SEC’s proposed semiannual repo
Investors of all types are concerned about having less financial information.
Investors don’t like the US Securities and Exchange Commission’s (SEC) weeks-old proposed rule on semiannual financial reporting. They In fact Don’t like it.
Of the comment letters the SEC received regarding the proposed rule, the majority, 92%, opposed it. Only 6% supported adoption of the rule, while 2% wanted only additional details about how the rule would operate.
According to experts, the proposed rule, a pet project of the Trump administration, is likely to be implemented.
“There are strong indications that this 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 is looking into this. This is a matter for the SEC Chairman.”[Paul] Atkins has been a big supporter of this. I think it’s very unlikely that this will become an official rule.”
Pros and cons
The current proposal would allow public companies to choose semiannual reporting instead of the standard quarterly reporting. The SEC estimates that companies have to spend an average of $330,000 in compliance costs for three Form 10-Q quarterly reports. Alternatively, a Form 10-S semiannual filing costs approximately $198,000. According to a K&L Gates blog post, savings could come from outside professional fees, auditor reviews, data tagging costs and investor engagement costs.
However, the most common concern cited by rule commentators is the reduction in the amount of available financial information investors can receive. This will lead to greater reliance on interim guidance, less chances of detecting corporate wrongdoing, increased market volatility and the need for improvements in investment and trading strategies.
Disclosure of Content
Mark Steinberg, Radford Professor of Law at Southern Methodist University’s Dedman School of Law, said that in markets that already have semiannual financial reporting, such as the European Union and Australia, companies should release material information promptly unless there is a specific business case, such as entering merger negotiations or receiving a contract that has not been finalized.
In the U.S. market, he said, 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 talked about the matter. Information that does not rise to the level of an 8-K disclosure, such as the loss of a major contract, may be held until the next quarterly report.
“With some companies moving to semiannual reports, that means a company can keep news of a major contract loss restricted for more than six months, which is obviously important to investors,” Steinberg said.
According to Bartz, it’s unlikely the SEC will change the rules. “This has been going on for several months now, so I think it’s probably been vetted pretty thoroughly. There will probably be minimal changes to the rule once it’s officially approved.”
next step
Once the rule’s comment period ends July 6, staff at the SEC’s corporate finance division will review comments before drafting a proposal that will work its way through various offices before being presented to the commission for review and vote, Steinberg said.
