The Securities and Exchange Commission officially proposed last week to weaken the quarterly reporting standards for publicly traded companies. So far, public comments submitted to the financial regulator about the idea are overwhelmingly negative. But the best objection was filed yesterday by the popular subreddit, WallStreetBets.
The community of “approximately 18 million retail investors on Reddit” argued in the unsigned letter that quarterly financial filings — known as 10-Q filings — are “the single most important leveling mechanism between retail and institutional investors in U.S. equity markets.”
“Institutional investors have expert networks, channel checks, alternative data, satellite imagery of retailer parking lots, credit card panel data, and direct management access through conferences and one-on-one meetings that cost more than most of our portfolios. We have the 10-Q,” the letter reads.
While the SEC isn’t doing away with 10-Qs, the regulator’s proposal suggests that companies will be able to elect every year whether they want to file an annual report and three quarterly reports (as is the case now) or simply one annual report and one semi-annual one. The rule change is particularly relevant as SpaceX — which is expected to allocate unprecedented IPO share to retail investors — along with a string of other buzzy and high-profile AI and tech startups begin queuing up for IPOs.
WallStreetBets argues this will not only decrease the level of real-time visibility into the financial health of a publicly traded company — also referred to by the Commission and in this letter as “issuers” — but that it will actively hurt the wallets of retail investors:
The Commission’s release talks about reducing costs for issuers. We would like to know what the Commission thinks the cost is to a retail investor of holding a position for six months without a single mandatory disclosure from the company. The answer is not zero. The answer is the spread between what insiders know and what we know, multiplied by every share we own during the gap. Someone is going to capture that spread. We have a guess about who it will not be.
The SEC has justified its proposal by claiming semi-annual reporting would reduce cost and time burdens associated with creating a 10-Q every quarter. It also says this move will help companies focus more on long-term growth versus hitting Wall Street analysts’ quarterly estimates.
WallStreetBets thinks these ideas are bunk:
We also want to register, respectfully, our objection to the suggestion that quarterly reporting is a burden the Commission can lift to help companies focus on the long term. The companies we trade are not being held back from greatness by the obligation to file four reports a year. Apple files a 10-Q every quarter and has nine hundred billion dollars in cash equivalents. Nvidia files a 10-Q every quarter and is worth more than the GDP of most G20 countries. The entire S&P 500 files a 10-Q every quarter, and the S&P 500 is at an all-time high. If quarterly reporting is crushing American capitalism, American capitalism is hiding it well. We have looked.
The retail trading subreddit is not alone. The SEC’s arguments have been soundly rejected by more than 120 people in the first week of the 60-day public comment period. That group includes a number of retail investors, some of whom submitted anonymously, but also certified financial planners, hedge fund managers, and even one former SEC attorney (who, to be fair, also used the opportunity to promote his book).
The proposed rule change has even riled up both sides of the political aisle. One anonymous financial planner wrote that, “[a]fter years of fighting against ideologically driven rules that politicized corporate disclosures, I never expected to see a Republican-led Commission deliver a gift-wrapped exemption that so clearly undermines market transparency and tilts the field against everyday retail investors.”
Even the (very) few people who’ve submitted comments in support of the rule tend to have attached caveats, like suggesting companies release monthly revenue and balance sheet statements in lieu of more detailed quarterly reports.
The public comment period is open until early July, and as law professor Ann Lipton (who first highlighted WallStreetBets’ comment on BlueSky) recently pointed out, larger institutional investment firms have yet to weigh in.
But for now, no one has voiced their opposition as sharply as the WallStreetBets crew, which has been humming along since the GameStop craze five years ago. It even drew on that history in its letter, in an unsurprisingly sardonic tone:
Some of us are very good at this and some of us are, in the technical securities law sense, terrible at it. Many of us learned what a 10-Q was the hard way, which is to say we bought a stock, watched it fall 40% on an earnings release, and then read the filing to find out why. That is a stupid order of operations and we acknowledge it. But it is also the entire mechanism by which a generation of retail investors taught itself to read financial statements, and the Commission is now proposing to cut that mechanism in half.
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