SEC proposal tests 'long-termism,' meets short-term doubts

The Securities and Exchange Commission has proposed making quarterly reporting optional, but a high-ranking agency official and corporate lawyers downplayed the impact it would have on most companies, investors and the markets.

If adopted, the SEC proposal would allow public companies to choose to file semiannual reports on new Form 10-S instead of quarterly reports, which have been required since 1970, on Form 10-Q. Public comment period on the proposal will last 60 days into early July.

SEC Chairman Paul S. Atkins, an appointee of President Donald Trump, said in a statement Tuesday that the plan would give companies "increased regulatory flexibility" and encourage more of them to go public.

He added that "the rigidity of the SEC's rules has prevented companies and their investors from determining for themselves the interim reporting frequency that best serves their business needs and investors."

The idea, originally suggested to Trump by former PepsiCo Inc. CEO Indra Nooyi in 2018 and endorsed by him last September, has sparked debate among corporate and securities lawyers.

The goal is to encourage company leaders to focus on "long-termism," so their decisions are less focused on earnings in the next quarter but in the next few years.

But it's not clear how much of an impact the proposal, if adopted, will have - or if it will be positive.

Would companies skip 10-Q filings?

James J. Moloney, director of the SEC's Division of Corporation Finance and a longtime partner at Gibson, Dunn & Crutcher LLP in Irvine, told attendees at a conference in San Francisco last month that he did not expect many large public companies to take advantage of the option.

"Who's going to voluntarily do it?" Moloney said at the conference, sponsored by the UC Berkeley Center for Law & Business and co-sponsored by Freshfields. "Probably not the large, multi-billion-dollar companies. It's something that might be attractive to smaller companies."

Moloney - who took the SEC job last September - said a voluntary system might appeal to life sciences companies, waiting to get a drug company through regulatory approval, as well as companies dependent on IP royalties and small regional banks.

"I think folks will live, and the guardrails will still be there," said Moloney, adding that he was speaking only for himself and not on behalf of the commission.

Several corporate attorneys said that smaller companies, especially biotech companies with no earnings, would take advantage of the semi-annual reporting change to save money on SEC filings. Even critics of the proposal say that change might make sense.

"What we are hearing from our clients is that even if the SEC isn't going to require quarterly reporting, they believe that their relationship with their investors will make it important to provide some level of quarterly reporting," even if it's not in the form of a 10-Q filing, said Robert W. Downes, a partner with Sullivan & Cromwell LLP who is co-head of the firm's Capital Markets Group.

More risk, no reward?

Critics warn that less frequent reporting could reduce transparency, increase volatility, and weaken investor confidence.

A trade organization that represents hedge funds and other alternative asset managers argued in a letter to the SEC that any savings on cutting the number of 10-Q statements would not be worth the loss of investor confidence, especially because AI will make preparing those filings a lot cheaper.

"Reducing the frequency of reporting would not only diminish the timeliness and usefulness of this information, but would affect investor capital allocation decisions and undermine investor confidence," wrote Jennifer W. Han, executive vice president and chief legal officer of the Managed Funds Association.

"This in turn would have a negative impact on companies' access to capital," she added.

Joel Fleming, a partner with Equity Litigation Group LLP who represents public company investors in shareholder litigation, said "smaller, more volatile companies are most in need of discipline" that is provided by quarterly reporting.

"There is going to be a greater temptation for people to exploit and take advantage of material, non-public information," allowing executives to set option strike prices before the market knows of positive developments, but also more incentive to sell before bad news must be reported.

Quarterly reporting has been good for U.S. capital markets, he said. "We are now moving away from that to a system where there is less information for these smaller companies, and that makes it riskier for investors," Fleming added.

Regulators in the European Union decided against mandating quarterly reports in 2013, though ongoing disclosures are required.

Critics say that has been a mistake, citing lagging returns in Europe as well as lower deal volumes, weaker valuations, and thinner trading, according to Han.

Banks, investors may want quarterly reports

Matthew C. Sferrazza, of counsel with Jeffer Mangels Butler & Mitchell LLP in Los Angeles, said he thought companies looking to borrow money would still file quarterly reports with the commission.

Financial institutions "don't care what the SEC requires. They're going to want to see your numbers," Sferrazza said. Large institutional investors will feel the same way, in part due to concern that a future administration might change the rules back.

"It's hard to see the rule itself changing the entire infrastructure that would make [quarterly reporting] entirely go away" unless banks and other institutions decide it is not necessary, he added.

Back in the 1980s, drugmaker Eli Lilly and Co. maneuvered its earnings per share by imposing hiring freezes to make its numbers, according to Jay R. Ritter, an emeritus professor at Warrington College of Business at the University of Florida.

But he said investors are more focused now on long-term value creation, even if companies are losing money at the time, citing examples such as Anthropic PBC and OpenAI Inc., two AI companies that are valued highly because of their rapid growth prospects.

Amazon.com Inc. lost money for years even as its business expanded rapidly in the 1990s. Its first profitable year was in 2003.

"Growth is much more important than short-term profitability," Ritter said.

What happens to patent cases post-Albright?

U.S. District Judge Alan D. Albright of the Western District of Texas will have served on the bench for less than eight years when he leaves at the end of August for private practice. But he left a mark.

The judge, appointed by Trump in 2018, encouraged patent litigants to file in his Waco courtroom. And they did, to the point where about a quarter of all new infringement complaints in the United States were filed before Albright.

Patent defendants complained, especially California technology companies, and Chief U.S. District Judge Orlando L. Garcia issued an order in 2022 stating that new complaints would not necessarily be assigned to Albright but to any of the dozen judges in the Western District of Texas.

New lawsuits in the district dropped dramatically, but there are still plenty of patent cases left before Albright - too many for him to resolve before he leaves the bench.