SEC Chair Gary Gensler quietly dropped a controversial Trump-era rulemaking related to the nature, content, and timing of quarterly financial reports made by public companies, according to the most recently updated regulatory agenda made public on June 11, 2021.
This action will surely disappoint several business groups, including the U.S. Chamber of Commerce, who issued a joint statement on April 21, emphasizing the importance of capital formation. Gensler was sworn in on April 17.
They wanted the SEC to continue adopting rules that make it easier for companies to go public while expanding the private markets.
When the commission was led by Trump appointee Jay Clayton from 2017 to 2020, many of the items on the business groups’ regulatory wish list were implemented.
Among other things, the business groups, in their April policy statement, urged the SEC to permit emerging growth companies (EGCs) to follow simplified quarterly reporting requirements, including the option to issue a press release with earnings instead of the current Form 10-Q.
Rep. Ann Wagner, a Missouri Republican, in May introduced a bill that would allow streamlined quarterly financial results for all public companies, not just for EGCs. (See GOP House Bill Takes Aim at Quarterly Reporting Requirements in the May 27, 2021, edition of Accounting & Compliance Alert.)
Her effort is unlikely to be successful with Democrats controlling both the House and the Senate.
The head of a regulatory agency sets the agenda, and previous chairmen of the SEC usually relegated projects that they consider low priority to “long-term actions.” Some even put certain projects into that bucket to be silently dropped eventually.
In Gensler’s case, quarterly reports rulemaking was scrubbed from both the near-term and long-term agendas.
Clayton’s focus on quarterly reporting came as President Donald Trump in August 2018 asked the SEC to consider a six-month reporting system to replace the three-month quarterly and annual filing requirements that U.S. public companies have followed since 1970.
Trump made the request after a business executive told him that quarterly reporting is too burdensome. Some critics of the current system also argue that quarterly reporting promotes a short-term mindset among corporate executives who are driven to meet earnings expectations every three months, and Clayton said that it is important to examine whether the current requirement serves retail investors best at a time when they are trying to invest for the long run.
Rulemaking was Already Doomed
This project had already been on life support during Clayton’s tenure even though he was worried that the lengthy and complex reporting requirements for public companies are driving companies to private markets that retail investors do not have access to.
Many investor groups do not want the agency to change them. Investors believe the current quarterly reporting requirements instill discipline and provide needed transparency in companies raising funds in public markets.
After issuing a preliminary rulemaking document at the end of 2018, the SEC under Clayton placed it on “long-term” actions in early 2019. However, Clayton said that only the projects that he expected to move to the next phase of rulemaking within a year are put in the current agenda. Rather than moving this project to a proposal earlier in the year, the SEC first held a roundtable in July on quarterly reports and earnings releases when participants discussed their views about Release No. 33-10588, Request for Comment on Earnings Releases and Quarterly Reports, issued in December 2018.
In the spring of 2020, Clayton brought it back to the short-term agenda. He wanted a proposal to be issued by Spring of 2021. But then, in the fall last year, he put it back to long-term projects. It said: “Next Action Undetermined.”
Meanwhile, quarterly reporting is not the only rulemaking agenda that got silently dropped.
Among other rules, Gensler removed real estate disclosure rule from both near- and long-term agendas. (See SEC Eyes Revamp of Disclosure Rules for Real Estate Industry in the March 16, 2020, edition of ACA.)
This article originally appeared in the June 21, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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