For over 50 years, U.S. stocks have filed quarterly reports to update the market on their latest financials. Soon, they might have an alternative option.
Per The Wall Street Journal’s Corrie Driebusch, the U.S. Securities and Exchange Commission is preparing a proposal that would eliminate quarterly reporting requirements for public companies.
That move would allow companies to decide whether they want to report on a quarterly schedule or on a semiannual one, making good on a promise from President Donald Trump and his SEC Chairman, Paul Atkins.
Proponents of semiannual filing say the move would be good for business. But as it turns out, what’s good for business might not be good for everybody.
It could be good for business…
At its core, the argument for a less taxing filing schedule is simple. Its proponents argue that it allows businesses to spend less time “living and dying by the quarter” and more time building and focusing on their business. This gives businesses, at least for the first time in 50 years, the option to shift to semiannual frames of reference.
That could be desirable for firms for many reasons. Chiefly, it saves time and money. Preparing quarterly reports takes man hours from accountants, legal, and investor relations teams. By going from four filings a year to two, you could argue that these people might be working half as hard. It might allow you to also hire less of those people, which is a particularly big deal for smaller firms.
Of course, there’s an argument that it also frees up firms to focus on building their business, rather than working about making each quarter count. Filing twice a year means you’ll only face an official account of your firm’s financials and health every six months. That means less need for financial engineering or short-term thinking; you can focus on the long-run.
But arguably, the most powerful element is that it allows you to control the narrative for longer. Say you move from a quarterly to semiannual schedule. Absent business updates, alternative data, or industry reports, investors might not know as much about how your firm is operating.
These factors also beg the question of whether this proposal might motivate privately traded firms to move up to markets. There was a time, not really that long ago, that it was attractive to be a publicly traded company. Thanks to the deluge of venture capital, many firms have stayed private for longer, avoiding compliance overhead that comes from being on the market.
But it’s probably bad for retail
Structurally, a loosening of reporting requirements has a huge downside: it keeps less resourced investors in the dark for longer. That’s particularly bad for retail investors and short-term traders; potentially even passive investors, too.
Trading in the dark (some brought a light)
That’s because the absence of information will largely benefit big trade shops like quantitative firms, high frequency traders, and institutional investors that have armies of smart people working with more resources.
These firms already boast sophisticated trading strategies, modeling, and technology that should give them an edge in the market. But give them six-month silences between reports and they might gather a significant edge thanks to industry data, alternative datasets, and physical assets which are not available to the everyman.
Companies causing chaos
There’s another party that it helps benefit: the companies themselves, especially ones which are not operating with the best of intentions. If the number of times that a firm goes for an official account is cut in half, that is detrimental to market transparency. It should throw up red flags.
You could easily garner a picture of how businesses might exploit the six months of silence between updates, cherry-picking positive information and providing upbeat business updates only to surprise the market with the bill.
In the most charitable case, it’s a case of spin. In the worst case, it could be an opportunity for fraudsters or operators to deceive investors while enriching themselves. When you pair that with the increasingly lax enforcement and oversight offered by the SEC in recent years, you can see how this all adds up to something fantastically bad.
In a market that operates in silence, retail is likely going to be last to know if something is wrong. And even for passive investors, who proponents of a semiannual filing option say will benefit, there are serious drawbacks to losing half of a firm’s results in a year.
What can be done?
In the coming weeks, the new SEC rule will likely go for comment. During that period, investors who are worried about the impacts this could have on market transparency will have an opportunity to make their case to the SEC.
Ultimately, it might not change very much, given how much demand there is for this semiannual filing option in the administration.
To that end, it might fall on index constructors to compel businesses to stay on quarterly filing as a condition of inclusion. For example, the creators of the S&P 500, Dow Jones Indices, or Russell FTSE could require that firms file at least some form of quarterly update, even if doesn’t amount to something as constructive as the 10-Q.
But don’t hold your breath for Nasdaq, which has been doing summersaults to win the forthcoming SpaceXIPO by relaxing requirements for the company to instantly join the index, an epically stupid decision for the still-unprofitable firm. The California-based Long Term Stock Exchange (LTSE), one of the bigger proponents of a semiannual requirement, won’t be lining up to demand accountability from businesses, either.
