steinberg, the Radford Professor of Law at Southern Methodist University’s Dedman School of Law.
In the U.S. market, there is no duty to disclose unless it is required under Form 8-K, which must be filed within four business days, or if the company has already spoken about the matter, he added. Information that does not rise to the level of an 8-K disclosure, like the loss of a major contract, can be held until the next quarterly report.
“With some companies going to a semiannual report, it means a company could keep the news of a loss of a major contract embargoed for over six months, which is clearly material to investors,” said Steinberg.
The chance that the SEC will change the rule is slim, according to Bartz. “It’s been floated for several months now, so I think it has probably been pretty well vetted. There will probably be minimal changes to the rule once it’s officially approved.”
Next Step
Once the rule’s comment period ends on July 6, the staff of the SEC’s Division of Corporate Finance will review the comments before drafting a proposal, which will work its way up through various offices before it is presented to the Commission for review and a vote, said Steinberg.
