SEC's 2-report plan could end quarterly earnings focus

The U.S. Securities and Exchange Commission (SEC) has floated a proposal that would permit public companies to report earnings on a semi-annual basis, a significant departure from the quarterly cycle that has defined Wall Street for decades. The proposed amendments would allow companies to file a new Form 10-S twice a year, aiming to reduce the reporting burden and encourage a more long-term corporate focus.

The move has drawn support from several business leaders who see the current quarterly cadence as a driver of short-term thinking. "I think we need to clarify thresholds and provide safe harbors for interim disclosures so companies can share what's appropriate in that sense," said Kunal Kapoor, CEO of Morningstar, who noted the benefits of flexibility already seen in Europe and Australia where similar systems exist.

Proponents argue the change would allow executives to concentrate on long-term value creation rather than managing market expectations every three months. The proposal comes as regulators explore ways to lessen the costs and complexity of being a public company, which some believe has deterred private firms from pursuing an IPO. However, the plan is still subject to public comment, and many companies may continue quarterly updates to satisfy investor demand.

At stake is the balance between easing the regulatory load on corporations and ensuring investors retain access to timely, transparent financial data. While the shift is optional, it creates a new landscape for corporate disclosure that compliance firms are already preparing to navigate. "Regulatory change often creates uncertainty, but it also opens an opportunity for companies to modernize how they manage disclosure," said Craig Clay, President of Global Capital Markets at Donnelley Financial Solutions (DFIN).

A Focus on Long-Term Strategy

The most cited benefit of moving away from quarterly reports is the potential to curb corporate short-termism. Arista Networks CEO Jayshree Ullal called the idea "music to my ears" during a recent interview. This sentiment was echoed by Morningstar's CEO, who argues the relentless pressure to beat quarterly earnings-per-share (EPS) estimates promotes "myopic behavior."

Morningstar itself provides a case study in alternative approaches. The investment research firm reports earnings quarterly but has never held investor calls, a practice founder Joe Mansueto adopted from Warren Buffett's democratized communication style. The firm's website states this ensures all investors receive information equally, without preferential treatment for large funds or analysts. Kapoor believes that if the SEC's proposal is adopted, the U.S. should also set higher standards for other disclosures and discourage certain types of forward guidance that fuel the quarterly hamster wheel.

Investor Transparency and Market Expectations

While the proposal is aimed at issuers, the reaction from the investment community will be critical. Even with a formal shift to semi-annual filings, many companies may feel compelled to provide quarterly updates through press releases or investor calls to meet market expectations. Experience in Europe, where semi-annual reporting is common, shows that a significant number of large-cap companies continue to report on a quarterly basis voluntarily.

This highlights a key challenge in the SEC's proposal: ensuring a consistent flow of material information to the market. Kapoor suggested the SEC would need to implement "safe harbors for interim disclosures" to guide companies on what to share between formal reports. Australia, for example, pairs semi-annual reporting with a requirement for immediate disclosure of any information that could have a material impact on a company's share price.

A New Market for Compliance

The potential shift in reporting cadence is creating an opportunity for financial compliance and software firms. Donnelley Financial Solutions (DFIN), a major provider of SEC filing software, is positioning its ActiveDisclosure platform to support companies regardless of which reporting model they choose.

Craig Clay of DFIN noted that the need for "accurate, timely, well-controlled and decision-grade disclosure does not go away." He sees an integrated disclosure environment becoming even more critical as companies might adopt hybrid models, supplementing required semi-annual filings with voluntary quarterly updates. DFIN believes that reducing the complexity of being public could improve the health of the IPO market over time, making a public listing more attractive for growth companies. The firm is prepared to help clients navigate the operational and governance questions raised by the proposal, from XBRL tagging requirements to the treatment of public debt obligations under a new system.

This article is for informational purposes only and does not constitute investment advice.