It’s pretty apparent from looking at a quick tally of investor comments on the SEC’s semiannual reporting proposal that they are universally opposed to it and aren’t happy that it seems almost inevitable that the SEC will move forward with it, their opposition notwithstanding.
Investors who are angered that their comments are likely to be given short shrift may get some sympathy from an unexpected source – public companies and their advisors. That’s because, as Gunster’s Bob Lamm pointed out around the time the regimes changed, issuers found themselves in the same position during the Gensler era. Of course, people being what they are, not everyone may respond with sympathy. My guess is that there’s a healthy dose of schadenfreude among the issuer community as well.
There’s always tension between the SEC’s investor protection mandate and its desire to promote capital formation, so issuers and investors are unlikely to ever be unanimous in their support of the SEC’s regulatory initiatives.
Still, dramatic shifts in the regulatory climate every four years that leave one side or the other enraged at rule changes and chomping at the bit to undo them when their side gets back in power isn’t exactly an ideal model for financial regulation. Unfortunately, it appears to be one we’re going to be stuck with for a while.
I’m not going to pretend that I’ve waded through the avalanche of comments on the SEC’s semiannual reporting proposal, but with some notable exceptions, many of the comments I’ve seen shed more heat than light on the benefits and detriments of a semiannual reporting option for public companies. That’s why I found this recent study comparing Europe’s semiannual reporting regime with the United States’ quarterly reporting regime interesting.
The study, which appeared in The International Journal of Financial Studies, compared quarterly reporting DJIA firms with semiannually reporting STOXX 50 firms, to assess how the cadence of disclosures affects market reactions to earnings news. It’s worth noting at the outset that this study focused on some of the largest of the large caps, so caution is warranted before applying its conclusions across the public company universe. But with that caveat, here’s an excerpt from the study’s conclusion:
Our comprehensive analysis, comparing quarterly reporting DJIA firms with primarily semiannual-reporting STOXX firms, reveals a profound influence of disclosure frequency on the intensity, duration, and volatility of earnings-related price reactions. Quarterly reporting, for instance, compresses price discovery into shorter windows, significantly accelerating information assimilation and reducing the persistence of post-announcement mispricing.
This expedited information flow facilitates faster capital reallocation, enhancing market allocative efficiency. However, this substantial informational benefit is accompanied by a significant drawback: sharper short-term volatility spikes, particularly during periods characterized by high market volatility, in response to negative earnings surprises, and within cyclically sensitive sectors where investor expectations are inherently more susceptible to shifts.
Conversely, semiannual reporting presents a different set of trade-offs. While it effectively mitigates contemporaneous noise and lowers short-term volatility, thereby dampening apparent overreactions, these benefits come at the cost of slower and more gradual information absorption. When markets remain underinformed, this extended period can widen risk premium and delay crucial capital reallocation in response to fundamental information.
The authors conclude that the data indicates that the two alternative reporting cadences involve inevitable tradeoffs: quarterly reporting results in faster information processing by the market and more transparency, while semiannual reporting mitigates short-term market instability and overreactions.
Given the tradeoffs the study identified, the authors argue that a more complex regulatory approach than that embodied in the SEC’s current proposal may be optimal:
Advocating for a uniform or monolithic disclosure cadence across all market environments may not achieve an optimal outcome. Instead, a more adaptive regulatory framework, one that allows for tailored disclosure guidance based on specific factors such as sectoral sensitivity to economic cycles, the prevailing macroeconomic conditions, and the inherent complexity of information within an industry, could strike a more effective balance between market transparency and stability.
Honestly, this is where they lost me. This “adaptive regulatory framework” sounds like a complicated mess that only an academic could love. Sometimes, I think that people who read and write about disclosure for a living think that companies exist to satisfy their unending desire for an avalanche of trivial information more disclosure and more intricate disclosure requirements. Unfortunately for them, the people running those companies think they’re in business to make money.
Yesterday, the SEC announced that it had established a unit in the Division of Enforcement focusing on financial reporting and accounting cases. This excerpt from the SEC’s press release provides some background on the new unit:
The Securities and Exchange Commission today announced it is establishing a new specialized unit within the Division of Enforcement to provide the dedicated expertise, focus, and capacity to pursue accounting and financial reporting fraud cases as well as general misconduct in the accounting and auditing areas. The Financial Reporting and Accounting Unit will work in close collaboration with staff across all relevant SEC divisions and offices to ensure its approach to enforcing federal securities laws is consistent with the Commission’s policy goals.
