[House Report 115-811]
[From the U.S. Government Publishing Office]
115th Congress } { Report
HOUSE OF REPRESENTATIVES
2d Session } { 115-811
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MODERNIZING DISCLOSURES FOR INVESTORS ACT
_______
July 10, 2018.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Hensarling, from the Committee on Financial Services, submitted the
following
R E P O R T
[To accompany H.R. 5970]
The Committee on Financial Services, to whom was referred
the bill (H.R. 5970) to require the Securities and Exchange
Commission to implement rules simplifying the quarterly
financial reporting regime, having considered the same, report
favorably thereon with amendments and recommend that the bill
as amended do pass.
The amendments are as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Modernizing Disclosures for Investors
Act''.
SEC. 2. FORM 10-Q ANALYSIS.
(a) In General.--The Securities and Exchange Commission shall conduct
an analysis of the costs and benefits of requiring reporting companies
to use Form 10-Q for submitting quarterly financial reports. Such
analysis shall consider--
(1) the costs and benefits of Form 10-Q to emerging growth
companies;
(2) the costs and benefits of Form 10-Q to the Commission in
terms of its ability to protect investors, maintain fair,
orderly, and efficient markets, and facilitate capital
formation;
(3) the costs and benefits of Form 10-Q to other reporting
companies, investors, market researchers, and other market
participants, including the costs and benefits associated
with--
(A) the public availability of the information
required to be filed on Form 10-Q;
(B) the use of a standardized reporting format across
all classes of reporting companies; and
(C) the quarterly disclosure by some companies of
financial information in formats other than Form 10-Q,
such as a quarterly earnings press release;
(4) the costs and benefits of alternative formats for
quarterly reporting for emerging growth companies to emerging
growth companies, the Commission, other reporting companies,
investors, market researchers, and other market participants;
and
(5) the expected impact of the use of alternative formats of
quarterly reporting by emerging growth companies on overall
market transparency and efficiency.
(b) Report Required.--Not later than 180 days after the date of
enactment of this Act, the Commission shall issue a report to Congress
that includes--
(1) the results of the analysis required by subsection (a);
and
(2) recommendations for decreasing costs, increasing
transparency, and increasing efficiency of quarterly financial
reporting by emerging growth companies.
Amend the title so as to read:
A bill to require the Securities and Exchange Commission to
carry out a cost benefit analysis of the use of Form 10-Q and
for other purposes.
PURPOSE AND SUMMARY
Introduced on May 24, 2018, by Representative Ann Wagner,
H.R. 5970, the ``Modernizing Disclosures for Investors Act'',
as modified by an amendment in the nature of a substitute,
requires the U.S. Securities and Exchange Commission (SEC) to
report to Congress within 180 days of enactment with
recommendations to decrease costs, increase transparency and
increase efficiency of quarterly financial reporting by
emerging growth companies (EGCs) for SEC Form 10-Q. Among other
things, the SEC's report shall include analysis of the costs
and benefits of Form 10-Q to EGCs; the costs and benefits of
Form10-Q to the SEC, other reporting companies, investors,
market researchers, and other market participants; the costs
and benefits of alternative formats for quarterly reporting for
EGCs; and the expected impact of the use of alternative formats
of quarterly reporting by EGCs on overall market transparency
and efficiency.
BACKGROUND AND NEED FOR LEGISLATION
The goal of H.R. 5970 is to reexamine the current SEC
disclosure regime for EGCs and identify reforms that will allow
EGCs to concentrate more resources on innovation, growth, and
job creation while still providing information material to
their investors. Further, the bill also will reexamine how
issuers present the information and whether another form would
reduce the costs on investors, regulators, and other market
participants to access and absorb the information.
Federal securities laws require that most SEC registrants
disclose certain information on an ongoing basis, including a
quarterly report on what is known as Form 10-Q. Form 10-Q
includes condensed financial information and other data
prepared by a company and reviewed--though generally
unaudited--by its independent auditor. The purpose is to
provide a continuing view of the company's financial position
during the company's fiscal year. The company must file the
report must for each of the first three fiscal quarters of the
company's fiscal year.
