SEC proposes optional semiannual reporting for public companies

The United States Securities and Exchange Commission (SEC) has issued a release (Release) for proposed rule amendments that would give companies reporting under the Securities Exchange Act of 1934 (Exchange Act) the option of filing semiannual interim reports on a new Form 10-S in lieu of quarterly reports on Form 10-Q. If adopted, the proposal would represent a significant change to the SEC’s periodic reporting framework. This alert summarizes the SEC’s proposed framework and highlights key considerations for reporting companies. 

Key provisions of the proposed framework

Election mechanics

The proposal would amend Exchange Act Rules 13a-13 and 15d-13 to allow any reporting company currently filing quarterly reports on Form 10-Q to elect semiannual reporting on new Form 10-S instead. A company would signal its election by checking a new box on the cover page of its Form 10-K. Leaving the box unchecked would default the company to quarterly reporting. The election would be made annually, and a semiannual filer would be required to affirmatively re-elect each year to continue filing on a semiannual basis. 

Companies that have not yet filed a Form 10-K, such as companies conducting initial public offerings, would make their initial election on the cover page of the applicable registration statement. For such newly reporting companies, the first semiannual report on Form 10-S would be due on the later of i) 45 days after the effective date of the registration statement or ii) the date on which Form 10-S would have been due had the company been an Exchange Act reporting company. 

Commitment for the fiscal year

Once an election is made, a company would be required to maintain that reporting cadence for the remainder of the fiscal year to avoid investor confusion. The SEC proposes to permit corrective amendments to Form 10-K to address inadvertent checkbox errors, provided the amendment is filed no later than the due date of the company's first Form 10-Q for the fiscal year in which the erroneous Form 10-K was filed.

New Form 10-S

Semiannual filers would file a single interim report each fiscal year on proposed Form 10-S, covering the first six-month period. The second semiannual period would be included in the annual Form 10-K. Form 10-S would require the same narrative disclosures and financial information as Form 10-Q, including management’s discussion and analysis of financial condition and results of operations (MD&A), legal proceedings, material changes in risk factors, sales of unregistered equity securities and use of proceeds, financial statements reviewed by an independent registered public accounting firm, and certifications by the principal executive and principal financial officers regarding disclosure controls and procedures and internal controls over financial reporting. These requirements would apply to a six-month period rather than a fiscal quarter. 

The financial statements covering the semiannual financial period would be required to be prepared in accordance with US generally accepted accounting principles (GAAP) and reviewed by an auditor. The filing deadline for Form 10-S would be 40 or 45 days after the end of the first semiannual period, depending on filer status, consistent with existing Form 10-Q deadlines.

Regulation S-X amendments 

The proposal includes amendments to Rules 3-01 and 8-08 of Regulation S-X (the latter applicable to smaller reporting companies) designed to incorporate semiannual reporting into the financial statement framework and to simplify the rules governing the age of financial statements. The proposal would consolidate the requirements of current Rule 3-12 into Rule 3-01 and revise the age requirements so that a semiannual filer's financial statements included in registration statements and proxy statements would not be considered stale under rules developed for a quarterly reporting framework. 

The proposed amendments to Rule 3-01 would provide for consistent requirements for the most recent balance sheet that must be included in a company’s registration statement or proxy statement whether at the time of filing or effectiveness (or mailing for proxy statements). In addition, the proposed amendments would align the dates on which the financial statements would go stale so that they would occur on the dates on which the next periodic filings are due, rather than applying the current 130-day or 135-day windows. Companies not subject to Exchange Act Section 13(a) or 15(d), such as non-reporting companies that have filed a registration statement that has not yet become effective, would be required to include interim financial statements that would have been required had they been reporting companies.   

The SEC also proposes amendments to Rules 10-01 and 8-03 to reflect the semiannual reporting structure by revising definitions and clarifying other provisions. Under proposed amended Rule 10-01, a semiannual filer would provide an interim balance sheet as of the end of the first semiannual period and a balance sheet as of the end of the preceding fiscal year. Similarly, proposed amended Rule 10-01 would require semiannual filers to provide interim statements of operations, comprehensive income (loss) and cash flows for the first semiannual period and the corresponding period of the preceding fiscal year. Proposed amendments to Rule 8-03 address balance sheet, statements of operations, comprehensive income (loss) and statements of cash flow requirements for smaller reporting company semiannual filers. The SEC also proposes various related technical amendments to implement semiannual reporting.

No changes to earnings release practices

The proposal does not include general changes to regulatory requirements governing earnings releases or earnings guidance; Item 2.02 of Form 8-K would receive only technical amendments to reference semiannual periods. Companies that elect semiannual reporting and continue to issue voluntary quarterly earnings releases would remain subject to Regulation FD and Regulation G. The Release seeks input, however, on whether semiannual filers’ earnings releases should be required to be filed rather than furnished, given that financial information for the first and third quarters would no longer be subject to auditor review. 

