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Apr 04, 2019

Cleary Gottlieb lawyers eye improvements to quarterly reporting

Attorneys responding to SEC request for feedback

Attorneys with Cleary Gottlieb Steen & Hamilton have urged the SEC to consider making changes to the quarterly reporting requirements it imposes on companies to ease the compliance burden while improving the process.

‘We believe the commission should focus its regulatory energies on reducing the burdens of Form 10Q where that can be done without weakening investor protections,’ the attorneys write in a recent comment letter. ‘This would make it easier for issuers to reduce the delay between publishing the earnings release and filing the Form 10Q, and to align the content of the earnings release and the report.’

The Cleary Gottlieb lawyers were responding to an SEC request for feedback on the ‘nature, content and timing’ of earnings releases and quarterly reports made by issuers. The commission asked for 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 asked for feedback on how the existing periodic reporting system, earnings releases and earnings guidance might create an ‘overly short-term focus’ by managers and other market participants.

The Cleary Gottlieb lawyers suggest the SEC consider taking a number of potential actions. For example, they note that preparing XBRL files plays a key role in the timing of having Form 10Q ready to submit to the agency. If SEC rules were changed to allow XBRL files to be submitted to the regulator a specified number of days after the report is filed, companies would be able to file the report sooner and more of them would be able to narrow the window between when the earnings release and Form 10Q are ready, the attorneys say.

‘The notes to interim financial statements represent a significant burden for issuers, and some of the information is of little or no benefit to investors, particularly where there is no material change from the annual financial statements,’ the lawyers write. They point to, as examples, disclosures on derivative positions, on fair-value measurements and on changes in accounting standards that are expected to have minimal impact on the company.

‘We recognize that these requirements arise in part from US Gaap standards rather than commission rules, so reducing this burden could require co-ordination with the FASB,’ they add.

The attorneys further recommend that the SEC consider whether there are other aspects of financial disclosures required by Form 10Q that impose heavy compliance burdens on companies but create little benefit to investors – or benefit that could be derived from other efforts. They point to, as examples, the requirement to report on both the current quarter and the year to date, and the requirement to include a cash flow statement.

In addition, the attorneys state that workload of preparing periodic reports could be lightened by allowing companies to make the disclosures in other ways, such as by posting them on the issuer’s website.

‘This could be well suited for information that is not specific to the subject period and not subject to rapid change – such as basic information about an issuer, its operations and its management,’ they say. Companies could then update their information when it is appropriate, and instead concentrate regular regulatory filings on new information, they add.

Among other commenters responding to the SEC, the Council of Institutional Investors has given its backing to the existing quarterly reporting model while expressing concern that quarterly guidance can lead to short-termism and ‘making the numbers.'

Attorneys at Sullivan & Cromwell said the SEC should avoid imposing additional rigid regulatory restrictions on quarterly earnings disclosure practice, noting that issuers take into account many factors when deciding the timing, content and format of quarterly earnings disclosures.

Ben Maiden

Ben Maiden is the editor-at-large of Governance Intelligence, an IR Media publication, having joined the company in December 2016. He is based in New York. Ben was previously managing editor of Compliance Reporter, covering regulatory and compliance...