Why the SEC’s Proposal to Get Rid of Quarterly Reporting Is Bad for Investors

0:00Tomorrow's opportunities start by seeing beyond the surface. Global X ETFs combine deep research and global expertise to uncover the forces shaping markets. Explore ETFs for investors who lead with conviction at GlobalXETFs.com. Hi, everyone. It's Miriam. I'm here today with John Weil. He is a columnist at WSJ's Herd on the Street. Thanks for joining me, John. Thank you for having me. Now, John is WSJ's resident expert on accounting and financial reporting. He's modest, so he said, am I really an expert? But I think he is. He's here with me today to discuss a topic that I think we both feel hasn't gotten enough attention from investors, the SEC's pending proposal to eliminate quarterly reporting requirements for public companies.

0:49That could be happening soon, and we're going to have a really interesting conversation about that in a bit with SMU professor Mark Steinberg, who is one of the foremost scholars in securities law. But before we get to that, we have to go back to the thing that has been on the market's mind for a couple of weeks now. In fact, it was the subject of our last episode, and that is the fact that U.S. Treasury yields keep on climbing. They do. And this is going to increase borrowing costs for everybody, for public companies, for private companies, for individuals, for mortgage rates. You would think that this would have some type of a tempering effect on the economy and maybe even do some of the Fed's work for it so it doesn't have to raise interest rates just yet.

1:32But nobody really knows where the ceiling is. We could be at 6 % for all anybody knows. That's not a prediction, by the way. The yields have really escalated sharply for any number of reasons. And in fact, market expectations for a rate hike from the Fed in October have fallen a lot, as our colleague Spencer Jacob wrote about in his column this past week. And that is in part because of some of the economic data that came out this week, as well as comments by a senior Fed official who tempered expectations himself. But as you said, a lot of this could be the market doing the Fed's work for it. It could be that, you know, with yields rising so high this past week, that could create some of the slowing effects, the cooling off effects that the Fed would be trying to achieve with higher rates.

2:19That's true. At the same time, nobody really knows whether it's going to have that effect. Right. And in part, the soaring rates are a reflection of a booming economy. It's not just that oil prices are up or people are concerned about the war. It's also that we have a, at least particularly driven by AI, a very booming economy. And you get higher interest rates as a natural consequence of letting the economy run hot. And it's unknown how high interest rates will have to be to get that AI boom to slow down. That's also true. But one thing that we have seen already is that there are other aspects of the AI boom that are starting to slow down.

2:58OpenAI and Anthropic have both come out and said, oh, maybe, you know, we need to do something about this maybe 10 percent chance that AI could end humanity and maybe try to impose more, you know, restrictions on ourselves to prevent this from happening. And there was a meeting this past week with President Trump and many of the leaders of these companies to discuss that. And that's also raising a question of what is going to happen with the IPOs of these big companies, because we don't know about, you know, this 10 percent chance that these companies could end humanity. That's kind of unknowable for us as investors right now.

3:38But what we can look at is how is this going to affect their IPOs? Well, OpenAI's Sam Altman has come out publicly and said that safety concerns are the reason that they're going to be putting the brakes on their IPO plans until at least next year. I think a lot of people, especially a lot of investors, just really do not know what to make of some of these claims, that they are so terribly concerned about the threat that AI could pose to humanity. This is something of a debating point at the minimum among companies. And there's also a lot of concern that perhaps this is something that even the industry is kind of cooking up in order to try to capture the government or set regulations the way they want to do it.

4:26I don't think anybody is really in a good position to know how to evaluate these types of spectacular concerns. Another theory is that maybe these companies aren't ready to go public and this is their way of delaying that. I mean, I don't know enough about that, but there was some information that was actually leaked this past week. A Reuters reporter got a hold of Anthropik's S1, which was supposed to be highly confidential at this point. And among other things, that S1 had a risk factor about AI potentially harming humanity. We don't know if Anthropik will delay its IPO further. I think it's already pushed it back to November.

5:09It had been thinking about IPO-ing in October. We'll see what happens with that. Some people say, oh, there's no way that it can IPO this year with these concerns hanging over it. And all of that seems to have also cast a chill on the rest of the IPO market. I would say that plus what's happening in the bond market. And so we've seen other companies come out and say, I'm not going to actually go forward with my IPO. And one of those companies was Aura, the smart ring maker, which we discussed on this podcast in a previous episode. Aura said it was delaying its IPO, quote, despite strong demand due to uncertainty in the IPO market.

