SEC Focus on Communication Compliance 

The Securities and Exchange Commission (SEC) has been cracking down on companies that fail to comply with the securities laws. In April 2018, the SEC issued a study on how public companies communicate with investors, including how they disclose information. The SEC is also cracking down on communications made by buy-side analysts and sell-side analysts. The SEC is focusing on “material misstatements” and overly optimistic statements that influence investors to make decisions.

The SEC is concerned about the way companies communicate with investors.

The SEC is concerned about the way companies communicate with investors.

Companies are not disclosing enough information.

Companies are not communicating with investors in a timely manner.

Companies are communicating with investors in a misleading way, or sometimes just being overly optimistic about their prospects for growth and profit.

In April, the SEC issued a study on how public companies communicate with investors, including how they disclose information.

The SEC is concerned about the way that public companies communicate with investors. In April, the SEC issued a study on how public companies communicate with investors, including how they disclose information. The study noted several areas of concern:

Companies may be failing to provide sufficient detail when describing risks associated with their business prospects and financial performance. For example, some disclosures only refer to “risks” without explaining what those risks are or how they could affect operations or results.

Investors are often left guessing as to whether companies’ disclosures are accurate because there is no way of knowing whether management has provided all relevant information in its filings (and not just what management wants investors to know).

The SEC is also cracking down on communications made by buy-side analysts and sell-side analysts.

The SEC is also cracking down on communications made by buy-side analysts and sell-side analysts. Buy-side analysts are independent research professionals who work for institutional investors (e.g., pension funds or mutual funds), while sell-side analysts work at investment banks that engage in securities underwriting and other client services activities. The SEC has long been concerned about the potential for conflicts of interest when firms pay for research, but it has only recently begun to focus specifically on whether these communications are fair, balanced and understandable to investors.

The SEC’s report highlights several areas where it believes improvements can be made:

Paying analysts based on how many investment banking deals they bring in creates an incentive to recommend stocks even if they don’t think they’re good investments;

Analysts often fail to disclose important information such as whether they own shares of companies they’re covering;

Analysts sometimes make misleading statements about their independence when writing reports about companies that employ them as consultants;

The SEC is focusing on “material misstatements” and overly optimistic statements that influence investors to make decisions.

The SEC is focusing on “material misstatements” and overly optimistic statements that influence investors to make decisions.

In recent years, the SEC has charged several companies with violating securities laws through misleading statements and omissions in their communications with shareholders and employees. These cases have involved a wide range of violations including:

Inaccurate or incomplete financial reporting;

Failure to disclose material information about significant legal proceedings;

Failure to disclose adverse facts about business prospects;

False or misleading statements regarding corporate events such as acquisitions or divestitures;

Unauthorized payments made by employees without proper approval

In response to these changes, FINRA released regulatory alerts and guidance on the subject. The recommendations state that businesses must keep an eye on and record social media posts, chats, text messages, voicemails, and emails. This means that in addition to the old archiving rules, businesses must now also attain WhatsApp FINRA compliance.

Organizations must have a strong monitoring and archiving solution that can archive business-related communications. They must also introduce instant message archiving solutions as communication technologies advance and new digital channels are launched. Regulated businesses must have a proactive compliance strategy to help them get ready for regulatory sweeps and maintain compliance with evolving legal requirements.

Read more on this subject with this infographic by Telemessage.