Sullivan & Cromwell attorneys back quarterly reporting flexibility

The SEC should avoid imposing additional rigid regulatory restrictions on quarterly earnings disclosure practices, according to attorneys at Sullivan & Cromwell.

The agency in December published a request for comment on the ‘nature, content and timing’ of earnings releases and quarterly reports made by reporting companies. The SEC wants industry input on how it can ‘reduce burdens on reporting companies associated with quarterly reporting while maintaining – and in some cases enhancing – disclosure effectiveness and investor protections,’ officials wrote in a statement.

The commission also wants comment on how the existing periodic reporting system, earnings releases and earnings guidance, alone or in combination with other factors, may foster an ‘overly short-term focus’ by managers and other market participants.

In a recent letter to the commission, Sullivan & Cromwell partners Robert Buckholz and Robert Downes note that there are many considerations issuers take into account when deciding the timing, content and format of quarterly earnings disclosures. These include economic and commercial factors, major legal considerations, the nature of the company’s business and the nature of its shareholder base and engagement with that base.

These decisions lead to diversity in quarterly earnings disclosure practices such as the relative timing of the earnings release and the Form 10Q, and the provision of forward-looking or non-Gaap information in these documents, they write.

‘Subject to appropriate guardrails – currently provided by the line-item requirements and filing deadlines of Form 10Q, as supplemented by Rule 12b-20 – we think reporting companies are best positioned to make those choices for themselves, and that it would be a mistake for the commission to seek to promote convergence in practice, under the auspices of uniformity or in an effort to reduce unnecessary duplication,’ Buckholz and Downes write.

‘Reporting companies are generally free, under existing rules, to reduce such duplication in their different quarterly earnings disclosures, but for a complex set of reasons often choose not to do so. While any of those considerations could be the subject of a separate policy review, if the commission were so inclined, we think their number and complexity is a strong argument for leaving reporting companies at least the flexibility they currently have in designing and changing their particular quarterly reporting practices.’

The attorneys do not see the variety of disclosure practices as being harmful to investors. ‘Rather, we think investors are looking for timely information, in the form that reflects the insights of management as the operators of the business, as soon as they can get it, and would not discount information actually released by an issuer based on the format in which that disclosure appears,’ they write.

Companies have appropriate incentives based on their desire to keep credibility with investors and avoid liability, the attorneys suggest: ‘[T]here is no further need to try to drive all reporting companies toward uniform disclosure practices. In a similar way, we do not think the commission should attempt to police the relative timing of press releases, filings and earnings calls – though publicizing investors’ concerns in this regard, and even suggesting… best practices, can only be constructive.’

Buckholz and Downes also suggest improvements to the SEC’s reporting process that they argue would promote prompt and easy-to-use access to information. For example, they suggest that the Edgar platform be updated to reflect a ‘company file’ approach, giving investors a uniform and coherent presentation of basic information while allowing companies to file the underlying information in increments, as and when they are ready.

The SEC asked for comment on reporting following a request from US President Donald Trump in August that the regulator study the possibility of allowing US companies to report on a semi-annual basis.

At the time of Trump’s request, the Council of Institutional Investors (CII) said it believed public companies should continue to report quarterly on their financial performance. ‘Investors and other stakeholders benefit when regulations ensure that important information is promptly and transparently provided to the marketplace,’ said Amy Borrus, CII’s deputy director, in a statement last August. ‘Investors need timely, accurate financial information to make informed investment decisions.’

CII also said it believed public companies should have flexibility on whether and how often to issue earnings guidance. It noted that it backed an initiative by the Business Roundtable to encourage companies to focus more on long-term performance by shifting away from providing quarterly earnings per share guidance and potentially dropping such guidance in the future.