Navigating the SEC's Potential Shift to Semi-Annual Reporting: Key Considerations for Corporate Leaders

The SEC's consideration of semi-annual reporting marks a consequential inflection point for U.S. public companies, investors, and the broader disclosure ecosystem. While a change in cadence would not alter the core obligation for companies to provide complete and accurate information to the market, it could materially affect how companies plan, produce, and communicate that information across the fiscal year.  

While potentially affording greater flexibility to public companies in how they approach their disclosure obligations, the prospect of semi-annual reporting raises a series of important and interesting issues that companies might consider in order to stay ahead in this evolving regulatory environment. 

Setting Market Expectations

1. Companies will need to evaluate and determine the appropriate cadence for investor updates between semi-annual reports because market participants, including investors, analysts, proxy advisory firms, and rating agencies, may resist a six-month gap in reporting. Companies will need to assess their investor relations profile and evaluate whether to maintain quarterly earnings releases (albeit without Form 10-Qs), provide interim key performance indicator ("KPI") dashboards, and/or file more-frequent Form 8-Ks. 
2. For those companies that expect to continue issuing quarterly earnings releases, consider whether to expand the scope to provide a more MD&A-style presentation. Companies will also need to evaluate and consider how much detail (regarding segments, cash, liquidity, non-GAAP measures, etc.) to include in the earnings release.  
3. With fewer mandated filings, KPIs may carry additional weight. Companies will need to determine whether and how to tighten KPI definitions, change reconciliation practices, and adjust controls to avoid the perception of selective transparency.

Analyst and Shareholder Communications

4. Companies will need to assess how semi-annual reporting has the potential to impact interactions with analysts and shareholders and whether more-structured Q&A sessions should replace informal interactions. 
5. Companies will need to assess whether semi-annual reporting has the potential to increase Regulation FD risk. Investor relations teams will need to revisit their quiet periods in which they do not speak to investors. 
6. Companies will need to monitor market practice with respect to pre-announcements of financial results, including whether they become more or less common as a result of semi-annual reporting or remain tied primarily to deal activity and material and unanticipated market changes. 
7. Companies will need to evaluate and address a potential increased risk of market rumors. 
8. The timing and content of Form 8-Ks may evolve as a result of semi-annual reporting, as companies may be more inclined to make voluntary Form 8-K filings. Companies will need to consider revising their policies with respect to voluntary Form 8-K filings and may determine to attach slides, scripts, or metrics to reduce selective disclosure risk.  
9. The SEC currently permits companies to disclose the material terms of definitive material agreements or new compensation arrangements in a Form 8-K but delay the filing of the underlying documentation until the next semi-annual report. Companies should anticipate and evaluate the impact of a potential change to this reporting cadence. 
10. Companies will need to evaluate whether semi-annual reporting increases risks of shareholder activism. Quarterly reporting may be considered a best practice and, accordingly, companies that report semi-annually will need to evaluate whether they may be subject to criticism or increased risk of attack by activists for failing to follow best practices.

Guidance

11. Companies will need to consider how semi-annual reporting might impact their guidance practices and determine whether to avoid quarterly guidance, shift to semi-annual or annual guidance, or stop providing guidance entirely.  
12. Companies will need to consider how changes to their guidance practices might impact disclosure of their business drivers and trends. 
13. Companies will need to monitor market practice with respect to incorporation of earnings releases into registration statements/prospectuses and decide on company practice. Will the practice be to segregate certain portions of earnings releases to avoid incorporating guidance and other non-GAAP metrics into prospectuses? Or will companies separate earnings and guidance announcements?

Internal Controls

14. Companies will need to recalibrate internal controls over interim information not included in SEC reports.  
15. Internal controls testing cycles may need to be redesigned to remain effective. 
16. Companies will need to evaluate the incremental risks associated with having to assess the effectiveness of their internal control over financial reporting and disclosure controls and procedures every six months as opposed to every quarter.  
17. Companies will need to consider whether to implement new internal attestations or sub-certification practices around interim releases.  
18. Companies will need to evaluate whether it is appropriate to clarify to investors what information is subject to independent auditor review.

Board Oversight

19. Disclosure policies and board calendars may change as a result of semi-annual reporting. The content of what materials are included in board packages may also change. Companies will need to consider how and to what extent semi-annual reporting may change the cadence or content of the financial results that are provided to the board. 
20. The board may need to consider whether changes to the manner in which it monitors strategy and risks between semi-annual reports are appropriate. 
21. Companies will need to determine whether to institute scheduled interim reviews of trends, controls, and pending disclosures so that semi-annual reports are not "first looks" to the board or audit committee. 
22. Companies will need to consider whether semi-annual reporting may require audit and disclosure committees to amend their charters.

Reframing Materiality

23. Semi-annual reporting may require companies to adjust their materiality analysis since less-frequent reporting has the potential to increase Section 10(b) exposure around interim statements. 
24. Many jurisdictions that currently permit semi-annual reporting also have adopted reporting requirements, such as the European Union's Market Abuse Regulations, that require a company subject to the regulations to inform the public as soon as possible of inside information that directly concerns that company. Companies will need to consider the impact on their disclosure practices and disclosure controls and procedures if the United States were to adopt similar requirements.

