Federal regulation of publicly traded companies

The Securities and Exchange Commission oversees publicly traded companies. Following the market collapse that precipitated the Great Depression, Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934. Together, they created reporting requirements and a mechanism for the public to examine reports about publicly traded companies. Both acts contain voluminous regulations on businesses. They commonly use the term “security” to refer to the stocks a company issues. Derivatives, swaps, bonds, debentures and futures are all types of securities too, but are more complicated financial instruments. The basics that are generally most useful to business reporting are explained below:

1933 Act

The Securities Act of 1933 (codified at 15 U.S.C. § 77a) is designed to prevent fraud in the sale of securities. It requires initial disclosures about securities, such as stocks, that are going to be sold to the public. Most securities that are to be sold have to be registered. The registration documents have to describe the securities that are being sold, provide financial statements and a describe the management structure of the company.

1934 Act

The Securities Exchange Act of 1934 (codified at 15 U.S.C. § 78a) created an enforcement mechanism for the 1933 Act in Securities and Exchange Commission. It also added more reporting requirements for securities that are being sold on a secondary market, such as a stock exchange, and it set thresholds for how large a company has to be in order to fall under the reporting requirements.

The size of companies that fall under the 1934 Act has been amended over the years; currently, the Act applies to publicly traded companies that have more than 500 shareholders and $10 million in assets. It also requires companies to provide annual and quarterly reports, called 10-K’s and 10-Q’s, which are publicly available on EDGAR, the SEC’s electronic filing system. The SEC also may require some businesses to file additional reports.

What’s available and where to go

The Securities and Exchange Commission maintains EDGAR, the database of all corporate filings. The database takes some getting used to, but every public filing of publicly traded companies is in it. There are other Web sites that often include SEC documents, such as www.secinfo.com www.marketwatch.com, www.freeedgar.com, and www.10kwizard.com, with varying degrees of completeness and access costs that range from nothing to several hundred dollars a year. Some of the pay services allow searches for keywords across SEC filings.

There are numerous documents that appear in SEC filings, and they’re named after the corresponding SEC rule number that caused the document to be filed. The most important documents for a business reporter are the 10-K (annual report), 10-Q (quarterly report), and 14-A (proxy statement). Other important forms to keep an eye on are the 8-K, which lists material changes that occur between quarterly and annual reports, Form 4 (insider trading) and 13-G (trading by large shareholders).

10-K (annual report)

The 10-K is a lengthy report filed annually that includes a wealth of information about the company. Management will provide a statement on what worked well for the company the previous year and what didn’t, and what moves the company expects to take that might affect its performance. Perhaps the most important item in the 10-K is the balance sheet, which reveals the financial bottom line for a company.

Also noteworthy in the 10-K is its section on liabilities, where management has to disclose any pending litigation involving the company, and its footnotes containing story tips.

Reporter’s tip: Compare 10-K’s from different companies across the same industry. For example, is one company making more aggressive disclosure than others in the industry? Is one company more conservative? More vulnerable?

10-Q (quarterly report)

The quarterly report is similar to the annual report, only smaller. Its balance sheet contains comparisons of financial information for the quarter being reported and for the same quarter in previous years. It is often referred to as an earnings report, and comes with a year-to-date summary. Like the 10-K, it will have statements from management about any major factors affecting the company’s bottom line. Often, it will also have discussions of ongoing litigation under a section titled “contingencies.”

Reporter’s tip: Companies that postpone projects will disclose this in a 10-Q. Asking about postponements can lead to a great story. For example, one business reporter asked about a private prison company that was postponing expanding facilities, according to a 10-Q. It led to a story about states couldn’t afford to house more prisoners.

14-A (proxy statement)

The proxy statement comes out before an annual meeting of shareholders. It contains important information that shareholders are expected to discuss. If any seats are up for election on the board of directors, the proxy will include biographies of management’s proposed candidates for those seats. It also discloses executive compensation (though this information can be scattered throughout the form in different places.) Finally, it will include any proposals that are up for a shareholder vote.