5:47It must not have been that strong if they couldn't get the IPO up. Well, you know, as we discussed on this podcast, we had questions about whether Aura and other, you know, single product wearable companies are really appropriate candidates to be public companies. And I don't know. We'll see, you know, if that company does end up going public, how it performs. But one thing that really stood out to me about that disclosure was, you know, Aura said, despite strong demand and, you know, that combined with Anthropics S1 statement having gotten out there, its IPO prospectus. These are two pieces of information that the SEC, you know, should not want to have be leaked out there.

6:33Historically, under past commissions, the SEC was highly concerned about issuers of new securities trying to condition the market or jump the gun or basically engage in sales of securities through marketing that wasn't extremely regulated, highly restricted, usually restricted to the prospectus itself. To see a prospectus leak entirely before it's filed publicly, I can't remember having seen anything like that before. This is not the way things normally happen with IPOs. And so I can tell you that if you'd gone back a generation and something like this had happened, there would have been immediate questions about, well, is the SEC going to be trying to figure out whether the company was involved in any way in the release of this information?

7:25Potential enforcement actions. Yeah. And the thing is, nobody really wants witch hunts. Nobody wants anybody going after the journalists who are breaking these stories. But at the same time, in the past, if you had seen a situation like this, the first question that would have leapt to mind is, is this going to end up delaying the IPO? And so far, we really haven't seen any concerns about that like that at all. It's possible still that Anthropica is public in November, which has been the latest timetable. But at the same time, you know, this is not the way you're normally supposed to be doing the sale of securities.

8:03And what about Aura commenting on its strong demand? Again, that's outside the terms of the prospectus. You would have thought that, you know, well, one, if it was that strong and, you know, at that price, then they probably would have done the offering. So, you know, take that for what it's worth. But, you know, I thought it was a bit unusual to see those types of comments are managed with. And that leads us to the topic we want to talk about today, which is really part of the evolution of the SEC and what we've seen the SEC start to do during the Trump administration. The specific topic that we're going to discuss today is the SEC's pending proposal to do away with quarterly reporting requirements for public companies.

8:45Now, a lot of investors have kind of ignored this issue, I think, because some people don't think the SEC is going to move forward with it. But our guest today doesn't agree with that view. He thinks there's a strong chance that this could actually happen and it could happen soon. In fact, this could be the last set of third quarter earnings reports that we get from some public companies. Right, John? That's correct. So to talk to us about this today, we have Mark Steinberg. He is a professor at Southern Methodist University's Dedman School of Law, and he was John's personal securities law professor when he was in law school.

9:23So a very important man in all respects. Mark is one of the top scholars in securities regulation. He literally wrote the book on many of these topics and a former enforcement attorney at the SEC. I think it will be a really relevant conversation for all investors. That's coming up in a bit.

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10:20Professor Mark Steinberg, thanks so much for joining us. Thank you for having me on this program. So for those listeners who haven't been paying attention, can you describe exactly what the SEC is proposing to do? With respect to the Form 10-Q, which has been a part of the securities disclosure framework since 1970, the SEC is proposing to allow publicly held companies to elect to go to semi-annual reporting rather than to maintain their current quarterly reporting obligations. And Form 10-Q, that's what the quarterly reports the companies file when they file, not their annual report, but their first quarter report, second quarter report, third quarter report.

11:05And so what - Right. As it now stands, a publicly held company must file three 10-Qs, it's called, and then the annual report, the 10-K. Do you have a sense for who is agitating for this? What's driving this proposal? Well, certainly President Trump raised the idea. the idea and the current chairman chairman atkins is a strong proponent of this this is a framework that has been placed in place since 1970 with both republican and democratic administrations there has been some noise to change in the past but very little noise this is an idea that really has just come into a focus with respect to its adoption in the last year or two since the president's re-election a couple of years ago.

11:55Note here, this particular commission is not focused primarily on investor protection. It's focused primarily on facilitating capital formation. And when you talk about this current SEC's priority is capital formation, is that potentially on a collision course with the stripping of investor protections? Because the reason that investors want to put capital into the U.S. is precisely because they have confidence that there will be investor protection. Right. I mean, that's what it seems like to me, like the provision of capital should be conditioned on the idea that I would be protected as an investor.

12:35Right. As we know, the mandatory disclosure framework with its relatively vigorous enforcement by the SEC, and also the practice of attorneys and auditors with respect to the regimen of the disclosure process has helped enable the U.S. capital markets to remain the foremost markets in the world. What the commission is doing here is taking the risk of upsetting the U.S. prominent stature, a risk that is utterly unnecessary to take. Furthermore, to elaborate on one other point is, is that Chairman Atkins, one of his missions basically is to induce companies to go public. and he thinks that this type of going to semi-annual reporting will help induce companies to do this.

