Five Potential Impacts of Semiannual SEC Reporting

If you don’t run a public company, the idea of shifting from quarterly to semiannual financial reporting may sound like a classic case of a solution in search of a problem. There was nothing obviously broken about the system that generated performance data four times a year—at least for fund managers and securities analysts. If you had to churn out that data, however, you might really wish that “four” was a “two.”

On May 5, the Securities and Exchange Commission granted that wish. That’s when it proposed the creation of an optional semiannual filing on a new Form 10-S. What may sound like a wonky issue to some, those in the know understand that a change to the mechanics of financial reporting could have broad effects. Here are five potential consequences of the proposal to be mindful of as the SEC puts semiannual reporting into place.

1. Benchmarking quandaries

A uniform financial reporting rhythm offers end users the ability to take information from companies in the same industry and make like-for-like comparisons. Such comparisons become less useful when companies are reporting on different timelines.

For example, if trends in one car manufacturer’s sales look dramatically different from those of its competitors, investors know to look deeper into developments at that company. It gets more difficult to assess what those results mean, though, if that company maintains a semiannual reporting schedule and its industry peers are putting out quarterly financial statements.

2. A blow to the little guys?

In the battle to capture investment returns, armchair professionals are typically bringing a proverbial knife to a gunfight, operating at a significant informational disadvantage. Savvy investing doesn’t necessarily require sophisticated analytical models and the services of expensive investment analysts. Even so, the resources available to major institutions seemingly give them a significant advantage in the marketplace over your average mom-and-pop investors.

What might it do to retail investors if quarterly reporting goes out of style? You could make the case that less frequent reporting would further skew the asymmetry of information in favor of institutional investors with deeper pockets to develop useful, alternative data on performance, like satellite imagery of retail parking lots. Meanwhile, retail investors would suffer from the lack of transparency.

3. What do investors want?

Even if some larger investors can identify alternative means of assessing performance (and have the resources to put them in place), it doesn’t mean they would prefer that approach over companies reporting on a quarterly basis. As such, moving from quarterly to semiannual reporting could risk irking institutional investors. In 2019, half of the respondents to a CFA Institute survey said that quarterly reporting was more important than earnings releases.

4. The IPO impact

In theory, fewer required reporting periods should encourage more companies to go public. The rationale is that semiannual financial reporting would reduce compliance costs and encourage smaller companies mulling initial public offerings to take the plunge. (Though it’s not clear that semiannual reporting would relax the administrative burden significantly.)

On the other hand, smaller companies—and newer ones—arguably face more pressure to report on a quarterly basis than their larger peers. The reality is that investors need greater assurances about the financial health of smaller issuers. Even if they want to report semiannually, fledgling companies may have no choice but to continue issuing financial statements every three months.

5. Unknown costs

As attorneys at the law firm Mayer Brown noted in a memo on the proposal, SEC estimates imply registered companies would accrue savings of nearly $200,000 per year by shifting from quarterly to semiannual reporting. If the move to semiannual reporting prompts some analysts to drop their coverage of a company, though, that could lead to reduced liquidity and a higher cost of capital. Such cost increases could offset or exceed the savings from reducing the compliance burden.

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Assuming the SEC moves forward with the semiannual reporting option, it’s worth keeping in mind that it would be just that: an option. Companies would still choose how often to issue financial statements based on their own needs. The practical impact may vary significantly depending on company size, investor expectations, analyst coverage, and industry norms. As attorneys from Sidley Austin LLP concluded in a commentary on the proposal, few issuers may ultimately decide to take the SEC up on its offer: “For most established public companies, however, the practical change is likely to be smaller than the headlines suggest—and the strategic and governance questions the proposal raises are larger.”

The key takeaway for issuers, reporting frequency may increasingly become a strategic governance decision rather than simply a regulatory requirement.

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