Andrew Jones 

Associate Editor 

Loyola University Chicago School of Law, JD 2027 

The SEC’s proposed rule to permit public companies to file semiannual reports in lieu of quarterly reports may create one of the worst shifts in access to timely and reliable information for investors in the last 50 years. U.S. securities markets are the deepest, most liquid capital markets in the world, and have undoubtedly benefited from consistent and reliable reporting of public companies. Nonetheless, the SEC and others highlight that this rule change gives public companies flexibility and reduces costly compliance burdens. Additionally, they believe the proposal will reduce the short-term effects on stock prices and their corresponding volatility, allowing company management to focus on longer-term strategies over short-term returns. Others, including the SEC’s Investor Advisory Council (IAC), argue that the proposed rule harms investors by widening the information gap between the investing public and corporate insiders. Under the SEC’s proposed rules, investors lose a key source of information while bad actors gain a significant advantage on material nonpublic information between reporting cycles. 

Public commentary is fearful of insider trading and disadvantaging ordinary investors  

Data collected and analyzed by Professor Tzachi Zach of The Ohio State University suggests that the SEC has received over 181,000 comments on the proposed rule, with 99.5% of comment letters suggesting opposition to semiannual reporting. Particularly, the IAC’s comment letter highlights concern that investors will have fewer opportunities per year to reallocate positions based on standardized reports. The IAC also highlights that a shift to semiannual reporting increases the likelihood of insider trading, reasoning that as information is disclosed less frequently to the public it increases insiders’ ability to profit from it. Another interested party, the CFA Institute, along with many others, joined the IAC’s concern of insider trading and disadvantaged investors in their comment letters. To support its position, the CFA Institute provided an investor survey, suggesting investors value quarterly reporting and rejecting the argument that quarterly reporting supports investor short-termism. Investor short-termism is the notion that investors give greater weight to short-term performance of management rather than the long-term strategic goal of the company. 

Proponents place emphasis on reduced regulatory burdens and costs 

Although Professor Zach’s data suggests overwhelming opposition to semiannual reporting, there are at least 400 commenters that support it. Common rationales in support of the proposed rule include reducing the compliance burden and costs imposed on public companies, dissuading investors from focusing on short-term outcomes instead of management’s longer-term strategy, and giving companies optionality to determine which reporting cadence works for them. Indeed, these rationales are in line with the SEC’s stated purpose in the notice of proposed rulemaking. 

One proponent of the proposed rule, Exxon Mobil Corporation, surveyed their investors and found the information investors consume has evolved beyond the quarterly reports, making them an unnecessary source of information. Exxon calls out alternative sources of information, such as earnings releases, webcasts, investor presentations, and Form 8-K filings. Another comment received from the Financial Executives International – Committee on Corporate Reporting (FEI CCR) supports the option of companies adopting semiannual reporting as a way to address the specific risks and factors unique to each of them.  

Benefits to management at the cost of transparency 

 By allowing companies to shift to semiannual reporting the SEC is giving priority to company management over investing public, while simultaneously giving insiders a distinct advantage to trade on material nonpublic information. Securities markets function because investors believe they are receiving accurate and timely information. While insider trading and asymmetric information in markets exists today, the SEC’s proposed rule exacerbates both of these problems. SEC Chairman Paul Atkins underscores the need to pass this rule in the name of “mak[ing] being public attractive again.” 

The agency’s views, however, seem to ignore the strength of U.S. capital markets under the existing quarterly reporting rules, which has averaged returns of 11.5% over the last 40 years. Furthermore, the SEC fails to outline mitigants to the increased risk of insider trading. The SEC should take the time to consider the feedback of the 181,000 commenters and the consequences average investors will suffer under this reporting framework. A semiannual reporting framework will bolster the opportunities for insider trading while harming average investors.