The new, improved SEC was just beginning to show its stuff when the federal government shut down on October 1. In the weeks before the shutdown, the SEC had, among other things, approved ExxonMobil’s innovative program enabling retail investors to provide standing voting instructions (see our E-Alert on the subject) and dropped its opposition to mandatory arbitration provisions in the charters of IPO companies. SEC Chair Atkins commented on the unfortunate “kitchen sink” approach to risk factors disclosure. And the SEC’s latest RegFlex agenda contained some hints of additional disclosure reforms to come. But the item that seemed to have generated the biggest buzz was the possible elimination of the 10-Q quarterly report.
Soon after President Trump suggested that public companies should report semiannually rather than quarterly, SEC Chair Atkins stated that the suggestion would be fast-tracked, possibly resulting in a rule proposal by late 2025 or early 2026. Unless the shutdown ends a lot sooner than seems likely, that timetable may be doomed. However, there’s little reason to believe that the proposal will go away.
On its face, transitioning from quarterly to semiannual reporting may not seem like a big deal. After all, quarterly reporting has only been the norm in the U.S. since the 1970s, and semiannual reporting has been in place in the U.K., among other places, for a while. But the switch is not as simple as it may seem. Let’s consider the benefits and risks of going to semiannual reporting, some possible alternatives, and some related concerns.
Why Switch to Semiannual Reporting?
The easy answer is that eliminating quarterly reporting will reduce costs and other burdens, particularly for smaller companies with more limited resources. However, the size of the reductions is hard to predict and will depend upon the outcome of the SEC process and companies’ practices if the requirement goes away. It’s been noted that some companies may opt to provide detailed quarterly reports, if not full-blown 10-Qs, to keep investors satisfied (if not happy); others may continue to issue quarterly earnings releases, conduct conference calls, or take other actions to keep investors informed. And while smaller companies would benefit from the reduced costs and burdens, some of these companies may be sufficiently desperate to attract interest that they may feel they have no choice but to continue to engage in some type(s) of quarterly disclosure. In any event, any of these approaches will involve costs, including those arising from consultation with auditors and counsel. So lower costs may result, but how much lower is an open question.
In suggesting the elimination of quarterly reports, President Trump predicted that dropping quarterly reporting will reduce so-called “short-termism,” but that seems speculative, at best. Among other things, changing the short term from three to six months doesn’t seem like that big a deal in a world where five years is considered very long-term. The President also said that switching to a semiannual reporting schedule would enable management to focus more on the business. I suppose, but my experience suggests that the benefits will be marginal.
What Are the Downsides?
This is easy – dropping quarterly reports will reduce transparency. Investors hunger for information, and eliminating quarterly reporting will reduce the amount of information that’s out there. That’s why some companies are likely to continue to put out quarterly information, even if not as robust or as detailed as now appears in 10-Qs.
Some pundits have predicted that reduced disclosure will lead to increased volatility and thereby make U.S. markets less attractive. Based on what I’ve read, that doesn’t seem to have happened in the U.K. Moreover, it’s hard to know whether the impact on transparency will be significant or minor – again, depending upon what the SEC does and whether and to what extent companies seek to satisfy investors’ demands for quarterly information beyond the minimum legal requirements.
One article suggested that the elimination of quarterly reports will cause some companies to postpone or try to hide adverse developments. Perhaps true, but I suspect that those companies are already engaging in such behaviors, though I suppose that reduced reporting may make it easier for them to get away with it.
What Are the Alternatives?
This is where it may get very interesting. SEC Chair Atkins has indicated that he’s not a fan of a “one-size-fits-all” approach; for example, he noted that many companies provide monthly reports to management, and “so maybe a company might find that monthly reporting…might lead to a lower cost of capital…”. I doubt that, but his comment suggests that the SEC may permit companies to pick from a smorgasbord of disclosure alternatives, possibly depending upon their size and other factors.
One approach could be to replace the three 10-Qs with one report covering the first six months. But would that semiannual report be similar to a 10-Q or would it be some sort of “mini” 10-K? (If that’s what emerges, companies may end up preferring 10-Qs.) Other alternatives could be to retain the quarterly reporting requirement but to skinny down the 10-Q. Another suggestion is to treat quarterly earnings releases as sufficient. For many companies, the quarterly earnings release is pretty comprehensive, frequently including some explanation of the factors behind the results, thus arguably qualifying as a “mini-MD&A”. The Society for Corporate Governance commented favorably on this approach when the SEC proposed relief from quarterly reporting in 2018 (you can find its comment letter here). Notably, the Society was opposed to treating such releases as “filed” (vs. “furnished”), but it remains to be seen whether the Atkins Commission will be stuck on the point.
Some commentators have already suggested that the elimination of quarterly reporting would be accompanied by the addition of various triggers for 8-K reporting.
The upshot of all this may be that advocates of semiannual reporting may end up wishing that they’d been more careful what they wished for.
Other Complications
Which brings us to the many collateral impacts that may flow from eliminating quarterly reporting. These range from the mildly annoying, such as how 13D and 13G filers would determine their percentage ownership in the absence of 10-Qs to how Reg FD would apply in a semiannual reporting world.
While Reg FD wasn’t as novel as some people seemed to think, the SEC interpreted it in ways that were counterintuitive or sometimes just plain silly. For example, if a company provided guidance in its first quarter earnings call, merely confirming such guidance at some uncertain point during the second quarter (e.g., “we’re sticking with our guidance”) could be viewed as a violation of FD. Agonizing over questions like this could offset the benefits of eliminating 10-Qs. Another problem with FD is that the SEC has frequently used it to second-guess whether a factoid was material, notwithstanding the company’s reasoned determination that it was not.
Finally, companies and investors alike should be concerned that 10-Q relief today could be reversed tomorrow. It’s no secret that, particularly in recent years, the SEC has reversed rules and policies following a change of administration. For example, rules and policies relating to shareholder proposals adopted under the leadership of Gary Gensler were almost immediately reversed when President Trump took office in January 2025. If the “Atkins Commission” eliminates quarterly reporting, who’s to say that a future Commission won’t reinstate it? Aside from staffing implications, these reversals can greatly affect disclosure controls and procedures, which were the basis for several major actions brought by the Enforcement Division during the Biden administration. Ongoing regulatory whipsawing doesn’t seem like a good thing for business.
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Intellectually and otherwise, it will be interesting to see what path the SEC takes on this matter. For now, all we can do is “watch this space” and cross our fingers.