The SEC's current corporate disclosure system imposes a
number of outdated, duplicative, burdensome, and unnecessary
requirements on U.S. companies, which diverts corporate
resources to regulatory and legal compliance and away from
innovation, growth, and job creation. Moreover, this outdated
disclosure regime leads to unnecessarily long, complicated, and
often immaterial public company disclosures, which results in
widespread investor confusion and potentially suboptimal
investment decisions because many investors choose not to read
a lengthy and over-legalistic document. While the SEC has often
recognized the need to study and streamline the corporate
disclosure regime, it has recently been Congress that has
spurred action in this regard--such as through provisions in
both the JOBS Act and the FAST Act that required the SEC to
study its disclosure regulations and eliminate outdated,
duplicative, and unnecessary disclosure obligations.
Form 10-Qs can impose significant administrative costs. A
2011 report of the IPO Task Force found that 92% of public
company CEOs said that the ``administrative burden of public
reporting'' was a significant challenge to completing an IPO
and becoming a public company.
In addition to filing Forms 10-K annually and 10-Q
quarterly, companies must file ``current'' reports on Form 8-K
often within four (4) business days after occurrence of
specified events. This means that by the time a company files
its quarterly report, the company has already reported many
material events already, and according to widespread economic
views regarding the efficiency of markets, those current
reports are used to price the cost of an equity security.
Further, as both annual quarterly reports have grown in
size and complexity over the years, the ability for investors
to comb through so much information to determine relevant
information to guide their investment decisions has become
increasingly difficult. The potential for so much information
to overwhelm investors is illustrated in part by the sense that
investors increasingly are relying on information in press
releases to inform decisions rather than the forms filed with
the SEC and made available on its Electronic Data, Gathering,
Analysis and Retrieval (EDGAR) database.
University of Notre Dame Professors Tim Loughran and Bill
McDonald recently studied the use of EDGAR filings by
investors, and their findings support the need for the SEC to
reexamine the efficiency of the current disclosure regime. In
particular, the magnitude of non-robot investor requests of
EDGAR filings is ``surprisingly low.'' The average 10-K filing
of a publicly-traded firm is requested only 28.4 total times on
the day of and day after the initial filing. ``And the low
requests totals for the median firm in the smallest three
quintiles (only five requests per day around the 10-K filing
date), challenges the notion that annual report readability
affects the trading behavior of retail investors.'' Notably,
these observations are for Forms 10-K, and as the authors
observe, Forms 10-Q attract must less interest from investors
than Forms 10-K.
Granting EGCs the option of issuing a press release or
other short form that includes earnings results, as opposed to
a full 10-Q, will provide investors with important quarterly
financial information but reduce unnecessary burdens and
complexities associated with the current quarterly reporting
system. By studying and reporting on these issues, the SEC can
consider the substantial costs of these financial disclosures
and examine ways to modernize the disclosure regime in a manner
that recognizes how investors use technology to obtain
information about a potential investment, acknowledges that
companies may want to communicate with investors more directly
than the SEC's website and encourages investors to make more
efficient use of the information filed on EDGAR.
HEARINGS
The subcommittee on Capital Markets, Securities, and
Investment held a hearing examining matters relating to H.R.
5970 on May 23, 2018.
COMMITTEE CONSIDERATION
The Committee on Financial Services met in open session on
June 21, 2018, and ordered H.R. 5970 to be reported favorably
to the House as amended by a recorded vote of 56 yeas to 0 nays
(recorded vote no. FC-191), a quorum being present. Before the
motion to report was offered, the Committee adopted an
amendment in the nature of a substitute offered by Ms. Wagner
by voice vote.