“Since my return to the Division, I have been assessing every aspect of our staffing to ensure that we are aligned to deliver results in our core mission areas,” said David Woodcock, Director of the SEC’s Division of Enforcement. “This new unit – which expands on the Division’s current and historical efforts to crack down on bad actors in the accounting and auditing profession – will be critical in our efforts to pursuing financial reporting fraud, as well as accounting and auditor misconduct more generally.”
The SEC said that the unit will be staffed by lawyers and accountants with specialized skills related to financial reporting, accounting, and auditing. The unit will be led by Timothy Zimmerman, who joins the SEC from RSM US LLP, where he served as Deputy General Counsel. Prior joining RSM, Mr. Zimmerman spent more than a decade with Gibson Dunn in the firm’s Denver office.
Glass Lewis recently blogged about its observations on shareholder proposals during the 2026 proxy season. The excerpt notes that the early trend toward issuers including a greater percentage of shareholder proposals following the SEC’s withdrawal from the Rule 14a-8 process continued throughout the season:
One of the main trends that we observed mid-season appears to have been borne out: in the absence of no-action relief from SEC staff, companies were far less likely to exclude shareholder proposals. Compared to 2025, barely half the number of exclusion notices were filed. . .
When the SEC’s decision was announced in November 2025, there was speculation that far fewer shareholder proposals would go to vote in proxy season 2026, given that issuers appeared to have free rein to set their AGM agenda. Ultimately, issuers were reluctant to exclude proposals without SEC backing, largely offsetting the reported decline in the number of proposals being submitted.
Even though the number of shareholder proposals filed is down by as much as 47%, the number of shareholder proposals that went to a vote is only down by approximately 12.4% compared to 2025. That’s largely because over the same period, the number of exclusion requests filed by companies dropped by 48.5%.
When it comes to deciding which proposals to exclude, Glass Lewis said that the identity of the proponent mattered a lot. Issuers were much more likely to exclude proposals submitted by individual proponents – particularly those named John Chevedden – than they were to exclude proposals from asset managers, pension funds, and “mission-driven investors.” The blog also discusses, among other things, the basis upon which issuers excluded proposals, and how investors have responded to exclusions.
According to this survey from Deloitte and the Society for Corporate Governance, public companies boards are pretty far from being “all-in” when it comes to the adoption of AI tools for board business. The survey solicited input from corporate secretaries, in-house counsel, and other governance professionals at 92 public companies and 14 private companies. Here’s excerpt with some of the highlights:
– Board adoption of AI/GenAI remains early-stage and inconsistent. Many companies have not formally enabled or standardized AI/GenAI for board activities, with nearly half of public companies not expressly supporting its use. Respondents overall are “unsure” whether their boards use AI/GenAI for board activity, and known adoption and use cases vary across organizations.
– Current use and capability-building efforts are focused on practical applications and education. Boards that use AI/GenAI primarily apply it to administrative and analytical tasks such as reviewing reports, summarizing materials, preparing questions, and identifying discussion topics. Respondents report that their organizations are more commonly enhancing AI capability through management briefings and director education than through formal governance mechanisms, recruitment efforts, or board evaluation processes.
– Policies, guidance, and governance practices are still developing. Most respondents reported a lack of board-specific AI policies or governance practices. Where policies exist, they tend to focus on security, confidentiality, acceptable use, legal considerations, and recordkeeping.
One of the most striking findings was the degree of uncertainty among governance professionals at public companies concerning whether their boards were using AI tools. For example, 71% of respondents were unsure about whether directors had used AI/GenAI tools in meeting-related activities during the past six months, and 72% didn’t know whether the board or any of its committees used AI/GenAI to support key oversight activities during the same period.
Given the potential downside of ill-considered uses of AI tools, these are pretty disconcerting findings.
What about your own use of AI/GenAI tools? We’re very interested in learning how our members are using AI tools in their work, so please take a moment to complete the AI Usage Survey for Corporate & Securities Lawyers that we posted a couple of weeks ago.
