On December 18, 2018, the U.S. Securities and Exchange Commission (SEC) issued a Request for Comment soliciting input from the public on the content and frequency of earnings releases and quarterly reports made by public companies. The Request for Comment seeks feedback as to how the SEC can reduce the burden on public companies associated with quarterly reporting while preserving the informational needs of investors.
The Request for Comment sets forth 46 specific groups of questions, which are listed on the Appendix attached to this Sidley Update. In general, the SEC is requesting comment on:
- The nature and timing of disclosures that public companies must provide in their quarterly Form 10-Q reports, including when the Form 10-Q disclosure requirements overlap with the disclosures such companies voluntarily provide to the public in earnings releases furnished on Form 8-K. In particular, the SEC is asking whether it should allow companies to use earnings releases to satisfy the core financial disclosure requirements of Form 10-Q. Under this approach, a company would use its Form 10-Q to supplement a Form 8-K earnings release with additional material information required by the Form 10-Q that was not included in the Form 8-K earnings release or, alternatively, incorporate by reference disclosure from the Form 8-K earnings release into the Form 10-Q.
- How the SEC can promote efficiency in periodic reporting by reducing unnecessary duplication in the information that public companies disclose and how any such changes could affect capital formation, while enhancing, or at least maintaining, appropriate investor protection.
- Whether SEC rules should allow all or certain categories of public companies flexibility as to the frequency of their periodic reporting. The SEC is also asking how a change in reporting frequency would impact other aspects of the SEC’s integrated disclosure regime, such as keeping Securities Act of 1933 registration statements current to enable swift access to the capital markets.
- How the current periodic reporting system, earnings releases, and earnings guidance (either alone or in combination with other factors) may affect corporate decision-making and strategic thinking – positively or negatively – including whether these factors foster an inefficient outlook among public companies and market participants by focusing on short-term results.
The comment period will end 90 days after the Request for Comment is published in the Federal Register.
Background
Nearly all large public companies supplement their required quarterly reports on Form 10-Q with earnings releases furnished on Form 8-K and conduct webcast earnings calls. Many of these companies also issue forward-looking earnings guidance.
Critics of the current quarterly reporting system argue that it inappropriately drives management to focus on short-term results rather than on long-term strategic goals. Earlier this year President Trump publicly expressed his support for semi-annual – rather than quarterly – reporting and requested that the SEC review the issue. In June 2018, Business Roundtable, the National Association of Corporate Directors and the National Investor Relations Institute each released statements urging companies to adopt longer-term strategies and stop issuing quarterly earnings per share guidance.
In a Concept Release on Regulation S-K disclosure requirements issued in April 2016, discussed in a previous Sidley Update, the SEC solicited public comment on the frequency of periodic reporting. Specifically, the SEC asked the following in the 2016 Concept Release:
- Do investors, registrants and the markets benefit from quarterly reporting?
- Does quarterly reporting help or hinder long-term decision making or influence management’s strategic goals and timelines?
- Should certain categories of registrants be permitted to file periodic reports on a less frequent basis (e.g., should smaller reporting companies be permitted to file semi-annually rather than quarterly) or be required to file on a more frequent basis (e.g., monthly)? If so, which categories and what disclosure should be required?
- Should the SEC reduce the level of disclosure required in quarterly reports for the first and third quarters?
The Request for Comment is intended to solicit comment that would add to the feedback received in response to the 2016 Concept Release. The SEC noted in the Request for Comment that the comments from the 2016 Concept Release regarding the frequency of periodic reporting were mixed, with some commenters suggesting that the SEC reconsider the content of quarterly reports rather than adjust the frequency.
Recommended Actions
Public companies should review the Request for Comment or the Appendix attached to this Sidley Update to determine whether they would like to provide input to the SEC on any of its requests for comment. Interested parties may submit comments here.