Reporter’s tip: There are private proxy advisory firms that recommend how shareholders should vote. Knowing their recommendations is key to knowing how a vote will go. The big ones are RiskMetrics Group, PROXY Governance, Inc., Glass Lewis & Co., and Egan-Jones Proxy Services.

A corporation’s annual meeting may not be open to the public. Some companies will open at least a portion of the meeting to the press or public. They might also make top executives available to the press before or after the meeting. If a company is not planning to allow a reporter access to the annual meeting as a member of the press, one way to gain access is to purchase one share of stock in the company before the record date at which the company creates the list of shareholders of record for the meeting. Corporate “gadflies” use this approach frequently, but never do it before asking your editor whether company policy allows it.

Reporter’s tip: Annual meetings can be quick and are often one-sided affairs presenting the company in the best light. Do your homework beforehand. Know what’s going on and who is going to be there. Read the most recent quarterly report and the proxy statement, which may point you to dissident shareholders and their concerns beforehand, and look for recent reports about the company by analysts and in newsletters.

8-K (interim report)

The 8-K gets filed whenever there is a material change in the business that investors need to know about. The SEC has a list of events that trigger a mandatory 8-K filing, such as a change of chief executive officers, a bankruptcy or mergers and acquisitions. The information in the 8-K will vary based on whatever triggering event has caused its filing.

Reporter’s tip: Always check out the 8-Ks. Older 8-K’s may have information on lines of credit and what entity is ultimately responsible if a borrower defaults. Credit lines can help sort out the ownership structure of a company.

Form 4 (insider trading)

When certain people associated with a company — including the top management and members of the board of directors — purchase or sell shares of the company’s stock, a Form 4 has to be filed. The purpose is to let investors know when “insiders” to the company are making decisions about their own stakes in the business. It can be useful to keep track of when the CEO or other top-level management members are cashing in options they have on stock, because it can be an indicator of how those people view the financial value of the company. They’re likely to cash in options and sell stock for a quick profit when they think the stock is high. Similarly, when executives allow options to expire without cashing them in, it might indicate how far the current stock price falls below expectations.

13-D and 13-G (major shareholders)

The rules that create forms 13-D and 13-G are similar to the insider trading rule, except they apply to large stakeholders instead of company insiders. Anyone who acquires more than 5 percent of the common stock in a company has to file one of these forms. Keeping track of what the large shareholders are doing with the company stock is important because it can indicate a number of things. Increases in ownership can be a precursor to a hostile takeover or a proxy fight. Decreases can indicate how an investor feels about the health of a company.

Form S-1

These forms are filed with the SEC when a private company wants to become publicly traded and sell stock. When the economy is not doing well, fewer companies will go public, making these filings all the more interesting. The company will also have to disclose information about its finances including recent profits and losses. A key detail on the form might be who is underwriting the stock sale.

Form S-4

When company seeks to issue new shares of stock to increase its capital — sometimes because it wants to use the money to buy another company — it will typically need shareholder approval and have to file a Form S-4 with the SEC.

Regulation Fair Disclosure (Reg FD)

No form is necessarily filed with the SEC under this rule, but it is an important one for access to company information. Before the fair disclosure rule took effect in 2000, most individual investors relied on institutional brokers for trading advice, or they looked for information in the quarterly and annual reports that were mailed to them and published in newspapers. With the rise of Internet-based brokerage services in the 1990s, there was also an increased demand by investors for access to information that companies had historically shared with institutional investors but not the general public.

This led to Regulation Fair Disclosure, which requires companies to release “material information” to the public at the same time it is disclosing it to institutional investors. If the disclosure to the institutional investor is accidental, the company has to quickly inform the public. But if the disclosure is planned, such as a quarterly conference call with analysts to discuss earnings, then public disclosure must be simultaneous.

Companies can meet that requirement in a number of ways, such as by filing a Form 8-K with the SEC that contains the information to be disclosed, or by opening the conference call to the public.

Reporter’s tip: You should be able to get the telephone number or Webcast address for the conference call from the company’s investor relations or media relations officers. These conference calls often coincide with the release of a company’s quarterly and annual reports.