August 17, 2018
President Trump has asked the SEC to study the possibility of changing the frequency of financial reporting for public companies from a quarterly to a six-month period. The idea is that this would increase “flexibility and save money.” Investors and regulators have grown accustomed to the Form 10-K for annual reporting and the Form 10-Q for quarterly reporting but many people may not be aware that there was a time in the past when there was a required Form 9-K that provided financial information semi-annually. The Securities Exchange Act of 1934 established the requirement for the Form 10-K as well as Form 9-K which was a semi-annual report that disclosed certain mid-year unaudited financial data. The Form 9-K had to be filed within 45 days of the end of the first two fiscal quarters. The Exchange Act did not require quarterly reporting.
In 1969, the SEC undertook a comprehensive study which resulted in the release of a report entitled “Disclosure to Investors–A Reappraisal of Administrative Policies under the ’33 and ’34 Acts.” The report is also referred to as “The Wheat Report” as it was submitted by a small group drawn from the SEC staff under the direction of then Commissioner Francis M. Wheat. One of the recommendations from the Wheat Report was that a new quarterly report form be adopted to replace Form 8-K and Form 9-K. The Form 8-K has survived to date and companies must file it with the SEC to announce certain material corporate events on a more current basis that shareholders should know about. In 1970, the Form 10-Q was born and Form 9-K was replaced and the requirements changed from semi-annual reporting to quarterly reporting.
The Wheat Report describes some of the considerations in developing a quarterly reporting requirement. At the time of the study, many publicly-held corporations were releasing condensed quarterly financial information. The New York and American Stock Exchanges required publication of such information by all listed companies but the standards set for the information was minimal. Members of the accounting profession, the Financial Executives Institute, and the American Society of Corporate Secretaries were consulted as to the feasibility of condensed quarterly financial reporting and the consensus was that such reporting was entirely feasible. The Wheat Report says in part, “The Commission’s current reporting requirements necessarily play a somewhat different role. They are not intended to, nor could they adequately, duplicate the timely disclosure policies of self-regulatory agencies. Commission requirements act to a degree as a backstop for those policies; they operate to encourage willingness on the part of issuers to keep the market place informed. They provide details which may be overlooked in the preparation of a news release or may not be included in a published news report. The Study attempted to balance the requirements which it considered meaningful current reports against the time to be allowed for filing them.”
While in 2018, the amount of data and the ability to gather and organize financial information is vastly different from the time of the Exchange Act in 1934 and the Wheat Report in 1969, there still remains the need to balance the timely release of meaningful information for investors to utilize versus the time, cost and effort required by companies to develop and share such information. The SEC may not need to conduct another Wheat Report type study but it would be instructive to take a look back to see how we arrived at the current reporting regime while contemplating any significant changes.