On March 19, 2019, the Corporations Committee submitted a comment letter to the Securities and Exchange Commission (the “SEC”) addressing earnings releases and quarterly reports. The letter was submitted in response to the SEC’s Request for Comment issued on December 18, 2018 (Release Nos. 33-10588; 34-84842) pursuant to which the SEC requested comments on how to address investor protections while reducing burdens associated with quarterly reports, such as reducing unnecessary duplication in the information disclosed. The SEC posed various queries covering the nature and timing of disclosures that reporting companies are required to provide in their quarterly reports on Form 10-Q, including when the disclosure requirements overlap with the voluntary disclosures provided in earnings releases, whether certain reporting companies should be provided flexibility as to the frequency of their periodic reports (i.e., whether companies should be permitted to report on a semi-annual basis), and how the existing periodic reporting system, earnings releases and guidance may affect corporate decision making.
In the comment letter, the Committee noted that quarterly reports serve an important purpose for many companies, providing transparency and timely, material information to investors, while at the same time allowing companies to raise capital and allowing insiders to trade in their companies’ securities on a more frequent basis. The Committee proposed that, for a small subset of companies, semi-annual reporting may significantly reduce costs, while still providing important protections to investors. These companies may consist of issuers that are not traded on a national securities exchange, have revenue less than a specified amount and do not incorporate by reference SEC filings into registration statements.
As it relates to earnings releases, the Committee encouraged the SEC to take a flexible approach in any rule changes that it may adopt. Although the type of information included in earnings releases and Form 10-Q may be similar in nature, the Committee noted that there can be material differences between the information provided in an earnings release, which is market driven and is generally unique to each company or industry sector, and Form 10-Q. Any rule changes should not explicitly or implicitly discourage (e.g., by requiring earnings releases to be “filed”) issuers from providing quarterly earnings guidance. The Committee believes that restricting or limiting quarterly guidance will ultimately change the focus on quarterly results (unless issuers cease to provide quarterly information in the first instance). Consistent with a flexible approach, the Committee noted that if the SEC were to adopt rules allowing Form 10-Q to incorporate by reference information from earnings releases, issuers should be permitted to choose to disclose in one place in the Form 10-Q or to incorporate by reference the information disclosed in the earnings release in order to reduce duplication of information. In all instances where incorporation by reference is permitted, issuers should be permitted to incorporate on a selective basis, rather than being required to incorporate the entire earnings release (including any forward-looking guidance).
The drafting committee for the comment letter submitted by the Corporations Committee consisted of Katherine J. Blair of Manatt, Phelps & Phillips, LLP and Sarah P. Payne of Sullivan & Cromwell LLP. The comment letter is available on the SEC’s website and can be accessed by clicking here.
This e-bulletin was prepared by Katherine J. Blair, a partner at Manatt, Phelps, & Phillips, LLP. Ms. Blair is a member of the Corporations Committee of the Business Law Section of the California Lawyers Association.