Whether or not boards are using AI tools themselves, directors and management teams need to ensure that they’re providing adequate oversight to AI governance efforts. This Gallagher blog discusses the board’s oversight role and offers up the following roadmap for boards and management teams to consider in developing their own AI governance structure:
Phase one: Understanding current use. The first step is understanding where AI is being used within the company. Management can develop an AI inventory, identify high-risk use cases, determine whether employees are using publicly available AI tools and assess whether vendors are embedding AI into existing products or services.
Phase two: Assigning ownership. Companies should clearly identify who owns AI governance at the management level and where AI oversight sits at the board level. Expect this to involve a discussion at the board level, with an existing committee or with a combination of committees. Several companies have disclosed their approaches to AI governance in their proxy statements. It may be worthwhile to look at some of those examples for inspiration.
Phase three: Adopting policies and controls. Companies should develop and adopt policies governing AI use, data protection, vendor diligence, documentation, employee training and incident escalation.
Phase four: Integrating into existing governance processes. AI considerations should also be incorporated into enterprise risk management, cybersecurity, privacy, compliance, internal audit, disclosure controls and incident response processes.
Phase five: Reporting to the board. Management should give periodic updates to the board or the relevant committee. Cadence will depend on the company, but those updates could cover AI strategy, important proposed use cases and their associated expenditures, risk management, regulatory developments, incidents, training and disclosure considerations.
The blog also addresses why AI has become a board-level governance issue, how large public companies are structuring AI oversight, what AI governance failures might look like and how they can evolve into regulatory, litigation and insurance issues.
We’ve recently posted another episode of our “Understanding Activism with John & J.T.” podcast. This time, Cleary’s J.T. Ho and I were joined by Christine O’Brien, Interim Head of Special Situations & IR at Edelman Smithfield, and Lex Suvanto, Edelman Smithfield’s CEO. Topics covered during this 47-minute podcast include:
– The biggest mistake boards make in the first 48 hours after an activist shows up.
– The problem with “listen-only” and better strategies for the first engagement.
– The downside of delay tactics.
– The line between managing the narrative and damaging trust.
– Activist expectations around early board-level engagement.
– How public comments during activist engagements can shift the balance of power.
– Is there ever a place for “bedbug letters”?
– How defensive moves like poison pills or bylaw changes are perceived by long-term investors.
– The risk of preemptively appointing directors in response to activist pressure.
– How overly aggressive standstill terms derail settlements.
This podcast series is intended to share perspectives on key issues and developments in shareholder activism from representatives of both public companies and activists. We continue to record new podcasts, and they’re full of practical and engaging insights from true experts – so stay tuned!
This Barnes & Thornburg blog cites recent comments from Corp Fin Director Jim Moloney about how he’d rather see more staff resources devoted to listening to earnings calls than to reviewing routine S-3 filings. I bet that part of the reason for Director Moloney’s position is that earnings calls are often a target rich environment for staff comments.
That’s because companies too often make the mistake of addressing something in their earnings call without considering whether the topic is appropriately addressed in the corresponding Exchange Act filings. When that happens, the blog points out that you should expect to receive a comment like this from the staff reviewer:
We note your disclosure indicating that you manage your business on the basis of one reportable segment and unit. Based upon comments made by management during your February 10, 2025, earnings call, it appears that discrete financial information below the consolidated level is both available to and reviewed by management. Please tell us how you considered ASC 280-10-50 in determining your operating and reportable segments. To the extent that you have aggregated multiple operating segments into a single reportable segment, please also tell us your basis for doing so.
That hiccup resulted in the company on the receiving end of this comment having to prepare a detailed response (which the blog reprints). That’s something that undoubtedly required significant time and resources which I’m sure the company and its management team would have preferred to devote to, well, almost anything else.
The blog points out that in order to reduce the probability of these situations arising, companies should be sure to have the accounting team to assess the earnings calls’ prepared remarks for such potential issues.
If your CEO can be an unguided missile at times (perish the thought!), I’d also suggest that, if you don’t already, you should consider holding off filing your 10-K or 10-Q until after the earnings call. That way, if the CEO or others on the call wander a bit in their remarks, you’ll have the chance to add any necessary disclosure to your 10-Q or 10-K before you file it.
