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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is founder and editor of Footnoted.com
Rulemaking by the US Securities and Exchange Commission tends to be a pretty dry affair. Typically, new rules run to hundreds of pages of dense legalese and include multiple footnotes. This includes the 279-page proposal made by the SEC last month that, if approved, would allow public companies in the US to do away with reporting quarterly earnings.
While the actual rule may still be verbose, the concept — unlike many other SEC rules — is easily understood. And it appears to have enraged a lot of investors, leading to a flood of comment letters to the regulator.
As of Thursday, the SEC has received more than 600 comments. Tzachi Zach, a professor at Ohio State University’s Fisher College of Business, built a tool to track responses and it shows that 94 per cent of all the comments made are against the proposal, compared with just 2 per cent in favour. The remaining 4 per cent give a conditional response.
Of course, it’s still early days. The public comment period does not close until July 6, and most of the letters from the likes of major law firms, public company executives, accounting firms and professional associations have yet to come in.
But it is clear that there is strong opposition from individual investors, many of whom say they rely on quarterly financials to make informed investment decisions. One letter went viral due to the eloquence of its criticism. “Quarterly reports are the single most important levelling mechanism between retail and institutional investors in US equity markets,” said the anonymous comment purportedly from WallStreetBets, a sub-forum on Reddit. “If quarterly reporting is crushing American capitalism, American capitalism is hiding it well. We have looked.”
Another letter came from an anonymous writer who described themselves as a “longtime moderately conservative investor who has consistently supported efforts to reduce regulatory burdens (and) eliminate wasteful woke mandates”. But this person went on to say that “I never expected to see a Republican-led Commission deliver a gift-wrapped exemption that so clearly undermines market transparency and tilts the field against everyday retail investors.”
The SEC considered doing this once before, back during the first Trump administration in December 2018. But unlike the current proposed rule, the SEC just made a request for comments and the response was much more muted, with fewer than 100 letters.
Why the SEC decided to take the idea out of storage and dust it off is clearly in line with chair Paul Atkins’ calls to “Make IPOs Great Again” by reducing what he has called numerous regulatory hurdles. In his statement accompanying the proposal, Atkins said “the rigidity of the SEC’s rules has prevented companies and their investors from determining for themselves the interim reporting frequency that best serves their business needs and investors”.
One big question about the proposal is whether Atkins can push this through, even if the letters remain overwhelmingly opposed. Atkins already has the votes that he needs to put this new rule in place, given there are three Republican commissioners — himself, Mark Uyeda and Hester Peirce — at the SEC and zero Democratic commissioners. But it remains to be seen if the political will is there.
It will be particularly interesting to see where the responses from major accounting and law firms fall. They typically help draft and advise companies on their quarterly earnings and related documents, so fewer earnings reports would undoubtedly mean fewer billable hours for those firms.
Under a foundational federal rule known as the Administrative Procedure Act, the SEC is required to take all of the public comments into consideration and carry out a detailed analysis. One former SEC attorney who used to review comment letters on proposed rules before moving to private practice says the process is not as simple as counting up the number of letters and sorting them into those in favour and those opposed.
But others disagree. Nell Minow, an attorney and longtime shareholder advocate, thinks the response is clear and that if the SEC tries to push this rule through, it will end up in the courts, much the same way that the SEC’s controversial climate change rules proposed by former SEC chair Gary Gensler did.
“If there are a lot of comments in opposition, based on the data, it could be thrown out,” Minow said. “I also believe that it is the users of the data whose views on materiality should be given more weight than the providers of that data.”