Appendix
SPECIFIC SEC REQUESTS FOR COMMENT
(excluding footnotes)
Information Content Resulting from the Quarterly Reporting Process
- Why do reporting companies choose to issue earnings releases, most typically quarterly? What are the costs to such companies in preparing earnings releases? Would companies choose to stop issuing these releases if disclosure of quarterly results was not required on Form 10-Q, or would this provide a greater incentive to issue them? Why do some companies choose to file only a Form 10-Q report and not to issue a separate earnings release?
- Do quarterly earnings releases provide benefits to investors, companies, or the marketplace separate and apart from the Form 10-Q report? If so, please describe the primary benefits. How do investors use earnings guidance to inform their investment decisions? To the extent there are benefits, do they stem largely from the content of the releases, their timing, or other reasons? Do they have any negative effects on investors, companies, or the marketplace? If so, please describe such effects.
- How do companies determine the information to present in the earnings release? Is there a market standard, or are companies otherwise generally consistent in the type and amount of information they present in earnings releases? To what extent is the content of earnings releases provided in response to investor and analyst needs or demands? Are such releases satisfying those needs? How would the content of earning releases change if they were required to be filed with the Commission and become subject to applicable liability provisions?
- Is the Form 10-Q or the earnings release the primary document upon which investors rely when a company provides both? What are the factors or circumstances that an investor considers when determining which document to rely on? Are there any benefits to investors and other market participants from having two sources of historical quarterly financial information, when only one is required? How do investors use quarterly financial information, and how does it inform, if at all, their investments decisions made throughout the year? Are there specific pieces of quarterly information that are important to long-term investors?
- Are there meaningful differences between the financial information typically provided in an earnings release and the financial information required by Form 10-Q? What accounts for the differences?
- When a company issues an earnings release that includes much of the information required by Form 10-Q before the form is filed, is the Form 10-Q still useful? Why or why not? How important to investors is the confirmation or interpretation by the Form 10-Q of the information in the earnings release? If investors rely on Form 10-Q as the primary document, is the historical financial information about the quarterly period included in the earnings release useful? Why or why not? Does the fact that Form 10-Qs are filed as opposed to furnished, and include certifications, impact the extent to which investors rely on them? Are there any instances when information disclosed in earnings releases may be useful to investors for purposes of interpreting the content of Form 10-Q? If so, when and how?
- Does confusion arise from overlapping disclosures in the earnings release and Form 10-Q? If so, are there changes we could make to our rules that would discourage the practice of providing earnings releases that contain information that is different than what is contained in Form 10-Q? Are there unnecessary burdens to investors or other market participants associated with reviewing, comparing, and digesting two presentations of similar financial information?
- Some have suggested that the practice of providing quarterly forward-looking earnings guidance creates an undue focus on short-term financial results and thereby negatively affects the ability of companies to focus on long-term results. Is this the case and, if so, are there changes we could make to our rules that would discourage this practice or address this concern? For example, should we require that earnings guidance be filed with or furnished to the Commission? Are there other factors that promote a focus on short-term results? If so, what are they and what is their impact on investors and companies?
- What are the specific benefits of the required Form 10-Q disclosures to investors and the marketplace separate and apart from the earnings releases? Do they stem largely from the incremental financial statement disclosures, incremental management discussion and analysis, auditor review, officer certificates or other items? Are there sections of the Form 10-Q that are particularly informative for investors? Are there any quarterly disclosure requirements that we should eliminate because they elicit disclosures that are not material to investors to make it easier for investors to focus on the disclosures that are material? If so, which requirements should be eliminated?
- Do the XBRL requirements of Form 10-Q enhance accessibility and/or usability of quarterly information relative to what is available from earnings releases, which are not required to be structured for machine readability or processing? If so, how is that information used and by whom? Would similar benefits be achieved if companies structured earnings releases using XBRL? Why or why not? How would the costs of structuring earnings releases in XBRL compare to the costs of complying with the XBRL requirements for Form 10-Q?
- What is the impact of the auditor review requirement of quarterly financial information on investors, companies, and other market participants? Do investors value the independent auditor review of quarterly financial information? Why or why not? Does the auditor review requirement have a relationship to the cost of capital for companies? If so, how?
