SEC Solicits Comment On Quarterly Reports – Part 2




Posted by on March 08, 2019

SEC Solicits Comment On Quarterly Reports – Part 2- Today is the continuation of a LawCast series talking about the SEC’s recent public inquiry on earnings releases and quarterly reports. In addition to annual reports on Form 10-K and current reports on Form 8-K, companies subject to the periodic reporting requirements under the Securities Exchange Act of 1934, other than foreign private issuers, must file quarterly reports on Form 10-Q, which include independent auditor-reviewed interim financial statements and other disclosure items. Foreign private issuers must file annual but not quarterly reports.

These quarterly reports, as well as other periodic reports, may be forward incorporated by reference into Securities Act of 1933 registration statements such as Forms S-1 and S-3, reducing the need for duplication of this information through post effective updates. As an aside, the FAST Act, passed into law on December 4, 2015, amended Form S-1 to allow for forward incorporation by reference by smaller reporting companies, which category of company has recently increased with the amended definition of a smaller reporting company. Other categories of filers, including accelerated and large accelerated filers, were already allowed to forward incorporate by reference.

A Form 10-Q is subject to the anti-fraud provisions of Sections 10(b) and 18 of the Exchange Act and Rule 10(b)(5) and can be the source of liability to the company, affiliates and underwriters under Sections 11, 12 and 17 of the Securities Act, related to the offer and sales of securities offerings. Each of these provisions imposes liability on companies in certain instances for making any untrue statements of a material fact or omitting to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading. The difference in the Sections relate to whether the cause of action is private or can only be pursued by a regulator or governmental body, if private, who has a right to pursue the action (for example, Section 11 provides an action for any purchaser of securities, regardless of whether they bought directly from the company or secondarily in the aftermarket), the elements of proof (such as scienter or intent or loss causation), allowable damages, the standard of proof, etc..
Liability under certain of these provisions, such as Sections 11 and 12 of the Securities Act and Section 18 of the Exchange Act, attaches only to documents that are filed with the SEC or incorporated by reference into a Securities Act registration statement. A Form 10-Q is always deemed filed with the SEC.

However, the SEC allows certain information to be furnished as opposed to filed as long as the company specifically discloses that it is avowing itself of the ability to furnish and not file. For example, reports in a Form 8-K under Regulation FD and earnings press releases under Item 2.02 related to results of operations and financial condition are allowed to be furnished and not filed. Although liability under Section 10(b) and Rule 10b-5 of the Exchange Act may attach to documents that are “furnished,” the standard of proof and elements to state a cause of action are different under these rules.

As mentioned, foreign private issuers must file annual but not quarterly reports. However, a foreign private issuer has obligations to furnish certain information under a Form 6-K, including, for example, information it (i) makes or is required to make public pursuant to the law of the jurisdiction of its domicile or in which it is incorporated or organized, or (ii) files or is required to file with a stock exchange on which its securities are traded and which was made public by that exchange, or (iii) distributes or is required to distribute to its security holders. This information is subject to liability under Section 10(b) and Rule 10b-5 of the Exchange Act and if incorporated into a registration statement, becomes filed in that registration statement, and subject to liability under Sections 11, 12 and 17 of the Securities Act.

As a result of these requirements, reports on Form 6-K often include quarterly reports or financial statements. For example, Canada, Hong Kong and Japan all require quarterly reporting. On the other hand, in 2013 the European Union (“EU”) amended its reporting requirements to eliminate the requirement to file quarterly reports altogether, which even prior to that time did not include financial statements. The EU found that quarterly reports were a burden for small and medium-sized companies, didn’t add to investor protection, encouraged a focus on short-term performance and discouraged long-term investments. Companies may still voluntarily file quarterly.