I write in strong opposition to the proposal to reduce reporting to file semiannual reports on the new Form 10-S in lieu of quarterly reports on Form 10-Q. I note that this was prepared entirely by me, without the aid of AI or any LLMs.

I agree with many of the thoughtful comments from investors, like the excellent comment from Marcie Frost, CEO of CalPERS, especially this:

If the Commission’s objective is to lengthen corporate decision-making horizons, then the more effective and well-targeted lever, as we have urged in prior comment letters, is to discourage the voluntary issuance of forward quarterly earnings guidance, not to dilute the historical financial reporting on which investors depend.

And I second this comment from Omer Yousif, PhD:

True long-termism is driven by corporate culture and executive compensation structures, not by withholding material financial information from the public for six months at a time.

The most important point to remember in considering the frequency of financial reports is that as “the investor’s advocate,” the Commission must recognize that there will always be an inherent conflict between the investor’s interest in all necessary information in order to make an informed decision about risk and return and the insiders (executives and board members), who prefer to limit transparency and oversight. It is the Commission’s mandate to resolve those conflicts in favor of the people for whom capitalism is named, the people who have to ask the core question of capitalism: “Why should I trust you with my money?” The only answer to that question is accountability through disclosure, the market, government regulation, and, when there is no other alternative, litigation.  Any reduction of the transparency that has, since the enactment of the ’33 and ’34 legislation and the creation of the Commission made the US capital market the envy of the world will make investors more hesitant, increase the cost of capital, and increase capital outflows to markets that show more respect for investor priorities.

As you know, the first Chairman of the SEC was Joseph P. Kennedy. When President Franklin Roosevelt was criticized for appointing a man from the world of investments instead of an enforcer in the job, he said, “Set a thief to catch a thief.” He knew, as Adam Smith knew, that while business leaders may love to rhapsodize about the purity of the free market, they will always try to tilt the playing field in their own favor. Smith wrote: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the publick [sic], or in some contrivance to raise prices.” Economists call the problem agency costs. Lawyers call it conflicts of interest. Both recognize that it is accountability to the providers of capital through disclosure and shareholder rights that align the incentives of insiders and shareholders as closely as possible. Therefore, the Commission should consider very carefully any reduction in those rights.

I therefore suggest that the Commission review with great skepticism the claims that this proposal will reduce costs. The claimed costs are nominal compared to, say, a CEO’s pay package. They are unaudited and provided without documentation. Corporate executives, who may think they will be less exposed to scrutiny and liability with fewer disclosures, have every incentive to exaggerate. What is especially telling is the absence of estimates of the benefits of the quarterly report, both for internal use and for board members. It is hard to imagine directors being able to meet their obligation as fiduciaries on behalf of long-term, sustainable value for investors if they have to wait six months for the next set of financial reports. And if they insist on getting them for every board meeting, why shouldn’t current and potential investors get them, too?

You do not have to use advanced math to figure out that quarterly reports are based on three months of numbers and twice-yearly reports are based on six months of numbers. They are still computing the results over the same period of time whether they report four times a year or twice a year. Their lawyers have to review the same volume of representations. Any savings from having to report on twice as many numbers/weeks have to be nominal at best.

Quarterly reports are an excellent discipline. They deter and mitigate any damage from misbehavior ranging from embezzlement to fraud. They promptly identify issues and opportunities in operations. They give investors what they need to evaluate risk and return.

This proposal comes at a particularly misbegotten time. Market volatility and the small number of companies behind the record-breaking highs are increasing uncertainty. The decision of major indexes to abandon the core principles of inclusion to allow in highly questionable new companies without seeking the permission of their investors is unsettling. Technology is advancing rapidly to reduce the costs of producing quarterly reports, and indeed more extensive and valuable ones, to a near-nominal amount. We can foresee a time when institutional and individual shareholders should be able to access financial reports on an almost daily basis, along the lines of the extensive market and individual security performance data they can already access when they check their brokerage accounts at Schwab, Vanguard, Fidelity and others or analysis through services like Motley Fool than Adam Smith or Joseph P. Kennedy ever dreamed possible.

It comes at a bad time for the Commission as well. Operating with a bare minimum of Commissioners, all from one party contrary to the fundamental conception of the independent agencies, makes any major policy change particularly vulnerable to challenge in court, especially given the uncertainty about the possibility of a de novo review rather than the pre- Loper Bright deference to the expertise and integrity of federal agencies.

I had an economics professor who ended every lecture with, “Of course, this depends on perfect information and no transaction costs.” We will never achieve that, of course. But it is clear that efficient markets do not run on money. They run on information and trust. It is disclosure requirements like the quarterly reports, public and subject to review by investors, the market, and the government, that take us as close as possible to that economic nirvana of efficiency.

Investors need to know what is going on at the companies they invest in or are considering investing in as promptly as possible. If they cannot get it when they need it, they will reduce their positions, increasing the cost of capital, provide more scrutiny through the proxy voting process, or make a very credible case in litigation that the corporate insiders were intentionally trying to obfuscate their results. In the words of the legendary John Louis, they will let portfolio companies know that they can run, but they cannot hide. And, always the underlying principle in Commission policy should be, in the words of Supreme Court Justice Louis Brandeis, “Sunlight is the best disinfectant.”