- What are the cost burdens associated with the preparation of a Form 10-Q? Are these cost burdens borne solely from the preparation of the Form 10-Q? How do the costs of preparation vary among different sections of the report? Would there be costs to a company to the extent it does not file a Form 10-Q? Would additional cost burdens be associated with the preparation of a registration statement in which a company would otherwise incorporate by reference a previously filed Form 10-Q?
- Are there other sources of information investors use to supplement information from earnings releases or quarterly reports? If so, please describe these sources.
- Are there approaches the Commission should consider to help alleviate any burden associated with the preparation of a Form 10-Q without adversely affecting the total mix of information provided to investors? For example, should we permit companies to omit certain disclosures currently furnished on Form 10-Q, such as unregistered sales of securities, so long as the information is provided elsewhere, such as on their websites? If so, should the information provided elsewhere be expressly incorporated by reference into the Form 10-Q, such that the same liability attaches to the disclosure of that information? What would be the benefits and drawbacks to investors and other market participants of such additional flexibility?
Timing of the Quarterly Reporting Process
- One study indicates that the “average public company needed 31.7 days to announce its earnings . . . and another four days after that to file its formal quarterly report.” The study finds that companies that release both documents on the same day tend to “take more time to deliver those pronouncements,” while companies that publish an earnings release “soon after the end of the quarter take more time to file their quarterly report.” Why do some companies publish an earnings release before filing Form 10-Q while other companies publish an earnings report and file Form 10-Q on the same day or near the same time? Should the Commission take any action to address time lapses between an earnings release and Form 10-Q, and if so, what action? If the Commission should take action to facilitate a decrease in this delay, what is the best mechanism to facilitate such a decrease? Is it more or less burdensome to issue the two documents concurrently?
- What is the impact on investors and other market participants participating in earnings calls when a company publishes its earnings release before filing its Form 10-Q? Are investors or other market participants disadvantaged at the time of the earnings call by not having access to the more detailed information contained in the Form 10-Q? If so, what are those disadvantages? Do the same disadvantages exist for the fourth quarter earnings release in comparison to the filing of Form 10-K?
- To what extent are auditors involved with earnings releases? Does such involvement or the auditor review of the quarterly financial statements contribute to any delay between publication of an earnings release and the filing of a Form 10-Q? If so, how? What steps could or should be taken to help ameliorate this delay? Do auditors conduct their review of quarterly financial information in phases due to companies’ preparation of two reporting documents? If so, does this result in efficiencies or inefficiencies based upon the nature of the two disclosure documents?
Earnings Release as Core Quarterly Disclosure
- To what extent do companies take advantage of General Instructions D.1 and D.2 of Form 10-Q to satisfy the requirements of Form 10-Q? What changes to our rules, if any, would increase the use of these Instructions? Is the required quarterly reporting process complex and burdensome for investors or companies? If so, how is it complex and burdensome? If so, what approaches should we consider apart from the Supplemental Approach (hereafter “other suggested approach”) to simplify the process by which investors collect and evaluate information and ease the burdens associated with the publication of earnings releases and the preparation and filing of Form 10-Q without adversely affecting the total mix of information provided to investors?
- Should Commission rules, accounting standards, and auditing standards allow for the interim financial statements to be separated so that certain parts could be presented only in the earnings release to satisfy the Form 10-Q requirements under the Supplemental Approach or other suggested approach? For example, should a registrant be able to present condensed interim income statements only in the earnings release and the remaining Regulation S-X required interim statements and footnotes in the Form 10-Q? What changes would be needed to the current accounting and/or auditing standards to accomplish such separation? Would separation of the financial statements help, harm, or have no effect on an investor’s ability to evaluate a company’s performance?
- Should information in an earnings release that is submitted on Form 8-K be allowed to satisfy the Form 10-Q requirements? Why or why not, and if so to what extent? What are the potential benefits and drawbacks to investors, companies, and other market participants of the Supplemental Approach or other suggested approach?
