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Should the SEC Loosen Quarterly Reporting Requirements?

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Should publicly traded companies be required to continue to release quarterly 10-Q financial reports as they’ve done for almost 50 years, or would less frequent reporting suffice?

It’s a question the Securities and Exchange Commission has been asking, starting with a request for comment released last December, which was prompted by a White House request that suggested a six-month reporting system, like some European countries. That was followed in late July with a two-part SEC-moderated roundtable of asset managers, corporate executives, academics, institutional investors and representatives of the Nasdaq and New York Stock Exchange.

(Related: SEC Seeks Comments on Earnings, Quarterly Report Changes)

“We recognize the importance of this information to well-functioning and fair capital markets,” said SEC Chairman Jay Clayton when the commission published its request for comment. “We also recognize the need for companies and investors to plan for the long term. Our rules should reflect these realities.”

Now the CFA Institute has released a report showing the results of a survey that asked several hundred analysts and portfolio managers — its members most concerned with corporate reporting requirements — for their views on the frequency and content of corporate financial reporting along with the results of a roundtable on the issues. About 700 members — 70% in the U.S. and Canada — were surveyed for most questions but not all answered every question.

Almost two-thirds of 600 respondents opposed replacing quarterly reporting requirements with semi-annual reporting requirements because the change would reduce transparency for investors and fail to accomplish what the champions of less frequent reporting have been touting: a greater focus on the long-term health of a company as opposed to short-term earnings.

Six months is not long-term, according to CFA Institute, which defines long-term corporate strategy as three to five years. “A better approach to deterring short-termism would be to focus on companies’ incentive structures, where more firms adopt five-year performance periods in their incentive plans,” according to CFA institute.

“Timely and accurate financial information is the lifeblood for financial markets,” the report notes. Quarterly reporting of financial information levels the playing field for information access among “insiders and outside investors and shareowners and, ultimately, promotes greater investor confidence and improved capital allocation,” according to the CFA Institute. Semiannual reports, in contrast, would “increase stock price volatility around earnings reports as there is greater likelihood of earnings surprises.”

Mohini Singh, director of financial reporting policy at the CFA Institute, tells ThinkAdvisor, “When you have the technology to produce more information and investors also seek greater transparency, it seems absurd to reduce the amount of information given to investors.”

Other key findings from the report:

  • Half of about 700 survey respondents said quarterly reports, which are reviewed by auditors, are more important to investors than earnings releases, which are not, and 85% opposed having earnings releases replace quarterly 10-Q filings. “Earnings releases provide minimal and slanted information, while quarterly reports provide standardized and detailed financial information that is extremely valuable to investors.”
  • Seventy-two percent of roughly 600 respondents opposed giving companies the flexibility to eliminate information from quarterly reports so long as the information was reported in earnings reports. (In its request for comment, the SEC asked whether earnings reports should substitute for 10-Q with additional information provided as a supplement to the earnings.)
  • Eighty-two percent of about 700 respondents felt that the supplemental approach would cause investors new difficulties with transparency, comparability and complexity.
  • Forty-nine percent of about 550 respondents said companies should issue quarterly earnings guidance because if they don’t, market participants will make and disclose their own estimates of future earnings. But 42% disagreed with that conclusion, and 52% indicated that companies should not cease releasing quarterly guidance.

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