Potential capital markets impact

Underwriters in securities offerings customarily seek comfort letters from a company’s auditors for financial statements included in registration statements and other offering documents. Under Public Company Accounting Oversight Board (PCAOB) Auditing Standard 6101 (AS 6101), an auditor’s comfort letter may not include negative assurance regarding subsequent changes to financial statements as of a date that is 135 days or more after the date of the last balance sheet that has been audited or reviewed. As a result, semiannual filers may not have financial information that is less than 135 days old, which could limit the ability of underwriters to obtain negative assurance for subsequent changes, unless an audit or review is conducted. As a result, companies that have a frequent need to access capital markets may be reluctant to adopt semiannual reporting unless AS 6101 is modified to comply with a semiannual reporting framework.   

Requests for comment and areas of uncertainty

In the Release, the SEC poses a range of questions that highlight open issues for consideration, including:

• Eligibility and scope: Whether the semiannual option should be available to all reporting companies or limited to certain categories, such as emerging growth companies or smaller reporting companies, and whether a pilot program would be appropriate.
  
  
• Impact on capital markets activity: Several questions probe whether semiannual filers would face practical obstacles in conducting public offerings. The current requirements of AS 6101 may affect the ability of auditors of certain semiannual filers to provide negative assurance for subsequent events in comfort letters. The SEC asks whether changes should be made to PCAOB auditing standards or semiannual filers would decide to retain their auditors for quarterly reviews to be able to request comfort letters. 
  
  
• Insider trading and trading windows: The proposal raises questions about the impact of semiannual reporting on corporate insider trading policies. With the adoption of semiannual reporting, companies may disclose material nonpublic information (MNPI) less frequently, unless they choose to make such disclosures on Form 8-K or in another widely disseminated manner. Accordingly, companies may find themselves having longer blackout periods at the beginning or end of a semiannual period, potentially affecting the trading activity of directors, officers, and employees and the use of Rule 10b5-1 trading plans. In addition, companies that disclose MNPI less frequently under a semiannual reporting regime may face heightened risk of inadvertent disclosures of MNPI.  
  
  
• Earnings release liability: The SEC asks whether Item 2.02 Form 8-K submissions should be “filed” rather than “furnished” for semiannual filers, which would subject those earnings releases to the additional liability provisions of Exchange Act Section 18 and, if incorporated by reference, Section 11 of the Securities Act of 1933. 
  
  
• Contractual and regulatory constraints: Debt agreements, bank regulatory requirements, exchange listing standards, and foreign legal obligations may effectively necessitate continued quarterly reporting for certain issuers. In addition, New York Stock Exchange and Nasdaq listing standards currently reference quarterly reporting on Form 10-Q in various contexts, although the SEC indicates that its staff would coordinate with exchanges and accounting standard-setters to facilitate conforming changes if the proposal is adopted.
  
  
• Industry trends: The SEC notes that companies in certain industries, such as biotechnology, may be more inclined to adopt semiannual reporting because quarterly financial reporting may be less relevant for their investors, analysts and other stakeholders. On the other hand, unless a broad enough set of similar companies adopt semiannual reporting, analysts and investors may be less able to compare company performance, which can support trading activity. This comparability concern can be heightened as companies need to assess whether to follow any emerging accounting and financial reporting trends for their industry.         

Key takeaways 

The proposal would provide companies with flexibility to determine a reporting cadence based on their size, maturity, operations, and financing arrangements. Companies may wish to start considering now whether they would utilize semiannual reporting if the SEC’s proposal is adopted and consider proactive engagement with their shareholder base to better understand such investors’ expectations regarding the cadence of reporting. This may motivate a company to engage in the SEC’s rulemaking process to ensure any final rules are clear and administrable from the company’s perspective, and it may also allow it to move quickly if final rules are adopted.

In evaluating whether semiannual reporting may be appropriate, companies may wish to consider factors, such as:

• Investor and analyst expectations around quarterly earnings releases
  
  
• Potential effects on insider trading policies, blackout periods, and Rule 10b5-1 trading plans
  
  
• The accounting, legal, and other costs of three quarterly reviews and Form 10-Q filings, and the expected savings from one semiannual review and Form 10-S filing 
  
  
• Requirements under existing contractual obligations, including covenants in credit agreements or investor rights agreements that may require quarterly reporting
  
  
• Anticipated securities offerings and the views of the company’s investment bankers regarding the financial information necessary to market offerings effectively
  
  
• The pace of material developments at the company, including whether Forms 10-Q have been or are expected to become an avenue for reporting new business developments, MD&A trends, and risk factor developments
  
  
• Potential changes to internal controls over financial reporting and disclosure controls and procedures
  
  
• Independent auditor procedures for interim reviews and comfort letter practices

The comment period closes 60 days after publication in the Federal Register, and meaningful engagement during the comment period may be critical for shaping the adoption of final rules. 

For more information, please contact the authors.