- If companies were permitted to omit from Form 10-Q information already contained in a Form 8-K earnings release, what specific information should they be allowed to omit? Is there any earnings release information that should not be allowed to satisfy the requirements of Form 10-Q? Would companies be likely to rely on the Supplemental Approach or other suggested approach, if available? If so, would certain types of companies benefit more from the Supplemental Approach or other suggested approach than others?
- If we adopt the Supplemental Approach or other suggested approach, should we require the relevant Form 8-K to be filed rather than furnished? Should we further require the relevant Form 8-K to be incorporated by reference into the Form 10-Q, in whole or in part? Should we require a hyperlink from the Form 10-Q to the relevant Form 8-K? Should we require the relevant Form 8-K to include certain disclosures that are otherwise required in Form 10-Q? If so, which disclosures should be required and why?
- Are there issues or concerns with the above approaches in relation to a registration statement and the ability to incorporate by reference? If so, please describe. For example, should a company relying on the Supplemental Approach or other suggested approach have to incorporate by reference the historical financial information in its earnings release into a Securities Act registration statement so that Securities Act liability would apply to that information, just as such liability applies to Form 10-Q information that is incorporated by reference into a registration statement?
- Would the Supplemental Approach or other suggested approach affect the quantity, quality, or nature of the disclosure being made to the public? If so, how? Would the Supplemental Approach or other suggested approach simplify or complicate the process by which investors collect and evaluate information? How would the Supplemental Approach or other suggested approach affect investors’ evaluation of company performance? Overall, what impact would the Supplemental Approach or other suggested approach have on investors?
- Would the Supplemental Approach affect the timing of earnings releases? If so, how? If we implement the Supplemental Approach or other suggested approach, should we modify the due date of Form 10-Q? Why or why not, and if so, how?
- How should the Supplemental Approach or other suggested approach take into consideration the XBRL requirements of Form 10-Q? If information currently required to be structured using the XBRL format on Form 10-Q were instead only disclosed in an unstructured format on Form 8-K, would this adversely affect investors or other market participants?
- If an earnings release were used to satisfy the requirements of Form 10-Q, should any financial statements included in an earnings release be subject to auditor review procedures at the time the Form 8-K is filed? Why or why not?
- Would the Supplemental Approach or other suggested approach reduce or add to companies’ disclosure or auditor review burdens? How should the Supplemental Approach other suggested approach take into consideration the requirements regarding disclosure controls and procedures set forth in Rules 13a-15 and 15d-15, as well as the related officer certification requirements, which apply to Forms 10-Q but not to earnings releases furnished on Form 8-K?
- Does the Supplemental Approach or other suggested approach raise concerns regarding a company’s liability under the federal securities laws? If so, please explain.
Reporting Frequency
- What are the benefits and costs to investors, companies, and other market participants associated with the current reporting frequency model, which requires from domestic issuers quarterly reports on Form 10-Q, annual reports on Form 10-K, and current reports on Form 8-K? Does the frequency of reporting lead managers to focus on short-term results to the detriment of long-term performance? Why or why not? If so, does this negatively affect investors? If so, how? Would less frequent reporting change management decision-making or otherwise positively affect investors? Or does the practice of issuing earnings guidance, including the frequency with which companies issue earnings guidance, lead managers to focus on short-term results to the detriment of long-term performance? Why or why not? Would more frequent reporting change management decision-making?
- Should we move to a semi-annual reporting model for all or certain categories of reporting companies? Why or why not, and to which categories of reporting companies (e.g., smaller reporting companies, non-accelerated filers, emerging growth companies)? Are there other categories of reporting companies, such as by industry, that we should consider? For example, are there any unique considerations we should give to certain commodity trusts, business development companies, and other collective investment vehicles? Would any other frequency of reporting model be more appropriate for these or other types of companies?
- What would the costs and benefits be to investors, companies, and other market participants of a semi-annual reporting model for all or certain categories of reporting companies? Are there market practices in place, for example contractually mandated reports to lenders and indenture trustees, that rely on the current regulatory reporting regime? If so, how would these market practices be affected by changes to that regime and what are the downstream effects?
- Would a change in reporting frequency affect the cost of capital to companies? Why or why not, and if so, how?
