Finding unusual financial information worries investors of all stripes.
Investors are unhappy with the US Securities and Exchange Commission's (SEC) proposed one-week rule on mid-year financial reporting. See indeed don't like it.
The majority, 92%, of comment letters received by the SEC regarding the proposed rule were opposed. Only 6% supported the adoption of the law, while 2% wanted more information about how the law would work.
The proposed legislation, a pet project of the Trump administration, is likely to be implemented, according to experts.
“There is strong evidence that it will happen,” David Bartz, partner and head of capital markets and securities regulation at law firm K&L Gates, told Global Finance. “The management has been looking at this, it is something the Chairman of the SEC[Paul] Atkins has been a big supporter of. I think it is very unlikely that it will become a formal law.”
Good and bad
The current proposal would allow public companies to choose to report twice a year instead of the usual quarterly report. The SEC estimates that companies incur an average of $330,000 in compliance costs for the three quarterly Form 10-Q reports. Alternatively, filing one Form 10-S each year costs about $198,000. Savings can come from outsourcing fees, auditor reviews, data markup costs, and investor engagement costs, according to the K&L Gates blog.
The most common concern expressed by regulatory analysts, however, is the decrease in the amount of financial information available to investors. This will lead to greater reliance on short-term guidance, reduce the likelihood of corporate inefficiencies, increase market volatility, and require restructuring of investment and trading strategies.
Material Disclosure
In markets that already have mid-year financial reports, such as the EU and Australia, companies should release important information immediately unless there is a specific business issue that is inappropriate, such as entering into merger negotiations or obtaining a contract that has not yet been finalized, said Marc Steinberg, Radford Professor of Law at Southern Methodist University's Dedman School of Law.
In the American market, there is no duty to disclose unless it is required under Form 8-K, which must be filed within four business days, or if the company has already spoken on the matter, he added. Information that does not rise to the level of an 8-K disclosure, such as the loss of a major contract, may be withheld until the next quarterly report.
“As some companies go to the annual report, it means that the company can keep the news of losing a major contract for more than six months, which is obvious to investors,” said Steinberg.
The likelihood that the SEC will change the rule is slim, according to Bartz. “It's been floating around for a few months, so I think it's been pretty well vetted. There will probably be minor changes to the law once it's officially approved.”
The Next Step
When the rule's comment period ends on July 6, staff from the SEC's Division of Corporate Finance will review the comments before writing a proposal, which will be worked on by different offices before being presented to the Commission for review and a vote, Steinberg said.