13:40He is wrong. He is wrong, first of all, based upon much of this discussion we've already had, and that is the companies are already engaging in these quarterly financial review activities. The cost savings are minimal, as shown by the commission's own studies, And thirdly, if the commission really wants to encourage and facilitate companies to go public, what they must do is to restrict the private offering rules. Companies today are able to maintain their privately held status for indefinite periods of time. For example, there are more than 1 ,000 unicorns in this country, companies that have assets of over a billion dollars.

14:32And they can engage in private offering after private offering after private offering with a lack of material information being disclosed in some of these deals. And thereby avoid being elevated into the public markets. If the private offering rules are made more restrictive, this will induce these larger companies to go into the public markets on a much more, on a sooner and a much more frequent basis. But are companies asking for this? I mean, does it benefit companies to have this change? And so far as I'm aware, the companies were not lobbying for this. They were not seeking this. Now, there are some companies that are in favor of the semiannual reporting.

15:21For example, Eli Lilly wrote a letter saying that they would go to semiannual reporting, as I believe, as did Exxon, if I remember correctly. So there are a couple of companies that had letters in favor of semiannual reporting, but this was not an issue in which the companies were seeking special favor. Is it a cost-saving thing? Why would a company like Eli Lilly want to move to semiannual reporting? Well, Eli Lilly basically says that the 10Qs really serve no special purpose in favor of disclosure because the company has analyst meetings. It voluntarily discloses information. There's ongoing due diligence and so on so that the 10 queues will enable a more long-term perspective and not tie up the company with respect to the quarterly reporting.

16:22And do you find that persuasive? No, I don't find this persuasive. And by the way, as perhaps we'll talk later, the vast, vast, vast majority of the common letters that the SEC has received, literally, what, hundreds of thousands of them, they oppose this proposal by, what, 99 percent? 99 to 1, if not more? I can give you some numbers just to put that in perspective. There were nearly 200 ,000 letters, not including about 50 ,000 form letters that were all against the proposal. And 99.6%, according to a survey by an Ohio State University accounting professor who was tabulating all of these, 99.6 % opposed.

17:07So what do you make of that? Have you ever seen anything like this before? I really haven't seen anything like this with a proposal of such magnitude. And I imagine that the Ohio State professor's findings are accurate. Me being a Michigan man, I am conceding that. Big concession there. We'll go with that. Absolutely. But what we're talking about is voluntary disclosure here. And of course, we have a mandatory disclosure framework. and when companies engage in voluntary disclosure, as we all know, they do not like to disclose bad news. And that's one of the great benefits of our mandatory disclosure framework, that every quarter and then pursuant to the Form 8K, the current reports, if an item falls within the Form 8K, then there is mandatory disclosure that must be made.

18:06With voluntary disclosure, unless an item falls within the Form 8K, which often it does not, a company can delay disclosure for several months. Mark, can I just interrupt for a moment? Tell us what an 8K is. Sure. An 8K is a current report, and what it does is it's a laundry list. If a corporate event falls within in this laundry list, such as a resignation of the auditor. Then the company must file a form 8K within a specified period of time, generally four business days, which is very long when you think about it. The Regulation FD going to fair disclosure generally requires disclosure after 24 hours to the public.

18:47This allows four days. But unless a disclosure event falls into the 8K laundry list, There's no due to disclose that information generally until the next quarterly filing or what would be if the proposal were adopted, semi-annual reporting or the annual report. You had a line in your comment letter that you wrote to the SEC where you said that current Form 8K, we talked about what that is, current report, does not require the prompt disclosure of the loss of a material contract with semi-annual reporting. This important fact will not reach investors until at least six months after the loss of such contract.

19:23And I think what I was reading between the lines, what you were saying in your letter, I think you were saying, if you're going to go this route, there are all sorts of other fixes that you need to make to the disclosure obligations. So the companies do have to disclose things on a timely basis if they're only going to be giving a semi-annual report and the annual report every year. Am I reading that right? Yes. Let me elaborate on that, please. Much noise has been made about in the EU, for example, that there's semi-annual reporting. What is not mentioned is that the disclosure systems of the EU, of the UK, of Australia, they all require the prompt disclosure of material information to the markets unless justifiable business reason exists for non-disclosure, such as if a company were in merger negotiations that may be scuttled if disclosure is made.

