The SEC today proposed that U.S. public companies – regardless of size – may report semiannually rather than quarterly.

Key points to note about the proposal:

• New Form 10-S would optionally replace Form 10-Q reporting. Each year, public companies would elect whether to report semiannually on new Form 10-S, or to continue with quarterly reporting on Form 10-Q. 
• Election made via checkbox. Reporting companies electing semiannual reporting would check a box on the cover of their Form 10-K filing, while IPO issuers (and other new registrants) would check a box on the cover of their registration statement (e.g., Form S-1, S-4, S-11 or Form 10). Once made, the election would be binding until the next fiscal year. Inadvertent elections could be corrected by filing an amended Form 10-K or a pre-effective amendment to a registration statement.
• Form 10-S requirements would track Form 10-Q. Form 10-S would follow the Form 10-Q requirements as applied to the first half of the year, rather than a single quarter (including required auditor review of interim financial statements). Semiannual reporting companies would make required CEO and CFO certifications on a semiannual basis only.
• Best of both worlds? Semiannual filers may issue voluntary quarterly earnings releases even without Form 10-Q filings, as some foreign private issuers currently do, resulting in three categories of interim reporting:

• traditional quarterly reporting using three Form 10-Q filings; 

• semiannual reporting using Form 10-S only; and 

• semiannual reporting companies that provide voluntary quarterly earnings releases without any Form 10-Q filings.

Each year, companies would be free to choose any one of these three methods, based on what makes sense for their own business. This would introduce a welcome change toward private ordering in interim reporting.

• Form 10-S would be due on traditional second quarter Form 10-Q deadline. Depending on the company’s filer status, Form 10-S would be due either 40 or 45 days after the end of the first semiannual period of a fiscal year. For example, Form 10-S for a calendar year large accelerated or accelerated filer would be due August 9 (40 days after June 30), while Form 10-S for a non-accelerated filer would be due August 14 (45 days after June 30).
• Financial statement staleness for securities offerings by semiannual reporting companies would be amended. Proposed changes to the staleness rules governing financial statements provide that: 

• year-end financials go stale on the Form 10-S due date; and

• June 30 financials generally go stale on the Form 10-K due date; but

• June 30 financials for IPOs, loss corporations, and delinquent filers go stale 45 days after year end.

• Here is how this would work for securities offerings by calendar-year semiannual reporting companies:

• Financial statement staleness for securities offerings by quarterly reporting companies would be largely unchanged. Quarterly interim financial statements would remain current until the next required quarterly report is due (with the same exception for third-quarter staleness date of IPO issuers, loss corporations, and delinquent filers). This technical change would eliminate occasional one- or two-day misalignments between the Form 10-Q deadline and the staleness date.
• Comfort letter issues for securities offerings by semiannual reporting companies; SEC solicits comments on whether to modernize PCAOB rules. Currently, an auditor’s comfort letter cannot include negative assurance regarding subsequent changes to financial statements as of a date 135 days or more after the most recent balance sheet date of the most recently completed audit or review, under PCAOB Auditing Standard 6101 (formerly SAS 72). The SEC has requested comments on whether to modernize that standard to accommodate semiannual reporting. Investment banks have traditionally been unwilling to underwrite securities offerings without market-standard comfort letters. As a result, we would expect implementation of semiannual reporting to prompt reconsideration of the 135-day limit in AS 6101 to facilitate traditional comfort letter practice in a world of semiannual reporting.
• Comments requested on insider trading compliance and Rule 10b5-1 trading plan practices. The proposal seeks comments on how semiannual reporting might reshape insider trading compliance practices and whether those changes would affect practices surrounding Rule 10b5-1 trading plans. We expect trading compliance to follow traditional market practice, which will vary with each company’s own assessment of its information flows, internal availability of financial and operating metrics, prudential concerns, and risk tolerance.
• Requirements for earnings releases would remain unchanged. The SEC is not proposing substantive changes to Item 2.02 of Form 8-K, or to earnings guidance practices. 

Comments on the proposal are due within 60 days after publication in the Federal Register, an uncertain process that can take several weeks.