Content of Semi-Annual Reports

25. Companies will need to evaluate whether and how risk factor and forward-looking statement disclosures may change, including whether to "refresh" the suite of risk factors in the semi-annual report. 
26. Similarly, companies will need to evaluate how MD&A will change and monitor whether market practice is to provide only six-month or trailing 12-month comparisons as well.

Impact on Contractual Reporting Requirements

27. Many companies are required to provide quarterly financial reporting under applicable debt reporting covenants. It remains to be seen whether the debt market will evolve such that reporting covenants will permit semi-annual reporting. Debt providers will need to evaluate the additional risk they may assume if companies are permitted to report financial results every six months. Companies will need to account for this potential risk shifting.  
28. Vendor, joint venture partner, or customer agreements often require quarterly financial statements. Companies will need to evaluate the impact on their relationships with these stakeholders as a result of a shift to semi-annual reporting, including whether changes to reporting covenants are feasible.

Impact on Capital Formation  

1. Semi-annual reporting may affect shelf takedown readiness. Specifically, underwriters may heavily scrutinize the "age" of financial information. Companies seeking to raise capital will need to take these factors into account when developing a go-to-market strategy.
2. Underwriters may require enhanced due diligence sessions and document backups, particularly during the second half of the semi-annual periods. These additional processes will need to be taken into account and may impact the ability of companies to execute "overnight" transactions or other transactions with accelerated timetables.
3. The "135-day rule" under SAS72/AU 634 limits the ability of auditors to provide a negative assurance on financial statements. Assuming the accounting guidance remains unchanged, the 135-day rule may effectively limit the ability of companies that report semi-annually to conduct underwritten transactions if the rule is triggered. Companies will need to assess whether to elect to obtain voluntary interim reviews to support offerings. Companies will also need to account for any related changes to auditor engagement letters and auditor fees. 
4. Companies will need to consider whether and how to forward incorporate by reference quarterly financial disclosures, if any, into prospectus supplements. Companies may determine to refresh risk factors, trends, and known uncertainties through Form 8-Ks or prospectus supplements to avoid stale narratives. 
5. It remains to be seen whether semi-annual reporting might have a direct impact on the cost of capital (i.e., if a company that continues to report quarterly will be able to raise capital at more favorable rates).

Impact on Securities Trading

34. Companies may determine that it is appropriate to adjust the timing of their open trading windows and trading blackouts. Companies will need to consider the impact on the effectiveness of equity compensation if trading windows shrink in the aggregate. 
35. Companies will need to determine whether to take a more permissive or conservative approach when pre-clearing trades by directors and executive officers. 
36. Companies will need to monitor whether the use of Rule 10b5-1 trading plans by directors and officers becomes more prevalent, including to manage withholding tax obligations and/or exercise price payments relating to equity awards. Rule 10b5-1's cooling off period for directors and officers is currently tied to Form 10-Q filings, and it is unclear whether and to what extent the rule might change as a result of a shift to semi-annual reporting. 
37. Companies, directors, and officers may need to reassess determinations as to whether they are in possession of material, nonpublic information at the time they enter into Rule 10b5-1 trading plans, including in connection with share repurchase programs.

Impact on M&A Transactions

38. Targets and acquirors will need to consider implications if the acquiror completes voluntary quarterly auditor reviews but the target does not. 
39. Financing cooperation covenants may need to be adjusted to require specified financial statements during the period between signing and closing. Similarly, access to information covenants and notice of certain events covenants may change. 
40. With regard to the presentation of pro forma financial information or acquired business financial statements, corresponding changes to Rule 3-12 of Regulation S-X may need to be made to maintain symmetry between the Securities Act of 1933 and the Securities Exchange Act of 1934 regarding the age of financial statements. 
41. The due diligence process may change. Acquisitive companies, or companies considering pursuing a strategic transaction, will need to determine whether to have quarterly financial statements prepared that have been reviewed by the auditors and that can be presented to potentially interested parties. 
42. There may be additional financing or due diligence challenges for potential acquirors that are considering an unsolicited offer. Companies will need to identify and develop an action plan for addressing these challenges.

Impact on Executive Compensation and Executive Transitions

43. Companies may need or want to abandon quarterly metrics and quarterly incentive programs in favor of annual (or longer) metrics and performance periods. Similarly, companies may need or want to move away from quarterly vesting schedules for equity awards. 
44. Compensation benchmarking may need to be adjusted. Also, incentive programs involving relative performance against peers may be more challenging to evaluate and measure. 
45. Companies will need to consider the impact of semi-annual reporting on equity grant dates and vesting triggers. Specifically, companies will need to monitor whether a more standardized cadence develops regarding equity award grant timing, including whether there might be a general market movement toward making all grants—including for promotions and new hires—after semi-annual reports are filed.  
46. Companies will need to assess whether semi-annual reporting (in the absence of increased Form 8-K reporting) may increase risk relating to employees who make investment decisions regarding stock-based awards granted under employee benefit plans. 
47. Companies will need to assess whether additional disclosure or explanation may be needed regarding the impact of material nonpublic information on executive compensation under Regulation S-K Item 402(x).  
48. Companies will need to consider whether and how CD&A and pay-for-performance narratives may need to change. 
49. The longer time period between semi-annual reports may influence companies with departing principal executive or principal financial officers to retain such officers (or appoint interim officers) specifically with
50. Companies will need to consider whether an expected increase in share price volatility following adoption of semi-annual reporting might influence the type of equity awards they grant, including stock options.