The Securities and Exchange Commission proposal would end a 55-year-old requirement that US public companies share detailed financial results four times a year, within 45 days of the end of their fiscal quarters, in a major shake-up of US corporate governance, which will likely be opposed by some investors.
“The rigidity of the SEC’s rules has prevented companies and their investors from determining for themselves the interim reporting frequency that best serves their business needs and investors,” said Paul Atkins, chair of the SEC, in a statement on Tuesday.
The move is supported by exchanges and some major corporations, such as JPMorgan Chase, which have argued that quarterly reporting places a costly burden on businesses.
They say it also fosters corporate short-termism at the expense of long-term planning and is one reason for a sharp decline in the number of publicly traded companies in the US over the last decade.
Some investors, however, contend that the quarterly earnings requirement makes markets more transparent and less volatile, setting the stage for a financial industry tug-of-war as formal comments on the proposal stream into the SEC over the coming 60 days.
Before finalising the proposed rule, the SEC should balance its objective of reducing corporate red tape “with the needs of investors who rely on timely information to evaluate companies and allocate capital,” said Bryan Corbett, president and CEO of the MFA, a financial industry trade group.
Among the questions about which the agency sought comment on Tuesday is whether a company’s choice to report semiannually would increase the risk of insider trading in its shares.
It also sought feedback on the impact on voluntary disclosures, such as press releases and earnings conference calls. An SEC official, speaking on condition of anonymity, said that companies that opt to file semiannual earnings can still issue quarterly earnings press releases or hold earnings conference calls more frequently.
‘INFORMATION ASYMMETRY’
Many companies will not necessarily make the switch immediately, if at all, according to asset managers. To switch to semiannual reporting, companies would only need to check a box on their annual earnings filing with the SEC. For many, the next opportunity to do that will come in early 2027.
The proposal acknowledges there are possible downsides to semiannual reporting, such as delaying the release of some important information and worsening “information asymmetry”, given that some investors lack ready access to alternative data in between earnings releases. That could “diminish perceptions of fairness, which can erode trust in markets and reduce capital market participation” and liquidity,” the proposal said.
Other possible disadvantages include higher costs of capital and weaker monitoring of management and governance risks.
An SEC official also noted that companies will have to consider investors’ and analysts’ needs, particularly if industry peers report quarterly.
The change would also require some index providers to update their methodologies. While the Nasdaq 100 does not require its constituents to report earnings quarterly, there are quarterly reporting rules governing the Standard & Poor’s 500 stock index (.SPX), opens new tab.
Nasdaq said in a white paper published last year that quarterly reporting is especially burdensome for small and medium-sized companies that must allocate a disproportionate amount of time and resources to tackle the red tape.
“It would be an interesting case study if this move could be shown to encourage IPO activity” among smaller companies, said Mike Reynolds, vice president, investment strategy, at Glenmede.
Reporting by Suzanne McGee in Providence, RI, Douglas Gillison in Washington, DC, additional reporting by Anirban Sen in New York, Editing by Edmund Klamann and Aurora Ellis.
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(Edited by : Juviraj Anchil)
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