The SEC’s optional semiannual reporting proposal for public companies was released on Tuesday, and with the benefit of some time, we can now reflect on some of the finer details of the proposal.

Rationale

In the proposing release, the Commission recounts the history of interim period reporting under the U.S. federal securities laws, noting that the SEC had initially moved from an early quarterly reporting regime to a semiannual reporting approach in 1953, and then revisited that decision in 1970 by adopting Form 10-Q and the quarterly reporting system that is in place today. In terms of the potential benefits of optional semiannual reporting, the SEC notes in the proposing release:

Companies that elect semiannual interim reporting may see a reduction in compliance costs of time and money, as they would incur these interim reporting costs only one time in connection with each fiscal year instead of three times in connection with each fiscal year pursuant to quarterly reporting. These companies could then choose to dedicate any compliance cost and resource savings to their business growth. Other potential benefits of semiannual reporting include: less distraction from running the day-to-day business; reallocation of attention from interim reporting to company strategy; additional time spent on new product development; and ability to engage in transactions that might not be possible when management is focused on preparing interim reports. To the extent that companies could not previously do so due to quarterly reporting, companies electing semiannual reporting may employ business strategies that may help ensure these companies’ long-term viability. In particular, emerging growth companies and smaller reporting companies may value having the flexibility to select the interim reporting requirement that is most appropriate for them and their investors. Additionally, reducing the compliance costs associated with quarterly reporting may contribute to more private companies deciding to enter the public markets and more companies deciding to remain public. Further, the flexibility provided in the proposal may appeal to companies in certain industries where investors may focus more on certain business, product, or regulatory developments than interim financial results.

Applicability

The SEC’s proposal would permit semiannual reports for all Exchange Act reporting companies that file Form 10-Q today, regardless of filer status, revenues, market capitalization, or other criteria. The Commission solicits comment as to whether the option for semiannual reporting should be available only for Exchange Act reporting companies that satisfy certain criteria.

Earnings Release Practices

The Commission makes the point in the proposing release that this proposal does not contemplate any general changes to the current regulatory requirements governing earnings releases or earnings guidance practices. The SEC notes that “federal securities laws do not impose general duties upon Exchange Act reporting companies to announce or publish earnings, conduct earnings calls, or issue earnings guidance.” The proposing release notes that, while the proposed rule changes are focused on the specific issue of the frequency of interim reporting, the Commission would welcome comments on the impact of the proposal on voluntary earnings release practices.

Other Rule and Standard Changes

The Commission notes that, if the proposal is adopted, changes may be necessary to existing stock exchange rules and accounting and auditing standards, and the proposing release notes that the Commission staff would coordinate any such changes with accounting and auditing standard-setters, securities exchanges, and other market participants. The proposing release seeks comment on what exchange rules and accounting and auditing standards may be impacted by the adoption of optional semiannual reporting. Similarly, the proposing release recognizes that regulations of other Federal agencies reference quarterly SEC reports, and therefore such agencies may need to change their regulations in the event that the SEC moves forward with the shift to optional semiannual reporting.

More Cover Page Check Boxes!

The proposing release contemplates adding a check box to the cover page of certain forms that would allow an issuer to elect to provide semiannual reports if the box is checked. If the box is not checked, the issuer will be subject to the “default” reporting regime of filing one Form 10-K and three Form 10-Qs for each fiscal year. The check box would be added to Form 10-K, as well as registration statements on Forms S-1, S-3, S-4, and S-11 and Form 10. The proposing release notes:

Companies that have yet to file Exchange Act reports, such as private companies conducting initial public offerings, would make initial elections to use semiannual reporting by checking the box on the cover page of the registration statement filed. This election would determine what financial statements are required in the registration statement and indicate the company’s planned interim reporting frequency to investors and other market participants. Similar to current requirements for the first quarterly report for companies that have newly become Exchange Act reporting companies, the first semiannual report on Form 10-S would be due the later of 45 days after the effective date of the registration statement or the date that Form 10-S would otherwise have been due had the company been an Exchange Act reporting company.

Correcting a Check Box Mistake

Recognizing the possibility that a company may mistakenly leave the check box unmarked or incorrectly mark the check box, the SEC proposes to amend Rule 13a-13(b) and Rule 15d-13(b) to permit companies to amend their Form 10-K to correct any such inadvertent mistakes. The proposing release notes that the corrective amendments would be required to be filed as soon as practicable after discovery of the mistake, but no later than the due date by which the company’s first Form 10-Q report would be required to be filed for the fiscal year in which the initial Form 10-K with the erroneous election was filed.

Changing Your Mind

The proposed optional semiannual reporting approach would permit a change in interim reporting frequency (either from quarterly to semiannually or vice versa) to be indicated on a Form 10-K by checking the box on the cover page to file semiannually or leaving the box unchecked to file quarterly. The proposal contemplates that the determination to report semiannually or quarterly would thus be made on an annual basis and may not be changed until the next Form 10-K annual report is filed. Companies would be required to file interim reports based on the chosen frequency, beginning with the report for the first interim period of the fiscal year in which the Form 10-K with the election was filed. The proposing release includes a number of examples explaining how this would work if the proposed amendments were adopted.

Amendments to Regulation S-X

The Commission is proposing amendments to various rules in Regulation S-X that would incorporate semiannual reporting and simplify the rules with respect to the age of financial statements. Specifically, the proposed amendments would:

– Simplify Rule 3-01 and Rule 8-08 by reorganizing each and consolidating the requirements of Rule 3-12 regarding the age of financial statements in a registration or proxy statement into the balance sheet requirements of Rule 3-01;

– Revise the age of financial statements requirements to incorporate semiannual reporting through the introduction of a revised model for determining the age of interim financial statements; and

– Revise other rules in Regulation S-X to incorporate semiannual reporting.

The Commission’s proposed consolidation of Rules 3-01 and 3-12 would streamline Regulation S-X, which the proposing release says would make the age of financial statement requirements easier to apply. The SEC is proposing to adopt new Rule 3-01(a), which would provide that the date of the most recent balance sheet included in a registration statement or proxy statement must be updated to comply with that section’s requirements as if the effective date of the registration statement, or proposed mailing date in the case of a proxy statement, were the filing date.

Transition Reports and Technical Amendments

The Commission proposes amendments to Exchange Act Rules 13a-10 and 15d-10, which set forth the Commission’s requirements with respect to transition reports upon a change in fiscal year, to incorporate the proposed semiannual reporting option. The Commission is also proposing a wide range of technical amendments to conform existing rules and forms to incorporate the proposed optional semiannual reporting frequency.

Comments

The proposing release includes numerous specific questions about a wide range of topics concerning the move to optional semiannual reporting, as well as more general requests for comment. Comments will be due within 60 days from publication of the proposing release in the Federal Register.

– Dave Lynn