Companies that are considering the possibility of moving to semiannual reporting have plenty of things to think about. Fortunately, the law firm memos on the SEC’s semiannual reporting proposal are rolling in and are full of helpful insights for these companies and their advisors. Here are a few examples from some of the memos that we’ve received so far:

Weil’s memo discusses the implications of reporting covenants in debt instruments on the ability of companies to opt in to the semiannual reporting regime, and as this excerpt explains, it all depends on how the covenant is written:

– Rule 144A Indentures for companies that are already reporting companies sometimes provide that “whether or not the Company is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company shall file with the SEC and provide the Trustee and Holders with such annual reports and such information, documents and other reports as are specified in Sections 13 and 15(d) of the Exchange Act, within the time periods specified in such Sections or in the applicable forms.” This formulation should provide flexibility for companies to report on a semiannual basis.

– Other Rule 144A Indentures instead require the issuer to deliver “all annual and quarterly financial statements that would be required to be contained in a filing with the SEC on Forms 10-K and 10-Q if the issuer were required to file such forms” within a specified timeframe. Because the proposed rules do not eliminate Form 10-Q, but instead make the filing of Form 10-Q optional, it is less clear that the issuer could choose not to continue to provide quarterly financial statements under this formulation.

This excerpt from Sidley’s memo discusses the need for companies to consider the seasonality & volatility of their business when deciding on the timing of their periodic reports and voluntary disclosures:

Does the company’s quarterly performance vary dramatically due to seasonality or other factors? Do investors focus on consecutive quarterover-quarter results more than results over corresponding prior-year periods? Companies with results that vary dramatically quarter to quarter would likely face longer trading blackout periods and longer quiet periods under a semiannual reporting regime absent voluntary Form 8-K filings or expanded earnings releases.

Latham’s memo highlights, among other things, the implications of the proposal for current market practice regarding auditor’s comfort letters:

Currently, an auditor’s comfort letter cannot include negative assurance regarding subsequent changes to financial statements as of a date 135 days or more after the most recent balance sheet date of the most recently completed audit or review, under PCAOB Auditing Standard 6101 (formerly SAS 72). The SEC has requested comments on whether to modernize that standard to accommodate semiannual reporting.

Investment banks have traditionally been unwilling to underwrite securities offerings without market-standard comfort letters. As a result, we would expect implementation of semiannual reporting to prompt reconsideration of the 135 day limit in AS 6101 to facilitate traditional comfort letter practice in a world of semiannual reporting.

Hunton’s memo also focuses on the proposal’s implications for capital markets transactions:

We expect market practice around securities offerings to evolve for companies electing to report semi-annually. Even if SEC rules would permit an offering on financial statements that are six months old, underwriters may be less comfortable going to market with interim financial statements older than 135 days.

Other prudential factors may also encourage companies on a six-month reporting schedule to disclose material interim developments. Quarterly ATM programs, for example, may pose unique challenges. Accordingly, companies reporting under a semi-annual cycle may still be motivated to publicize quarterly results or flash numbers, at least when contemplating an offering of securities. Again, practices across industries and companies of different sizes may diverge.

Be sure to check out these and the other law firm memos that we’re posting in our “Form 10-Q/Proposed Form 10-S” Practice Area.

– John Jenkins