As Wall Street’s chief securities regulator, the U.S. Securities and Exchange Commission (SEC) enables investors to get a clear picture of publicly-traded companies, asset managers and fund issuers. To fulfill its mandate of investor protection, the SEC has established a set of required disclosures that security issuers must complete in order to remain compliant.
As a regulatory watchdog, the SEC was created in the 1930s to help prevent stock manipulation and other forms of fraud. Its authority over securities regulation has evolved over the decades to keep pace with the ever-growing complexity of the financial system. Today, the SEC requires securities providers to complete a series of registrations and routinely checks the quality of information provided to ensure they meet certain standards.
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An Introduction to Key SEC Disclosures
Below is a rundown of key SEC filings and the type of information they convey to investors.
Prospectus: A prospectus is a legal document that requires a securities issuer to provide details of the investment it plans to offer. This includes information on the company’s business model, history and management.
10-K: The 10-K report provides a comprehensive analysis of an individual company, including financial statements, business summary and management information. This report is provided within 90 days of the end of fiscal year.
10-Q: The 10-Q is basically a truncated version of the 10-K that is provided within 45 days of the end of each first quarter of a company’s fiscal year.
8-K: An 8-K report chronicles major developments about a company. If any such development does not make it either into the 10-K or 10-Q, it is presented in the 8-K report, which is an unscheduled document that addresses specific events related to the company.
Proxy Statements: A proxy statement provides information on management salaries, conflicts of interest and other relevant material.
Forms 3,4, 5: These forms provide investors with information on how ownership and purchases are shifted within the company. Form 3 is the initial filing and discloses the ownership amounts. Form 4 documents changes in ownership. Form 5 is the annual summary of Form 4.
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Schedule 13D: Schedule 13D provides ownership information of the company’s shares as well as contact information. This form is filed within ten days of any person or entity acquiring 5% or more of any class of company shares.
Form 144: This form provides detailed insight into how corporate insiders buy and sell securities.
Foreign Holdings: The extent to which U.S. investors have participated in foreign security holdings has declined since 2008, when rules concerning foreign ownership changed. The SEC now allows investors to access information regarding foreign companies electronically.
Detecting Red Flags: In general, red flags are usually revealed in a company’s footnotes as opposed to the main body of the documents they submit. Common red flags are when a company discredits short sellers, submits confusing 10-K or 10-Q documents or introduces sudden one-time or special changes.
Dividend Specific Disclosures: The SEC has also made comprehensive changes to dividend disclosure requirements, including deleting provisions that require dividends per share on the face of the income statement and the so-called bright-line threshold, which previously requires disclosures about specific dividend restrictions.
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Implications for Investors
Investors should use SEC disclosures regularly to determine if a particular security would make a suitable investment. Not all types of disclosures will be needed, but forms like the 10-K/10-1, proxy statements and Schedule 13 are important when evaluating a company’s overall status.
The ability to detect red flags is also important, but it also requires the ability to read between the lines of SEC filings. That’s why it’s important to read SEC filings together as opposed to separately. This will allow you to detect suspicious or inconsistent information.
The Bottom Line
Although cumbersome, SEC filings help investors piece together important facts. Ultimately, this information can help investors determine whether a particular company would make a suitable investment or not.