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115th Congress    }                                  {       Report
                        HOUSE OF REPRESENTATIVES
 2d Session       }                                  {        115-811

======================================================================



 
               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.


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                      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.

                                  [all]