Responding to the SEC’s request for comment on the quarterly reporting system for public companies, the Chamber of Commerce’s Center for Capital Markets Competitiveness (CCMC) and the Council of Institutional Investors (CII) expressed their views on the pros and cons of switching from a quarterly reporting system to a semi-annual reporting system and whether the Commission should take action relating to company quarterly earnings releases. The SEC’s request for comment was issued a few months after President Trump tweeted that he would be asking the SEC to study whether it should “stop quarterly reporting and go to a six month system” to create a better business climate in the U.S.
Flexibility in reporting. According to CCMC, even if the if SEC amended its rules to allow flexibility as to the frequency of the periodic reporting by public companies, it still expects that many large- and mid-cap issuers would continue earnings releases and the corresponding Forms 8-K and would continue to file Forms 10-Q on a quarterly basis based on feedback from their investors, analysts, and other capital markets influencers.
In contrast, CII was emphatic in its opposition to switching to a semi-annual reporting period. CII disagreed with the notion that requiring quarterly reporting leads management to focus on short-term results to the detriment of long-term reporting, calling it “outdated” and not supported by empirical evidence. In particular, CII cited a study which indicated that a reduced frequency of reporting may lead investors to overreact to alternative sources of information for the non-reporting periods. It could also increase the volume of insider trading, according to the study.
CII also scoffed at the notion that three months is short-term while six months is long-term, describing it as “highly questionable at best.” Citing a CFA Institute study on public reporting companies in the U.K., CII observed that moving from quarterly reporting to semi-annual reporting is not effective for remedying undue corporate emphasis on short-termism.
Earnings guidance. The SEC’s request for comment also sought opinions on forward-looking quarterly earnings guidance. CCMC voiced its concern that “quarterly earnings guidance may be a greater concern than quarterly reporting.” A vicious cycle can emerge when management provides an explicit target that motivates executives to manage to those targets because investors may expect management to meet or exceed those targets and will penalize the firms that do not do so.
While CCMC stated that it would prefer to less emphasis placed on quarterly guidance, SEC rules neither prohibit nor require companies to set periodic earnings targets or publish other operational metrics. Advising that this is an area that private ordering and market dynamics can best resolve, CCMC said that the Commission should not further regulate the dissemination of earnings guidance, regardless of future actions it takes regarding quarterly reporting.
CII warned that forward-looking quarterly earnings guidance can have a negative effect on investors, companies, and the marketplace and that the SEC should require that such guidance be furnished to the Commission. Quarterly earnings guidance may cause undue focus on short-term profits at the expense of long-term strategy and investment, CII explained.
Earnings releases and Form 10-Q filing. CCMC and CII addressed possible Commission action to address time lapses between an earnings call or release and the filing of the company’s Form 10-Q. CCMC noted that while many public companies file a Form 10-Q on the same day they report earnings on Form 8-K Item 2.02, others do not, which leaves the 10-Q as “something of an afterthought.” The capital markets and market analysts by this time have already reacted to the earnings call long before the 10-Q is filed, CCMC observed. However, CCMC believes that in the interest of private ordering, it is unnecessary for the Commission to act to address the potential time lapse between the two filings because market forces are enough to address the dynamics of these processes.
CII stated that it would generally support SEC action to address this time lapse, as well as the approach adopted by some companies to issue the two documents concurrently.
Flexibility in reporting. According to CCMC, even if the if SEC amended its rules to allow flexibility as to the frequency of the periodic reporting by public companies, it still expects that many large- and mid-cap issuers would continue earnings releases and the corresponding Forms 8-K and would continue to file Forms 10-Q on a quarterly basis based on feedback from their investors, analysts, and other capital markets influencers.
In contrast, CII was emphatic in its opposition to switching to a semi-annual reporting period. CII disagreed with the notion that requiring quarterly reporting leads management to focus on short-term results to the detriment of long-term reporting, calling it “outdated” and not supported by empirical evidence. In particular, CII cited a study which indicated that a reduced frequency of reporting may lead investors to overreact to alternative sources of information for the non-reporting periods. It could also increase the volume of insider trading, according to the study.
CII also scoffed at the notion that three months is short-term while six months is long-term, describing it as “highly questionable at best.” Citing a CFA Institute study on public reporting companies in the U.K., CII observed that moving from quarterly reporting to semi-annual reporting is not effective for remedying undue corporate emphasis on short-termism.
Earnings guidance. The SEC’s request for comment also sought opinions on forward-looking quarterly earnings guidance. CCMC voiced its concern that “quarterly earnings guidance may be a greater concern than quarterly reporting.” A vicious cycle can emerge when management provides an explicit target that motivates executives to manage to those targets because investors may expect management to meet or exceed those targets and will penalize the firms that do not do so.
While CCMC stated that it would prefer to less emphasis placed on quarterly guidance, SEC rules neither prohibit nor require companies to set periodic earnings targets or publish other operational metrics. Advising that this is an area that private ordering and market dynamics can best resolve, CCMC said that the Commission should not further regulate the dissemination of earnings guidance, regardless of future actions it takes regarding quarterly reporting.
CII warned that forward-looking quarterly earnings guidance can have a negative effect on investors, companies, and the marketplace and that the SEC should require that such guidance be furnished to the Commission. Quarterly earnings guidance may cause undue focus on short-term profits at the expense of long-term strategy and investment, CII explained.
Earnings releases and Form 10-Q filing. CCMC and CII addressed possible Commission action to address time lapses between an earnings call or release and the filing of the company’s Form 10-Q. CCMC noted that while many public companies file a Form 10-Q on the same day they report earnings on Form 8-K Item 2.02, others do not, which leaves the 10-Q as “something of an afterthought.” The capital markets and market analysts by this time have already reacted to the earnings call long before the 10-Q is filed, CCMC observed. However, CCMC believes that in the interest of private ordering, it is unnecessary for the Commission to act to address the potential time lapse between the two filings because market forces are enough to address the dynamics of these processes.
CII stated that it would generally support SEC action to address this time lapse, as well as the approach adopted by some companies to issue the two documents concurrently.