COMMITTEE VOTES
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee to list the record votes
on the motion to report legislation and amendments thereto. The
sole recorded vote was on a motion by Chairman Hensarling to
report the bill favorably to the House as amended. The motion
was agreed to by a recorded vote of 56 yeas to 0 nays (Record
vote no. FC-191), a quorum being present.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
COMMITTEE OVERSIGHT FINDINGS
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the findings and recommendations of
the Committee based on oversight activities under clause
2(b)(1) of rule X of the Rules of the House of Representatives,
are incorporated in the descriptive portions of this report.
PERFORMANCE GOALS AND OBJECTIVES
Pursuant to clause 3(c)(4) of rule XIII of the Rules of the
House of Representatives, the Committee states that H.R. 5970
will help to modernize the SEC's corporate disclosure system
which is outdated, duplicative and burdensome to emerging
growth companies, by requiring the SEC to report to Congress on
SEC Form 10-Q and explore making the form optional for emerging
growth companies.
NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX EXPENDITURES
The Committee has not received an estimate of new budget
authority contained in the cost estimate prepared by the
Director of the Congressional Budget Office pursuant to Sec.
402 of the Congressional Budget Act of 1974. In compliance with
clause 3(c)(2) of rule XIII of the Rules of the House, the
Committee opines that H.R. 5970 will not establish any new
budget or entitlement authority or create any tax expenditures.
CONGRESSIONAL BUDGET OFFICE ESTIMATES
The cost estimate prepared by the Director of the
Congressional Budget Office pursuant to Sec. 402 of the
Congressional Budget Act of 1974 was not submitted timely to
the Committee.
FEDERAL MANDATES STATEMENT
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995.
The Committee has determined that the bill does not contain
Federal mandates on the private sector. The Committee has
determined that the bill does not impose a Federal
intergovernmental mandate on State, local, or tribal
governments.
ADVISORY COMMITTEE STATEMENT
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
APPLICABILITY TO LEGISLATIVE BRANCH
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of section
102(b)(3) of the Congressional Accountability Act.
EARMARK IDENTIFICATION
With respect to clause 9 of rule XXI of the Rules of the
House of Representatives, the Committee has carefully reviewed
the provisions of the bill and states that the provisions of
the bill do not contain any congressional earmarks, limited tax
benefits, or limited tariff benefits within the meaning of the
rule.
DUPLICATION OF FEDERAL PROGRAMS
In compliance with clause 3(c)(5) of rule XIII of the Rules
of the House of Representatives, the Committee states that no
provision of the bill establishes or reauthorizes: (1) a
program of the Federal Government known to be duplicative of
another Federal program; (2) a program included in any report
from the Government Accountability Office to Congress pursuant
to section 21 of Public Law 111-139; or (3) a program related
to a program identified in the most recent Catalog of Federal
Domestic Assistance, published pursuant to the Federal Program
Information Act (Pub. L. No. 95-220, as amended by Pub. L. No.
98-169).
DISCLOSURE OF DIRECTED RULEMAKING
Pursuant to section 3(i) of H. Res. 5, (115th Congress),
the following statement is made concerning directed rule
makings: The Committee estimates that the bill requires no
directed rule makings within the meaning of such section.
SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION
Section 1. Short title
This Section, as modified by an amendment in the nature of
a substitute, cites H.R. 5970 as the ``Modernizing Disclosures
for Investors Act''.
Section 2. Form 10-Q analysis
This section directs the SEC to conduct an analysis of the
costs and benefits of requiring reporting companies to use Form
10-Q for submitting quarterly financial reports and to consider
certain issues as part of its analysis. The SEC is required to
submit a report to Congress not later than 180 days after
enactment with the results of its analysis and ways to decrease
costs, increase transparency, and increase efficiencies of
quarterly financial reporting for EGCs.
CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, and existing law in which no
change is proposed is shown in roman): H.R. 5970 does not
repeal or amend any section of a stature. Therefore, the Office
of Legislative Counsel did not prepare the report contemplated
by clause 3(e)(1)(B) of rule XIII of the House of
Representatives.
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