The blog offers up one more thing to chew on – it notes the trend of companies shortening their earnings calls by issuing prepared remarks in advance, and just using the call as a Q&A forum. The blog also provides some recent examples of public companies that have opted for this approach.
I’ve always thought that one of the most interesting issues in securities litigation involves the circumstances under which an issuer has an obligation to disclose results for an incomplete quarter. We’ve touched on this topic in prior blogs here and on DealLawyers.com, and now a recent decision by a Massachusetts federal court in Buathongsri v. Zenas Biopharma, (D. Mass.; 6/26), gives me an opportunity to revisit the topic.
The case involved Section 11 claims arising out of Zenas Biopharma’s IPO. The plaintiffs’ alleged that the company’s failure to disclose information about significant increases in its R&D spend and cash burn during its first two quarters and during its ongoing third quarter was a material omission. The plaintiffs’ also contended that the failure to disclose this information in the prospectus’s MD&A discussion violated Item 303 of Reg S-K’s “known trends” disclosure requirement.
The Court disagreed with both of these allegations. This excerpt from AO Shearman’s blog on the case discusses the Court’s reasoning:
The Court first addressed whether the alleged omission of quarterly and intra-quarter financial data rendered the registration statement misleading. The Court noted that plaintiff did not dispute that the disclosed financials were accurate, nor did plaintiff identify any provision requiring disclosure of quarterly or in-progress data. The Court found that plaintiff’s theory was belied by the registration statement itself, which disclosed that the Company spent more than $56 million on R&D in the first half of 2024—nearly double the prior six months—and that the Company repeatedly warned that its R&D spending and losses were high and expected to increase for the foreseeable future.
Thus, the Court reasoned that plaintiff’s contention rested on an unreasonable inference that spending had peaked in early 2024 and declined in the third quarter because the Company’s own disclosures did not support this inference. The Court held that requiring further disclosures under these circumstances would amount to an untenable across-the-board rule requiring clinical-stage biotechnology firms to disclose in-progress quarterly burn-rate data.
Turning to Item 303 of SEC Regulation S-K, the Court held that the registration statement did not fail to disclose a known trend or uncertainty. Specifically, the Court held that, even assuming the increased spending was a “trend,” the Company’s disclosure in the registration statement was adequate because the roughly 50% quarter-over-quarter increase in R&D spending was fully consistent with the disclosed first-half 2024 figures.
The Court further observed that, when assessing the ways that R&D spending could double from one six-month period to the next, a fifty-percent quarterly increase was “something like a straight line.” The Court explained that an issuer conducting a public offering is not obligated to disclose interim results for a quarter in progress whenever it perceives that those results may disappoint the market.
Last month, Meredith blogged about the SEC’s decision to approve Nasdaq’s new $5 million minimum market cap requirement for continued listing. Just to bring everyone up to date, last week, the SEC stayed the new listing standard’s implementation. This excerpt from a recent Goodwin blog explains the SEC’s action:
The stay was triggered after the Small Public Company Coalition (SPCC) and Cemtrex each filed notices of their intent to ask the full Commission to review the Division of Trading and Markets’ approval. SPCC says it represents small public companies affected by the rule and participated extensively in the rulemaking process, while Cemtrex says it is directly affected because its MVLS is already below the proposed $5 million threshold and the rule could subject it to suspension and delisting.
Under Rule 431(e) of the SEC’s Rules of Practice, filing a notice of intent to petition for Commission review automatically stays an action taken under delegated authority unless one of a few narrow exceptions applies. As a result, the SEC’s July 29 letter did not itself grant a stay; rather, it confirmed that the approval order had been automatically stayed pending further action by the Commission. The petitioners now have five days to file their petitions for review setting forth the basis for challenging the approval.
The blog says that if the petitioners move forward, the SEC must decide whether to review the Division’s approval of the rule. If it does, then it will then have to figure out whether to affirm, modify, reverse, set aside, or remand the matter for further proceedings. There’s no specified timeline for review, so this could take a while. Whatever action the SEC takes, the matter may ultimately end up in federal court.
