Companies can tell investors less under proposed SEC rules

The Trump administration has aggressively expanded its push for financial deregulation, raising concerns that the changes could facilitate another Wall Street crisis, sooner or later.

The Securities and Exchange Commission this summer proposed two big changes to how publicly traded companies report their finances. The first, and most eye-catching, one would let companies file earnings reports only twice a year instead of quarterly, slashing a rule that has existed for more than half a century.

The second one, which has flown under the radar, would exempt most companies the SEC regulates from having to bring in outside auditors to verify a company’s internal books and processes for avoiding errors and fraud.

The rollback would weaken regulations passed by Congress in 2002, after the collapse of Enron, an energy trading company, and the implosion of Arthur Andersen, its accounting firm, revealed how easily companies could hide financial problems, or cook their books, without independent oversight.

Some money managers are asking whether either change would improve the investment environment. And public interest groups worry the changes could enable another costly scandal like Enron’s failure, or something worse.

“If the quality of reporting information from the financial system deteriorates, then that absolutely leads to financial sector risks of the kind that have bitten us before, as in 2008 and other crises,” said Simon Johnson, a Nobel laureate economist and a co-chair of the Systemic Risk Council at the CFA Institute, which administers the industry’s chartered financial analyst credential.

In the past three decades, the number of publicly traded companies active in the U.S. stock market has fallen by half. The number of initial public offerings has also greatly decreased in comparison with past business cycles.

Trump administration officials say onerous regulations and audits for public companies have made going public less attractive and increased the allure of less regulated private markets. This, in turn, has resulted in fewer opportunities for smaller investors to participate in the growth of early-stage companies the way large private investors can.

“Under my chairmanship, we’re out to change that,” Paul Atkins, the Trump-appointed chair of the SEC, said in a statement. “As part of my ‘make IPOs great again’ agenda, we’re advancing a modernized regulatory framework that will reduce friction and increase certainty for both issuers and investors and streamline the path for companies to go and remain public.”

Smaller public companies are already given more breathing room by U.S. regulators, which are sensitive to overburdening them with compliance costs that bigger companies can more easily afford. Now, however, the SEC wants to make a categorical shift that would bump the share of companies operating under lighter rules to about 80% from 50%.

The riskiest consequence, according to watchdogs like Americans for Financial Reform, would be to exempt those companies from more thorough independent audits to help ensure that the financial statements companies provide to investors and the SEC are accurate. That more stringent external vetting was a requirement Congress instituted under the Sarbanes-Oxley Act of 2002 to prevent accounting frauds such as those at Enron and WorldCom, which led to bankruptcies, mass layoffs, and billions of dollars lost by investors.

The Business Roundtable, a lobbying group that represents some of America’s largest companies, has supported the SEC moves on auditing and quarterly reporting, echoing concerns about the costs of independent auditor reviews and extra legal counsel. But a broad range of former and current executives have criticized the SEC’s deregulatory proposals, which remain provisional until they are made final.

The SEC received a lopsided response to the semiannual reporting proposal during its formal public comment period, which closed last month. Of the hundreds of thousands of comments submitted, more than 97% opposed the change.

The Managed Funds Association, which represents hedge funds and private credit funds, has said less frequent reporting could increase market volatility and harm transparency, raising the risk of insider trading. Institutional asset managers at banks and pension funds also say they rely on standardized quarterly statements to accurately value assets.

“What is the big problem that we need to solve?” said Rebecca Patterson, a former chief investment officer of Bridgewater, a hedge fund.

“U.S. firms today are highly profitable overall, and they are still able to make longer-term strategic business decisions,” she added. “They are nicely walking and chewing gum at the same time.”

With respect to the debate over financial audits, market analysts have questioned the SEC chair’s diagnosis that burdensome audit rules are to blame for the decline in IPOs or publicly traded stocks.

Matt Kennedy, a senior IPO market strategist at Renaissance Capital, an investment adviser, said the enormous growth in fundraising options outside publicly traded stock markets had been the key force keeping more private companies private.

Not too long ago, Kennedy explained, a company might have gone public after a “Series A, B, or C” round of funding. But in recent years, he joked, “we’re almost running out of the alphabet,” as venture capitalists, private equity, private credit, and angel investors have queued up for privately traded stakes in companies.

“I don’t think it’s compliance costs keeping them from going public,” he said.

Industry experts note that companies would still need audits of their financial statements. But 80% of publicly traded companies would no longer need auditors to separately attest and certify that a firm’s internal financial processes were aboveboard.

Other rollbacks the SEC proposed this summer have raised some concerns, too, including a rule change that would make federal regulatory laws “preempt,” or overrule, state-level financial regulations; another that would do away with the need for companies to report their “climate risk”; and a proposal to cut a requirement for companies to report ratios about disparities in pay.

The SEC is expected to finalize the proposed rule changes despite the opposition. Although the exact timeline remains unclear, agency leadership, including Atkins, has signaled reluctance to make concessions to critics in public remarks.

“I really don’t get it,” said Ben Carlson, the director of institutional asset management at Ritholtz Wealth. “In a world where information is becoming more and more important, why would you want less of it?”

This article originally appeared in the New York Times.