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SEC Requests Comment on the Nature, Content, and Timing of Earnings Releases and Quarterly Reports

December 21, 2018

On December 18, 2018, the SEC published a request for comment on the nature, content, and timing of earnings releases and quarterly reports on Form 10-Q filed by companies subject to periodic reporting requirements under the Securities Exchange Act of 1934. A copy of the request for comment is available here. Comments are due no later than March 21, 2019.

The SEC is requesting comment on the following general topics: (1) the nature and timing of the disclosures reporting companies are required to provide in their quarterly reports on Form 10-Q, including when those disclosure requirements overlap with disclosures in earnings releases the companies voluntarily issue to investors and furnish on Form 8-K; (2) whether SEC rules should provide reporting companies (or certain classes of reporting companies) with flexibility as to the frequency of their periodic reporting; and (3) whether the existing quarterly earnings framework (i.e., periodic SEC reporting, earnings releases, and earnings guidance), standing alone or in combination with other factors, fosters or promotes “short-termism.”

The SEC is interested in understanding whether there are ways to enhance, or at a minimum maintain, appropriate investor protections provided by periodic reporting and disclosure while also reducing the time and expense to companies in complying with quarterly reporting requirements, including by reducing unnecessary duplication in the information that reporting companies disclose in their earnings releases and periodic reports on Form 10-Q. The SEC is also interested in receiving input on whether there are steps it can take to simplify the earnings and reporting process for investors by relieving any burdens investors face in comparing a company’s earnings release with its Form 10-Q disclosures to identify whether they contain any new or different information.

The specific topics on which the SEC is soliciting comment are summarized in more detail below:

Nature and Content of Disclosures in Earnings Releases and Quarterly Reports

In its request for comment, the SEC highlights differences in the type and scope of disclosures provided by companies in earnings releases compared to their Form 10-Q disclosures. The SEC notes, for example, that the more detailed financial information and discussion required by Form 10-Q are not typically included in earnings releases but that earnings releases or quarterly earnings calls often include forward-looking earnings guidance information that is not included in a Form 10-Q. In light of these differences, the SEC is soliciting input on a series of questions focused on why companies choose to issue earnings releases, the costs involved in preparing an earnings release and Form 10-Q, the benefits earnings releases provide to investors and how they differ from Form 10-Q periodic reporting, how a company chooses the information to include in its earnings release and whether there are meaningful differences in the financial or other information reported in its Form 10-Q, the extent to which investors rely on earnings releases or Form 10-Q disclosures, whether overlapping disclosures create confusion for investors and the importance to investors of quarterly certifications, auditor review and XBRL interactive financial data provided with the Form 10-Q.

Timing of Quarterly Reporting Process

The SEC recognizes that there is disparity among companies in the timing of issuing their earnings releases and filing their periodic reports on Form 10-Qs, with some companies issuing their earnings releases in advance of their Form 10-Q and others issuing their earnings releases concurrently with the filing of their Forms 10-Q. The SEC is requesting comment on a series of specific questions to better understand the reasons for these differences, including (i) why a company would utilize a different timetable for its earnings release and Form 10-Q, (ii) whether and how the SEC should take action to address time lapses between an earnings release and Form 10-Q, (iii) any impact on investors where earnings releases are issued and earnings calls are held before a Form 10-Q filing, (iv) the extent to which auditors are involved with earnings releases and (v) whether the auditors’ review contributes to the delay in filing the Form 10-Q.

Earnings Release as Core Quarterly Disclosure

The SEC has suggested that one possible solution to alleviate burdens related to Form 10-Q reporting is to provide an option for companies that issue earnings releases to use the releases to satisfy the core financial disclosure requirements of Form 10-Q. Under this approach, a company would supplement its earnings release filed on Form 8-K with additional material information required by Form 10-Q or, alternatively, incorporate by reference disclosure from the Form 8-K earnings release into its Form 10-Q. For example, a company that does not provide Regulation S-X-compliant interim financial statements in its earnings release would be required to supplement the earnings release by including the financial statements in its Form 10-Q. The SEC is requesting comments on a series of questions to facilitate the SEC’s consideration of this supplemental approach and whether it would be sufficient to maintain appropriate investor protections.

These questions reference existing instructions to Form 10-Q that permit companies to incorporate in the Form 10-Q certain information by reference from another document. Importantly, these instructions would require the incorporated information to be filed as an exhibit to the Form 10-Q or, with respect to certain Part II information, if applicable, to be filed (rather than furnished) in a Form 8-K. In addition to seeking input on the extent to which companies currently rely on these instructions to incorporate information into the Form 10-Q, the SEC is also soliciting feedback on, among other things, (i) whether any changes could be made to the incorporation instructions to increase their use, (ii) whether other approaches can be used to simplify the earnings and quarterly reporting process, (iii) whether changes should be made to whether and how required Regulation S-X interim financial statements can be presented, (iv) whether companies should be able to use Form 8-K to satisfy their Form 10-Q requirements, (v) the type of Form 10-Q information that would be appropriate in a Form 8-K earnings release filing, (vi) whether any such Form 8-K filing should be deemed “filed” rather “furnished” and the effect on incorporation by reference into a Securities Act registration statement, (vii) any impact that such Form 8-K filing would have on the timing of earnings releases and a company’s liability under the federal securities laws and (viii) whether and how to take into consideration XBRL interactive financial data requirements, the auditor review process, requirements for disclosure controls and procedures and the quarterly certifications required by Form 10-Q.

Reporting Frequency

As part of an April 2016 Concept Release related to business and financial disclosures required by Regulation S-K, the SEC previously solicited input on questions related to the frequency of reporting requirements for public companies. According to the SEC, responses were mixed, with some commenters recommending less-than-quarterly reporting requirements, such as semi-annual reporting, for at least a subset of companies, while other commenters supported quarterly reporting. As the SEC continues to evaluate whether any changes should be made to the frequency of current reporting requirements, the SEC is also considering reporting requirements in other jurisdictions, including developments in the European Union and the United Kingdom to reduce the frequency of required reporting and voluntary quarterly reporting trends in those jurisdictions.

To help it further consider these questions, the SEC is now soliciting additional input on reporting frequency and has requested comment on a series of specific questions to allow it to consider whether there are approaches that would maintain investor protections while also reducing reporting costs and burdens for companies. These questions relate to, among other things, (i) the benefits and costs of current periodic reporting requirements, (ii) whether and how the frequency of reporting emphasizes short-term results to the detriment of long-term performance, (iii) whether a change to semi-annual reporting should apply to all companies or only a subset of companies, (iv) the costs and benefits of a semi-annual reporting model and any impact on existing market practices and other market participants, (v) whether there should be additional Form 8-K disclosure triggers under a semi-annual reporting model, (vi) the impact of a semi-annual reporting model on earnings releases, (vii) whether companies should have a choice in selecting a semi-annual or quarterly reporting model, (viii) the impact of a flexible reporting frequency model on investors, companies and other market participants as well as financial statement requirements and (ix) the impact of a semi-annual reporting model on existing stock exchange requirements and the manner in which a company conducts offerings under the Securities Act of 1933.

The concept release is a step towards possible future rulemaking by the SEC on the topics raised in the release. In light of the possibility of impactful rule changes to the current earnings release and quarterly reporting process, we encourage companies to review the release and to consider submission of responses to the SEC’s request for comments.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Shelly Heyduk, an O’Melveny partner licensed to practice law in California, John-Paul Motley, an O’Melveny partner licensed to practice law in California, and Robert Plesnarski, an O’Melveny partner licensed to practice law in the District of Columbia and Pennsylvania, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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