Semiannual reporting puts CFOs at greater risk of violating disclosure laws

CFOs, you can take a deep breath.

In the weeks since the Securities and Exchange Commission released its proposal to make quarterly reporting optional, the general consensus has become that your company will only have to change its cadence of public filing as much as you want it to. Many companies will stay the course and wait or decline to move to a semiannual reporting cadence.

We should clarify, though: You can take a nice deep breath, but it’s not time for a full-on, blissed-out meditation session. Quite the opposite, actually.

For firms that switch to semiannual reporting, there could be a serious side effect: CFOs could increasingly land in the hot seat, securities experts caution. What does that mean? Their every word during the six months between filings will take on more weight—with analysts, investors, and by extension, the SEC. Under Regulation Fair Disclosure, if a CFO or any executive discloses material nonpublic information to an individual or entity—like an analyst or institutional investor—it must disclose that information publicly.

“If I’m a CFO, I’m worried about…being forced, maybe by management, into making disclosures that then put me in the hot seat with the SEC,” Lisa Bragança, a former SEC branch chief who leads a securities defense law firm, told CFO Brew.

Silent spell. You know that kid in English class who absolutely never spoke? Until one day she meekly posited that “Maybe Boo Radley was actually the mockingbird?” and it sounded like scripture? Well, that’s what public comments from companies that report semiannually could sound like to the market and investors during the six months between filings, experts explain.

Francis P. McConville, partner at law firm Labaton Keller Sucharow, told us, “In a quarterly environment, when you are releasing information in a more frequent way, your earnings calls, your investor presentations, all sorts of social media and conferences, all the public appearances, are much more regulated in the sense that the information you’re talking about likely has already been disclosed.”

“If you’re only reporting twice a year, there’s going to be a real analysis on the information that is discussed, as to whether or not this is something that was required to be disclosed, whether it’s an 8-K or some other type of vehicle,” McConville, who focuses on securities fraud cases on behalf of institutional investors, added.

On the other hand, not saying anything for six months could be construed as negative. “If you let a quarter go by, and you don’t file a [10-]Q and you’re just silent, does that mean you don’t have anything good to say?” Rebecca Fike, partner in the regulatory and enforcement group at Reed Smith and a former SEC attorney, told us. Particularly for newer companies, staying silent for too long between filings “could be a bad thing,” Fike said, potentially signaling that “you weren’t ready to be public. How can you not have something out at the quarter?”

It depends. Whether or not that becomes a common implication will “depend on how many people actually take [the semiannual] path versus don’t, and then what that says about the ones who miss what would have normally been a [10-]Q,” she added.

Earnings calls and statements by executives might not be the only commentary more heavily scrutinized than before. In quarters when investors and analysts lack an earnings report, anything can become a public comment, Bragança added.

“You go have dinner with a bunch of investors….you’re going to be pumped for information constantly,” she said. In that environment, even offhand comments could have unintended consequences.

“People will have expectations, and sometimes getting asked a question and not answering might convey information,” Bragança said, in reference to CFOs’ interactions with investors and analysts.

“CFOs, controllers, presidents, CEOs of smaller companies who run afoul of this…are then having to say, ‘Well, yeah, but I talked to this analyst because he called.’ Well, you talked to that analyst, and then that analyst advised the investment banking clients of that firm, maybe, or published something that went to just the investors who are clients of that firm.”

“You didn’t fairly disclose everything to everyone at the same time,” she continued. “So one set of investors has a strategic benefit, edge over the others.”

Personality hire. Who knows? Maybe you’re the one and only person alive who became a CFO because the stand-up comedy thing didn’t work out. But if you’re like many folks in the top finance seat, you didn’t take the gig to crack jokes, schmooze, and work the room.

That could become a problem if a two-tier disclosure environment requires CFOs to speak off the cuff and fill in the gaps between earnings reports, Bragança warned.

“CFOs then will become less CFOs, like financial officers, and more like mini CEOs, where they’re just chatting [people] up,” she said. “And then the controller will become the most important person, internally. That’s the person who will have to control what’s going on in the company.”

“I don’t generally think of people who get CPAs as being wild and woolly kind of folks who want to go out and just make up the rules as they go along,” she continued. “I think of people who come up through the accounting profession, I am wary, and I think they should be careful, of being pushed into a role where they don’t have the guardrails.”