Insider Trading Anxiety Muddles SEC’s Semiannual Reporting Push

Insider trading concerns might deter companies from abandoning their current quarterly financial reporting schedule, the SEC cautioned in its newly proposed rule that would let issuers opt to disclose earnings and other events only twice a year.

Securities and Exchange Commission Chair Paul Atkins said the agency’s May 5 plan would give companies flexibility to choose their own reporting schedule. But the proposal’s text also warned less frequent disclosures could fuel investor worries about illegal activity, raise questions about when and how long to pause company leadership stock trades, and prompt companies to compensate corporate insiders for restricting the time they can buy and sell shares.

Corporate anxiety over insider trading activity is one reason the SEC said it expects only 20% of companies to adopt a semiannual schedule if the proposed rule goes through. But impact depends largely on whether companies that opt into twice-per-year reporting continue to hold quarterly earnings calls and compile quarterly information internally, attorneys said.

If companies move to a semiannual schedule but stick with typical earnings releases, insider trading policy compliance wouldn’t be a concern, said Matthew Franker, partner at Covington & Burling LLP.

“If, however, they go to pure semiannual reporting where they’re only reporting every six months—so no quarterly earnings release—it raises a lot of questions,” he said.

Earnings Reports

The SEC currently requires public companies to disclose their financial health metrics and certain other factors quarterly by filing a Form 10-Q. Many companies also publicly distribute optional earnings releases quarterly and hold informational calls with analysts.

If the semiannual proposal is approved, Jenna Cooper, partner at Latham & Watkins LLP, says she expects many companies to fall somewhere in the middle by continuing to release quarterly earnings statements but filing SEC reports semiannually.

Insider trading windows typically open in tandem with earnings releases, not formal 10-Q filings, said Brian Breheny, partner at Skadden, Arps, Slate, Meagher & Flom LLP. Keeping the same earnings call cadence regardless of official reporting schedules would resolve some concern about company officers sitting on consequential information.

However, semiannual reporting could put new pressure on earnings releases, Breheny said. 10-Qs have certain boxes to check, where companies have more discretion over what to say in earnings releases and on earnings calls. Semiannual companies would need to carefully judge whether any information they would normally put in 10-Qs—such as ongoing litigation, material changes, or business risks—warrants disclosure in an informal earnings statement.

For instance, companies that choose a semiannual reporting schedule couldn’t highlight all their wins on a quarterly basis and leave out everything going wrong.

“Once you choose to speak, you need to speak fully and accurately,” Breheny said.

Internal Information

Under the SEC’s proposal, companies could legally forgo both earnings releases and formal quarterly reports. But complications could arise if they keep collecting quarterly financial information internally without disclosing it, Franker said.

“It’s going to raise this question as to whether they’re pregnant with quarterly information that may be material to investors,” he said.

Cooper said she expects at least some semiannual companies to keep tracking quarterly metrics internally, in part to appease boards that favor quarterly updates.

Especially if they opt for semiannual disclosures, companies need to carefully assess how information flows internally, who has access to it, and at what point information poses an insider trading liability, attorneys said. Longer blackout periods, during which insiders are banned from buying or selling company shares, could be necessary in some cases where quarterly info circulates broadly—though directors and officers wouldn’t be happy about extending their hands-off time, said Matthew Gehl, who is also a partner at Covington.

To avoid this, semiannual reporting companies might file more 8-Ks and press releases to purge themselves of the information necessary to open trading windows, Franker said.

“It’s asking whether there’s something we can do quarterly to mimic the cleanse that you used to get from quarterly reporting without having to do all of the work of filing a 10-Q,” Gehl said.