- How would a semi-annual reporting model affect the general use of Form 8-K to report material information? Should we consider any particular additional Form 8-K requirements or triggers under a semi-annual reporting model? If so, what type(s)?
- How would a semi-annual reporting model affect the use of earnings releases? If we were to allow semi-annual reporting, should we require voluntarily published earnings releases, either on a quarterly or semi-annual basis, to be filed rather than furnished? Or, if we were to allow semi-annual reporting, should we require companies to file earnings releases?
- Should we allow for additional flexibility by permitting companies to select an approach to periodic reporting that best suits their needs and the needs of their investors? For example, should we allow a company conducting an initial public offering to announce its approach to periodic reporting, such as semi-annual periodic reporting, during registration and implement the elected approach going forward? Should a company be permitted to change its approach to frequency of reporting once it selects a reporting frequency? Why or why not? If it is permitted to change the frequency of reporting after it has established an approach, how often should the company be permitted to change its reporting frequency?
- What are the downstream effects of changing the reporting frequency to investment companies, investment advisers, broker-dealers, data aggregators, and other users of the reports?
- Should an emerging growth company or smaller reporting company be permitted to elect a semi-annual reporting frequency?
- What would the costs and benefits be to investors, companies, and other market participants of moving to a flexible reporting frequency model (rather than a mandatory quarterly or mandatory semi-annual model)? How would a flexible reporting frequency model (rather than a mandatory quarterly or mandatory semi-annual model) affect the ability of investors, analysts, and other market participants to compare results among companies, especially if companies in the same industry report on different schedules? Would companies that choose to report more frequently suffer adverse competitive consequences if peer companies choose to report less frequently (e.g., because relative performance and/or estimates of expected future cash flows would be measured on a less frequent basis)? Alternatively, would companies that choose to report more frequently benefit from their provision to investors of more and more timely information about historical results?
- What are the accounting and auditing changes that would be necessary for a flexible reporting frequency model (rather than a mandatory quarterly or mandatory semi-annual model)? For example, would there be concerns with how to apply ASC 270 Interim Reporting in U.S. GAAP or certain Regulation S-X disclosure requirements in a flexible reporting frequency model? Would there be concerns with how to apply auditing standards in relation to interim financial information, including procedures performed in relation to letters for underwriters and certain other requesting parties, in a flexible reporting frequency model?
- What other topics may raise concerns or questions with application under a flexible reporting model, and what are those concerns or questions? Do these concerns and questions exist in the current quarterly reporting model and would they still exist with a mandatory semi-annual model?
- Are existing U.S. GAAP taxonomies used for XBRL reporting appropriate for a flexible reporting frequency model?
- Should we limit such flexibility in reporting frequency to a particular group of companies as an initial step before considering whether to provide such an option to all companies? If so, which group of companies and why? Should any potential election by a company be limited to a specific period of time?
- How would a move to either a mandatory or optional semi-annual reporting model affect the current rules of self-regulatory organizations and national securities exchanges? For example, would exchanges still require quarterly reporting as a requirement of listing, as they did prior to 1970 when Form 10-Q was adopted?
- How would a move to either a mandatory or optional semi-annual reporting model affect a company’s ability to comply with current rules relating to Securities Act offerings? For example, given that Form 10-Q is often incorporated by reference into certain registration statements under the Securities Act, how would a company that reports semi-annually ensure that a registration statement currently in use does not contain a material omission of information? For example, how would an issuer ensure that a shelf registration statement on Form S-3 remains current? Under a flexible approach, would companies nonetheless elect to maintain a quarterly reporting model to avoid concerns about keeping their Securities Act registration statements current? How would companies meet the requirements regarding the age of financial statements under Regulation S-X with respect to new registration statements under such an approach? How would a change in reporting frequency impact the Commission’s integrated disclosure regime, including, for example, determining issuer eligibility and the speed by which a company may offer securities? How would a change in reporting frequency impact companies who use reports filed in the United States to satisfy state or international reporting requirements?
- Are there additional approaches that we should consider to better facilitate the dissemination of timely periodic information to investors and other market participants?
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