20:18In this country, we do not have this framework. Basically, the disclosure framework we have is that there are very set SEC items that are enumerated. So what my comment letter went to opposing this rule proposal is if the commission were to go to the Form 10S reporting, allowing companies to elect to go to semi-annual reporting, then what it must do is to amend the Form 8K to require the disclosure of all material information unless justifiable business reason exists otherwise, just like what is done in the EU and the UK and Australia, by way of example. Let me just step back a bit too, because I know that you teach your students, this is a disclosure-based system that we have for U.S.

21:10securities regulation. What does that mean for people who don't pay close attention to markets? What does it mean that we have a disclosure-based system, and what would the alternative be to that? What the disclosure system means is that the value, the worth of a particular offering or particular securities is not an issue that is within the SEC's purview. That what is focused upon is disclosure of material information in an accurate and sufficient manner that allows investors to make informed investment decisions. So the idea is that the more investors know about something, the better informed they are, as opposed to having the government putting a good housekeeping seal of approval on something and saying the government's picking the winners and losers.

22:05It's up to the investors to pick the winners and losers, but they have to have the information on a timely basis to do it. You have to have the information on a timely basis, and that's why there is already a black hole in the U.S. disclosure framework from the standpoint point that if material information is not called for by the Form 10-Q, the current Form 10-Q framework, the Form 10-K, the annual report, or the Form 8-K, the current report, then there's no duty for a company to disclose even material information. And what this proposal will do is that it will exacerbate this black hole. It will make it larger where companies can keep material information silent for prolonged periods of time, which, of course, detrimentally impacts investor protection, that the thought of an efficient market, are you kidding me?

22:58The efficient market theory is based upon the disclosure of all material information that is publicly disclosed. With this system, if the SEC were to adopt it and companies elected, we would have an even larger void in this? I mean, a couple of things. One, I thought the whole purpose of having good disclosure and having robust accounting standards was from a system-wide standpoint to lower the cost of capital for companies. Not only do you have reputational risk, but if you have less disclosure, does that possibly translate for some companies into having to pay higher yield on the on the bonds that they issue, or maybe not getting as high of a stock price because people have less confidence that they're going to be informed properly.

23:45What I'm trying to get at is, are companies taking the risk that they're basically going to be putting a big L on their foreheads for losers if they go through with this? I think definitely, yes. There is simply not the flow information that's necessary in order for investors and those who purchase debt securities and those who extend credit to have the information that they need to make the more informed decisions that they may view as necessary in order to extend credit on more favorable terms. So the result will be is, yes, credit will be extended, that debt can be issued, but it may well be viewed as less favorable to investors because of a higher risk due to the lack of transparency, thereby calling for higher premiums to be paid by the company in order to induce this investing.

24:44And say S &P 500 companies, well-known companies that have very large market values, do you expect that we're going to see a lot of companies in that class going to semiannual reporting? Assuming that this rule is adapted, I would be surprised because the board has to decide this. Under the U.S. securities law framework, a majority of the board must be outside directors. If I were an outside director, what I'm concerned about, among other things, of course, is the flow of information coming to me. It is already challenging to access information. because as we've seen time and time again, insiders, high-level insiders, CEOs and CFOs are reluctant to disclose bad news to even their own board.

25:44Going to semi-annual reporting will exacerbate that issue. That if I were an outside director, I want that flow of information coming to me. I would be surprised that a majority of the company or even even a large percentage, less than a maturity, would go to semi-annual reporting. However, if we have companies like Exxon, if we have companies like Eli Lilly going to semi-annual reporting, as they say they will, then what will other pharmaceutical companies say? another oil company or another pharmaceutical company, that they're saying we are on a disparate playing field here. So that, I think, is the risk that will develop that may cause a good number of these companies, perhaps a majority it's possible, to in a matter of time over the course of years go to some annual reporting.

26:40This is a great conversation, but I want to pause for a moment so we can take a quick break. We'll be back in just a bit.

26:56I have a question. It seems like insider trading ahead of the announcement of a piece of adverse news is something that's come up a lot in history. How could the reduction of disclosure or less frequent disclosure affect insider trading at a company? We are going to likely have so much insider trading that it's going to become far, far greater. There's already a lot of insider trading going on. Yes, the SEC and the Department of Justice, they prosecute insider trading and they do it fairly vigorous. But it's clear that there is still frequent insider trading that's going on. With this lag, with respect to going to semi-annual reporting, this will give insiders and others privy to material non-public information greater access and opportunity to engage in this type of illegality.

