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If it hadn’t been specifically demanded by Donald Trump, a proposal by US regulators to allow companies to scrap quarterly reporting would be in deep jeopardy.
There has been an extraordinary outpouring of opposition to the plan by the Securities and Exchange Commission from individual investors, investment professionals, trade and advocacy groups and some companies themselves. More than 99 per cent of comment letters were against giving companies the option to report semi-annually.
Much of the outcry focused on how the proposal could lead to more patchy and delayed disclosure of critical information. But the Council of Institutional Investors was among the critics to point to another potential problem — the risks to “comparability”, a core tenet of financial markets.
“Timely, accurate and comparable information from all reporting companies allows long-term investors to make more informed investment and voting decisions,” wrote Jeff Mahoney, CII general counsel. He argued that this in turn leads to more accurate market valuations that “better optimises the allocation of capital to the US economy”.
If the SEC proposal is adopted, there could quite quickly be a hodge-podge of different reporting practices. Some companies say they will definitely cease quarterly filing. More say they will maintain the status quo, at least while they monitor which way the wind is blowing. Close to half expect to put out a more limited earnings press release or selective performance metrics on a quarterly basis, according to a KPMG survey.
“When reporting frequencies diverge, investors face higher information-processing costs and greater difficulty evaluating relative performance across firms, industries and investment opportunities,” Stephen Berger, of the hedge fund Citadel, warned the SEC. Berger also made the broader point that “reduced comparability impairs portfolio construction, benchmarking and capital allocation decisions.”
And on comparability, there is much more for CII members or Citadel clients to worry about than just the SEC’s quarterly reporting proposal. Many investors may not have been paying attention to another proposal from the agency, the nerdier sounding Enhancement of Emerging Growth Company Accommodations and Simplification of Filer Status for Reporting Companies. It, too, could significantly reduce investors’ ability to compare different companies. The “accommodations” being “enhanced” would allow more than 80 per cent of US companies to opt for a slimmed-down disclosure regime currently available only to newly public or small issuers.
The disclosures that could be slimmed are not inconsequential and the companies to be granted this new reporting freedom are not inconsequential companies. As a matter of course, every company with a public float of less than $2bn will be granted the concessions. Every company that goes public would also be able to use the scaled-back disclosure regime for their first five years on the market, even if they are Anthropic or OpenAI-sized behemoths that will quickly account for a significant chunk of stock market tracker funds.
The disclosures that these companies could skip include the split between revenues and costs of products and services, and details of related party transactions, as well as some requirements to set out in detail the financial performance of other businesses in which companies have a significant stake.
Newly public companies would also be given extra time to adopt new accounting rules. That means large companies in the same industry could be taking different approaches to hot-button accounting topics of the kind adjudicated by the Financial Accounting Standards Board, such as the treatment of digital assets or, potentially, data centre investments.
Paul Atkins, SEC chair, is also pushing ahead on revisions to the rules governing disclosure of risk factors and other non-financial matters currently mandated in regulatory filings. A throwaway question in the SEC’s request for comments also wondered whether it should scrap the requirement for small companies to use XBRL, the common tagging system that makes financial data in corporate reports machine-readable, a widely praised innovation of the past decade.
If investors are alarmed that comparability of US corporate financial reporting is under threat, they will need to fight on multiple fronts to protect it.
This article has been amended to correct the description of Citadel
