How to handle the semiannual reporting conversation

The sky didn’t fall. The clocks didn’t stop. The Securities and Exchange Commission officially released its proposal to make quarterly reporting optional, upending a rule that’s been in place for US public companies since 1970, and everything seems…fine?

That calm, serene feeling you’ve been experiencing ever since the proposal came out likely boils down to a simple realization: This might not drastically change life in the top finance seat all that much, as experts have argued.

Lisa Bragança, a former SEC branch chief who leads a securities defense law firm, thinks the proposal won’t end up being “as big a deal as lots of folks think it will be” for one primary reason: investor expectations.

“There will be companies who opt into it, but I don’t think that huge companies will necessarily embrace it because they have investors who expect quarterly reports and are set up to do quarterly evaluations,” she told CFO Brew. “It may be a process over time that, once adopting this, more firms will transition into it, but I don’t think it’s going to be a deluge right away.”

But the business-as-usual approach would also create an awkward dynamic for smaller companies that might be considering a switch to semiannual reporting: There’s likely very little advantage to being an early mover, Bragança said.

Most people “like to see how things pan out for others first,” Bragança said. “There’s always the early bird gets the worm, but the early adopter gets the SEC investigation.”

Whether you have board members pushing for a switch to semiannual reporting or you feel market pressure or personal curiosity about a change in reporting cadence, ’tis the season of difficult conversations.

On board. Ultimately, reporting frequency is a topic to discuss with your board, and navigating those conversations smoothly starts with simply opening up that line of communication.

It’s a team sport: For CFOs, “the decision really comes above you,” Rebecca Fike, partner in the regulatory and enforcement group at Reed Smith and a former SEC attorney, said. “It’s you talking to your CEO, and then I think it’s got to be talking to the board. What do they expect? Are they going to be expecting the same amount of reporting going up each quarter anyway?” 

Bragança stresses the importance of considering the issue from the investors’ perspective. “Look at who your investors are. You need to look at how much things change in your company. Are you in a very volatile industry?” She explained that companies doing medical research, for example, might have quarter upon quarter with no news, making them prime candidates for a switch to semiannual reporting.

The bulk of companies, however, won’t fall into that category, Bragança noted. And for everyone else, conversations can be framed as a simple cost-benefit question, Fike said.

That will likely require some data collection, she added, in order to identify: “What is the burden, really? What is the benefit, really?” You’ll need that information to have an informed conversation with your CEO and board, she said. “Right now, all of these conversations, certainly every one I’ve had, is based on a lot of assumptions and guesses and thoughts.”

Risky business. Any conversation about the trade-offs between reporting cadences will necessarily delve into the costs of reporting, but experts have cautioned that savings from a switch to semiannual reporting will likely be minimal.

The choice to report semiannually has plenty of risks. “The group of companies that this really could maybe save some money for are the newer companies who most need to develop their rigor around financial reporting and their disclosure control processes generally,” Fike said. “I worry that being able to kick the can down the road another quarter, are you really going to be ready at the six-month mark to report out on two quarters at once?”

Money isn’t everything. There are also nonfinancial costs to mull over, like the aforementioned first-mover disadvantage.

Existing or newly public companies that choose to adopt semiannual reporting might be seen as “potentially signaling something to the market, and it serves as a red flag,” Francis P. McConville, partner at law firm Labaton Keller Sucharow, where he focuses on securities fraud cases on behalf of institutional investors, told CFO Brew. “Informational transparency reduces the cost of capital, so with longer periods of time [without reporting], there may be certain funds that won’t take a bigger position in a company that has adopted the semiannual versus the quarterly.”

Additionally, if a company with a semiannual cadence discloses less information to the public throughout a fiscal year, it could lead to “a much more volatile trading of the shares” when it does report, McConville said. “If the information is negative, I think the stock drops and the damages, as we would see it from a potential litigation standpoint, will be much larger.”

Another concern: the big swings in priorities between SEC administrations lately. “I could see this being abandoned by the next administration, should it have a different SEC chair,” Fike cautioned. “How much do companies want to react to this proposal when there’s maybe two and a half years left that it could be in effect?

“I personally would want my team to really still basically be ready for quarterly reporting,” Fike said, addressing a CFO’s POV. “Maybe it doesn’t have to then be actually drafted and go to outside counsel and all those things, but I would want the data to be available should we flip the switch back.”