27:55And let me mention something important here, I think. And that is that the Supreme Court in a case called Dirks referred to the Mosaic approach with respect to the accumulation of information. In other words, that a piece of information by itself may not be material information, but when combined with other pieces of information, cumulatively, they amount to material non-public information. We all know that directors, officers, other insiders know far more about a company than we invest in as outsiders. That's clearly the case. These individuals engage in this approach every day. They have access continually to pieces of information when put together and completing the puzzle constitute material information.

28:49So with the vast majority of people who wrote into the SEC opposing this, and not all that many folks coming out in favor of it besides President Trump and Chairman Paul Atkins of the SEC, do you see them backing down or do they have an out if they wanted to? I would like to think that the SEC, in view of this overwhelming opposition, will not go forward with this proposal. My feeling is, given this administration and given the position of Chairman Atkins, we will see the rule largely adopted as proposed. Now, of course, I'm looking through my crystal ball, and I may be mistaken, as I often am when I look through my crystal ball.

29:38But I think all signals are that the commission will go ahead with this determination. Now, note here what's going to be interesting to me if the commission adopts this is whether there will be a challenge to the legality of this rule, because many of the common letters refer to the SEC's haphazard analysis in justifying this rule and with its view that this is consistent with the protection of investors. As we know, the D.C. Circuit has invalidated many SEC rules based upon flawed analysis with respect to the particular rules adoption. Now, many of those rules, of course, dealt with greater investor protection.

30:28This one deals, of course, with less investor protection. But it seems to me that the same analysis applies and we may well have a rule challenge on this and we may well have a decision by the U.S. Court of Appeals, which may go up to the U.S. Supreme Court, that invalidates this rule proposal if it, in fact, is adopted. So can you help us put this proposal in perspective as far as the overall pendulum swing toward less strict governance and reporting requirements? What else has the SEC been doing in this vein? I've been involved with the SEC and being an academic and writing and as a consultant and so on for over four decades.

31:14The commission has seen itself with both Republican and Democratic administrations. There has been never anything in the history of the SEC with an assault on investor protection as with its current administration. For example, the SEC just a couple of weeks ago proposed rescinding the shareholder proposal rule. This allows shareholders, if the criteria are met, to have their proposal included in the company's proxy statement and voted on by shareholders at the company's annual meeting. It is now over 80 years old. It remained its vigor during the Eisenhower administration, during the Nixon administration, during the Ford administration, during the Reagan administration, during the two Bush administrations, all Republican administrations.

32:16There was no thought really of rescinding this rule. It was viewed as a key principle of ensuring sureholder voice. And now in one act, this administration seeks to rescind a rule that has been a part of corporate democracy for over 80 years. And then another example is that the commission proposes for 80 percent of the publicly held companies to avoid the Dodd-Frank advisory vote on executive pay. As you may recall, the Dodd-Frank Act that enacted in 2010 requires that publicly held companies have an advisory vote by shareholders on the amount of shareholder pay and whether they approve it. The SEC, by a proposal, seeks to allow 80 % of the publicly held companies from having to adhere to this requirement.

33:21So this is simply one huge, huge example out of several where the commission is on a mission to deregulate. And in deregulating, the commission is taking real, real risk on causing severe damage to the U.S. capital markets, to investor protection, and with the state legislation that has been adopted, like here in Texas, a corporate director and officer of a publicly held company can only be held liable if he or she engages in intentional misconduct. fraud or annoying violation of criminal law. So when we look at this simply as a totality of what is happening, there is a real risk, I believe, that we are going to have grave financial fallout, financial crisis, financial frauds, investors losing huge amounts of money, and a real detrimental impact on the integrity and viability of the U.S.

34:30capital markets. Now, of course, I hope I'm wrong. I hope I'm wrong, of course, because I really hope that the stock market continues to do well and that I'm mistaken in my thoughts. I hope I'm wrong, but I don't think I am. Wow. Those are pretty stark words. And I suppose we will see very soon what the SEC ends up deciding. Professor Steinberg, thank you so much for joining us. Thank you for having me on this wonderful podcast. I very much appreciate you having me here.

35:28Ennick is the Wall Street Journal's head of multimedia. For even more, head to WSJ.com. I'm Miriam Gottfried. And I'm John Weil. Until next time.

35:41What connects Global X ETFs with the advisors and investors who choose us? Conviction. The belief that vision returns value and innovation yields opportunity. Combining insights both local and global, We look beyond obvious trends to uncover the opportunities shaping tomorrow. Explore our funds at GlobalXETFs.com. GlobalX. Beyond Ordinary ETFs.