Is it time for more deregulation at the SEC? With a new chairman and a recent move to deregulate in one area, is it time to ask the SEC to consider a second (but much smaller) deregulatory action: eliminating the second phase of accelerated 10-K and 10-Q filings?

Last June, the U.S. Securities and Exchange Commission (SEC) approved the release of final rules for what it hailed as a significant deregulatory initiative--new rules designed to streamline the offering process. The commission was obviously pleased with itself, as it discussed the new rules at an open meeting. Most observers would probably agree that the chairman at the time (William Donaldson) and commissioners had every right to give themselves a pat on the back for acting not only to make the process of capital formation a bit easier, but to preserve the levels of disclosure needed to ensure investor protection.

It's an unfortunate fact of life, but regulation usually means an ever-expanding set of rules and guidelines that almost always make life more complex, more difficult and more expensive for the regulated. SEC rules are no exception. Nevertheless, as the SEC's 28th Chairman, Christopher Cox, (confirmed in August) aptly observed in his introductory remarks to the commission's staff on August 4, that while investor protection comes first at the SEC, "... it is not necessary for the interests of investors and the interests of business to be in conflict." He further suggested that these are not mutually exclusive, and, in fact, often embrace the same objective.

Given that the SEC has just approved one significant deregulatory move, and the new chairman immediately addressed the need to balance the interests of business with the interests of investors, one wonders if this is this not perhaps a good time to ask the SEC to consider a second (but much smaller) deregulatory action: eliminating the second phase of accelerated 10-K and 10-Q filings.

Recall that shortly after the collapse of Enron in late 2001, both the SEC and Congress concluded generally that "faster is better" when it comes to corporate reporting and disclosure. The first changes along these lines were made to Section 16 reporting. As prescribed by Section 403 of the Sarbanes-Oxley Act of 2002, the SEC issued final rules that August that immediately brought reporting deadlines under Section 16 down to two days following a trade by an officer or a director. This was from the prior requirement that allowed reports to lag events by as much as a month.

Another set of reporting requirements to get the faster-is-better treatment led to the complete overhaul of current-event reporting on Form 8-K. Although not issued in final form until March 2004, the new 8-K rules increased the items that needed to be reported from 12 to 22, and decreased the reporting deadlines for most items from 15 days to four days. The real significance of the revised 8-K rules, however, was not simply that the number of reportable events had increased or that deadlines were shortened, but that these changes effectively moved the U.S. from a periodic reporting structure to a "continuous" reporting structure. Material events could no longer to be held for the next quarterly or annual report--they were to be made public almost immediately.

Sarbanes-Oxley does not directly address accelerated reporting for either annual reports on Form 10-K or quarterly reports on Form 10-Q. But in the quest to speed up all reporting, this became the SEC's third area of interest.

The rules for accelerated 10-K and 10-Q reporting were issued in final form in September 2002. Pursuant to the rules, registrants would ultimately be required to file their 10-Ks within 60 days of the close of the company's fiscal year; quarterly reports on Form 10-Q would have to be filed within 35 days after the close of each quarter.

Unlike the issuance of the Section 16 and 8-K rules, the SEC harbored serious concerns about the impact of its acceleration rules. Worries about the impact of acceleration on smaller firms were so great that the agency completely excused smaller firms from having to comply with acceleration at all.

The rules governing the revised 10-K and 10-Q filing deadlines split the SEC's operating company registrants into two nearly equal groups. Those registrants with a public float of $75 million or more were termed "accelerated filers," and were expected to meet the new timetable for making their periodic filings. The smaller firms, those not in the accelerated filer class, could keep their existing reporting schedules for both the 10-K and the 10-Q.

In addition to its concerns about the burdens of acceleration on smaller registrants, the SEC also recognized that large firms (as well as their primary partners in the reporting process--the accountants and auditors) would almost certainly not be able to instantly shift 10-K reporting from 90 days to 60 days and 10-Q reporting from 45 days to 35 days.

Consequently, the move to the new 10-K/10-Q deadlines would be phased in over two years. Each phase of acceleration cut 15 days from the 10-K deadline and five days from the 10-Q deadline. Accelerated filers, their accountants and auditors were also given a full year (all of 2003) to prepare for accelerated filing.

