A few weeks ago the President renewed discussion of the possibility of eliminating quarterly reporting by US public companies and moving back to semi-annual reports. In a tweet on August 17, he said, “In speaking with some of the world’s top business leaders I asked what it is that would make business (jobs) even better in the U.S. ‘Stop quarterly reporting & go to a six-month system,’ said one. That would allow greater flexibility & save money. I have asked the SEC to study!” He later indicated the idea came primarily from the CEO of Pepsi. Later that day SEC Chairman Jay Clayton said that the SEC “continues to study public company reporting requirements, including the frequency of reporting.”
This is not a new drumbeat. It was reported about 3 years ago that some leading attorneys, including Marty Lipton of M&A law firm Wachtell Lipton, were making just such an argument. Why is less reporting potentially good? As was noted in 2015, because it allows companies to focus less on short-term results, which can help encourage capital investment and strategic thinking, especially in this era of activist investing. Who else agrees? Al Gore. The European Union eliminated mandatory quarterly reporting for listed companies in 2013. It is only since 1970 that the SEC required quarterly reporting for US public companies.
Those who counter this argument believe six months is too long to spot trends that are developing. They also argue that shareholder activists help shine a light on bad managers. Interestingly, Clayton’s response to the President’s tweet did not seem to suggest he considered the tweet a mandate requiring him to commence a formal review of the issue. Under recent legislation, the SEC currently is examining a variety of steps to simplify and update disclosure requirements. It will be interesting to see if the Commission takes a more serious look at reducing compliance obligations and pressure to beat quarterly earnings expectations.
HR 2864, the “Improving Access to Capital Act,” passed the US House of Representatives on September 5, 2017 with a lopsided bipartisan vote of 403-3. The short bill directs the SEC to permit full Securities Exchange Act reporting companies to use Regulation A+ for a public offering. Previously, only non-reporting companies could utilize the new streamlined approach with unlimited testing the waters capabilities.
Some smaller companies trading in the over-the-counter markets have been contemplating suspending their SEC reporting obligations to be able to move forward with a Reg A+ offering. If this bill passes the Senate and is signed by Pres. Trump, that would no longer be necessary. The bill makes clear that the company would be deemed to satisfy the post-offering reporting obligations under Reg A+ so long as they continue with full quarterly and other reporting required of most Exchange Act reporting companies.
As a practical matter, this change would only help companies trading in the over-the-counter markets with under $75 million market capitalization, companies that went public in the last year or those that have not made recent filings on a timely basis, since all others have some ability to utilize short registration Form S-3, which is a very simple and quick process even compared with Reg A+. It also avoids the limits on the value of shares that can be registered on Form S-3 for smaller exchange listed companies. But help it would.
On January 30, Pres. Trump issued an executive order that for every new regulation proposed, an agency must eliminate two old regulations. The order also requires the net cost of a new regulation to be zero after taking into account cost savings from regulations eliminated. Military and national security regulations are exempt from the order. The head of the Office of Management and Budget also is allowed to make exceptions. In signing the order, the President was surrounded by small business leaders, and said, “We’re cutting regulations massively for small business … that’s what this is about today.”
Many in the capital markets space feared this could hamper the SEC’s rulemaking process, as some “new regulations” can actually reduce regulatory burdens. For example, many have sought to convince the SEC to expand the use of short form registration on Form S-3 to all reporting companies – which would enhance opportunities for capital formation but would require a new regulation. Thankfully, last week the White House issued interim guidance on the order. Among other things, it said the order does not apply to “independent agencies” (ie those that are outside the federal executive departments), which includes the SEC.
A number of liberal groups filed a lawsuit last week to challenge the order, saying it forces agencies to be arbitrary, and that the order was outside the President’s powers. They are seeking an injunction to kill the order. Many, frankly, are scratching their heads over this order. Even those who strongly support easing business regulation are not sure this is the best way to do it. At least the SEC (and most of the finance-related agencies) may move forward in its usual manner.