Trump 6-month reporting idea has D&O claims benefits, downsidesPosted On: Aug. 28, 2018 7:00 AM CST
President Donald Trump’s proposal that the U. S. Securities and Exchange Commission consider permitting biannual rather than quarterly earnings reports could positively impact directors and officers liability claims by helping firms avoid the temptation to manipulate numbers to meet earnings expectations.
But implementing the proposal also has its drawbacks, including giving malfeasors more opportunity to conduct insider trading and other inappropriate acts, experts say.
Changing the quarterly report requirement, which has been required by the SEC since 1970, would only be made after a long process that includes soliciting public comments.
The idea is not new. Business organizations including the Business Roundtable, a Washington-based association of CEOs, and Berkshire Hathaway Inc. chairman Warren Buffett have previously supported eliminating the quarterly report requirement.
A number of academic studies have concluded quarterly reports promote “short termism,” by encouraging myopic behavior by management teams while discouraging long-term strategic planning.
The United Kingdom eliminated its quarterly reporting requirement in 2014, following a 2013 European Union directive making it optional for its members. Reuters has reported a select list of 29 other countries that also do not require them.
President Trump said in his Aug. 17 tweet, “In speaking with some of the world’s top business leaders I asked what it is that would make business (jobs) even better in the U.S. ‘Stop quarterly reporting & go to six-month system,’ said one. That would allow greater flexibility & save money. I have asked the SEC to study!”
SEC Chairman Jay Clayton, who was appointed by President Trump, said in a statement the president “has highlighted a key consideration for American companies” and “many investors and market participants share this perspective on the importance of long-term investing.”
He said also the SEC’s Division of Corporation Finance “continues to study public reporting requirements, including the frequency of reporting.”
Moving to a six-month reporting period “seems to make sense to me because it encourages, No. 1, long-term investing and long-term financial decisions on the part of the company,” said Joseph P. Monteleone, a partner with Weber Gallagher Simpson Stapleton Fires & Newby L.L.P. in Bedminster, New Jersey.
“They do not have to worry about meeting quarterly earnings projections” which “may actually reduce the frequency of litigation we see out there” because fewer lawsuits will be filed when firms miss their quarterly targets, said Mr. Monteleone.
Dan A. Bailey, a member of law firm Bailey Cavalieri L.L.C. in Columbus, Ohio, said, a rule change to bi-annual reporting would reduce the frequency of D&O claims, just because it would give firms “less opportunity for them to stub their toe.”
But there are possible negative impacts as well from a D&O claims perspective, say observers. “A company may not disclose something for six months that it might have disclosed sooner had it been reporting quarterly,” said William Boeck, senior vice president at Lockton Cos. L.L.C. in Kansas City, Missouri.
If that happened, class action claims “could end up being bigger in scope because a class period might be longer, whereas a company might issue a corrective disclosure in a quarterly report.”
As a result, “conceivably, claims could become larger, classes could be large and, by extension, potentially settlements or judgments could be larger,” said Mr. Boeck.
Mr. Bailey said it could increase the severity of claims because the longer period between disclosures means “investors may continue with an investment strategy consistent with what they think the company is doing based on older and older news, and by the time the company does get around to disclosing the changed information … the investors will have more losses based upon their reliance on earlier information which is no longer accurate.”
The longer reporting period creates the danger of “later accusations of insider trading on unpublished information, and of full-disclosure violations,” said Kevin LaCroix, executive vice president of RT ProExec, a division of R-T Specialty L.L.C., in Beachwood, Ohio.
The longer time period also creates opportunities for the inadvertent, nonpublic release of material information, Mr. LaCroix said.
Moving to a six-month reporting schedule “would upend a long history of quarterly reporting and “companies have a lot of structures“ in place that are based on quarterly earnings, said Kenneth Yeadon, a partner with Hinshaw Culbertson L.L.C. in Chicago.
Zachary R. Blume, a partner with Ropes & Gray L.L.P. in New York, said, “In reality, I think with the 24-hour news cycle and social media, companies are still going to be putting out a lot of information about their results,” even in cases where there is not a 10Q SEC report.
Mr. Blume said there are other items on the SEC’s agenda, including promoting initial public offerings. “I don’t think you’re going to see it in the near term,” he said of bi-annual reporting.
“It’s not going to happen this year or next,” but “it’s likely they’ll come up with something to ease the burden a little bit,” and “probably modify what people have to file quarterly,” said Teresa M. Goody, founder and CEO of McLean, Virginia-based consulting firm Goody Group P.L.L.C., and a former attorney in the SEC’s Office of the General Counsel.
But, she added, it is important the SEC continue to have a “rigorous” disclosure requirement such as it has now with the 8K form, in which firms must report material events.
One alternative suggestion is to eliminate full quarterly reporting but require a quarterly disclosure of revenues.