The first round of accelerated filing--which started with 10-Ks being filed in mid-March of last year--went quite well. The same was true for accelerated 10-Qs filed during the course of 2004. In fact, the splitting of registrants into two nearly equal groups has made some aspects of annual and quarterly filing easier simply by spreading the work out a bit.

One rough measure of the success of accelerated filing in 2004 can be seen in the number of 12b-25 notices filed (using EDGAR Form NT 10-K) to let the SEC and investors know the company will be late. As the table at the top of this page illustrates, the first year of acceleration showed great success in improving timeliness across the board: the total number of 12b-25s for all registrants dropped from the 1,271 filed during the 10-K peak in March 2003 to a total of 626 for both accelerated and non-accelerated filers in 2004. And, as the table shows, accelerated filers did especially well.

As positive as 2004 was with respect to accelerated reporting, everything changed as issuers and auditors struggled to implement Sarbanes-Oxley Section 404, the section dealing with internal controls. The impact of Section 404, especially on annual reporting, became so apparent to the SEC that it issued proposed rules in August 2004 and final rules in November postponing Phase II of acceleration for one year.

Even with the postponement, notices of late filing shot back up to the pre-acceleration level (although the biggest increase was among non-accelerated filers). One reasonable inference from all of this, however, is that the community of professionals responsible for gathering, analyzing, writing and publishing annual and quarterly reports is not just finite; it is currently stretched to its operating limits, and all involved are swamped.

Graphic evidence of this fact was offered by a partner from one of the Big Four accounting firms at the SEC's Section 404 roundtable held in April. He revealed that his firm's efforts to prepare for 10-K reports--which would include the new Section 404 audits and attestations--involved bringing 1,000 auditors back to the U.S. from overseas, combined with an immediate expenditure of $50 million in training costs.

Given the fact that 8-K reporting keeps all investors up to date with nearly all material events arising across the entire breadth of SEC registrants, combined with the clear difficulties the second phase of acceleration will engender, one has to ask what purpose is truly being served by Phase II? Some have relied on the sound byte that "disclosure delayed is disclosure denied," but that only trivializes an important issue.

Investors are not served best by having a hastily constructed annual report presented to them within 60 days of year's end simply for the sake of meeting a regulatory deadline. This document, more than any other, should transmit a comprehensive assessment of past performance, a well-reasoned explanation surrounding the positive and negative aspects of the business and an articulate strategy for going forward, this year and in the years ahead.

Doing justice to such a narrative and analysis takes time. The 15 days that will be lost in Phase II of the 10-K process is time that can be better spent by permitting the issuer to provide a clearer message to investors than by rushing a less-clear document into investors' hands.

There isn't a lot of time left, but if the issuing, auditing and legal communities believe it to be unwise for the SEC to push ahead with Phase II of acceleration, now is the time to petition the agency. In this case, it is probably most important that Chairman Cox or the other four commissioners be addressed directly, since they have the ability to move most quickly. It's clear that this is already an issue of some concern to the commission, and rational statements from affected parties will almost certainly fall on ears very willing to listen.

David T. Copenhafter ([e-mail]) is Director of EDGAR Services at Bowne & Co. Inc., the world's largest financial printer and a leading EDGAR filer. He has held senior management positions at the Securities and Exchange Commission (SEC).

RELATED ARTICLE: takeaways

* New regulations bring an expanded set of rules and guidelines, adding complexity, difficulty and expense.

* New 8-K reporting rules increased items to be reported from 12 to 22, while decreasing the deadlines for most items from 15 days to four days.

* One Big Four firm reports efforts for client 10-Ks (including Sarbanes-Oxley Section 404 audit and attestations) involved 1,000 additional auditors and $50 million in training costs.

* A question for the SEC: Are investors best served by a hastily constructed annual report for the sake of meeting a regulatory deadline?

12b-25s Filed for Late 10-Ks*

Year  Accelerated Filer  Non-Accelerated Filer    Total Filings

2002                                                  1,047
2003                                                  1,271
2004         84                  542                    626
2005        178                1,005                  1,183

*Numbers were taken from a commercial SEC filings database by searching
for NT 10-Ks filed the last day of each particular filing deadline, as
well as the day following that deadline