Knowing the ins and outs
of trading is incredibly important. Not only because of the financial benefits
but because there is an infinite amount of legal matter involved that it is
crucial to know the laws.
In
1934 the Securities Exchange Act was created. Along with this act congress
created the Securities and Exchange Commission (SEC). The Securities Exchange
Act of 1934 gives power to the SEC “with broad authority over all aspects of
the securities industry.” The powers that the SEC hold include the power to
register, regulate, and oversee brokerage firms, transfer agents, and clearing
agencies, in addition to our nation’s securities self regulatory organizations
(SROs). (NYSE and NASDAQ are
examples of SROs). One of the most essential components of this Act is that it
prohibits any type of unethical or immoral conduct in the market and gives the
SEC disciplinary power when deemed necessary. The SEC holds the most power when
it comes to publicly traded firms. They are considered the “parental figure”
and no one wants to upset their parents.
On
July 30, 2002, President George Bush passed the Sarbanes-Oxley Act of 2002. He
was quoted explaining that this Act is “the most far reaching reforms of
American business practices since the time of Franklin Delano Roosevelt.” This
Act ordered a certain number of reform to improve corporate responsibility, financial
disclosures, and to fight corporate and accounting fraud. Along with this Act
the Public Company Accounting Oversight Board (PCAOB) was founded in order to
oversee all auditing actions.
The
Sarbanes-Oxley Act of 2002 wasn’t the only step the U.S. government took in order to protect American
businesses. The United States also introduced Fair Disclosure or more commonly
referred to as Reg FD (Regulation Fair Disclosure). On August 15, 2000 the SEC
implemented Reg FD in order to deal with the “selective disclosure of
information by publicly traded companies.”
Regulation FD provides that when
an issuer discloses material nonpublic information to certain individuals or
entities—generally, securities market professionals, such as stock analysts, or
holders of the issuer's securities who may well trade on the basis of the
information—the issuer must make public disclosure of that information. In this
way, the new rule aims to promote the full and fair disclosure.
As I mentioned in the introduction the importance of
this knowledge is not only for financial benefit but to avoid the dark side of
the law, that holds most true for this next topic; Insider Trading. As I
conducted my research for this post, I Googled Insider Trading and “Financial
Crime”, “Illegal acts”, and “Illegal Trading” were of the top related topics to
my search. Insider Trading is defined as the
illegal practice of trading on the stock exchange to one's own advantage
through having access to confidential information. Insider trading is highly risky
because the majority of the time the information being used has not been made
public by the company. However, with that being said, according to Investopedia.com,
“Insider trading is legal once the material information has been made public,
at which time the insider has no direct advantage over other investors.” The
SEC also plays an important role in Insider Trading. In order to protect
companies and their investors, the SEC mandates that all insiders report their
personal transactions. Again, remember that the SEC is the parent in this
field.
Going hand in hand with illegal trading
is the topic of Selective Disclosure. Selective Disclosure is defined as:
When a public
company discloses material
information to a selected group of people, usually analysts and institutional
investors, before making the information
known to the public.
This practice creates the opportunity for a form of insider
trading and also creates conflicts of interest for securities
analysts.
Selective
Disclosure can be just as dangerous if not more so than insider trading and
much of the danger has to do with the old saying “safety in numbers.” Many
people feel as though if they are in a group than they have the support of each
other to not get found out. However, it is quite the contrary, and seemingly
obvious; the more people involved in the illegal act the more likely you are to
be discovered.
What
I find most Ironic about this topic is even with all of the safety measures
that these companies take and that the SEC takes in order to protect companies
an their investors they have recently approved using Facebook and Twitter for
official company disclosures. I find this ironic because Facebook and Twitter
are two of the top websites involved with the most hacking schemes every year,
yet the SEC still approved the postings on April 2, 2013.
“Most social media
are perfectly suitable methods for communicating with investors, but not if the
access is restricted or if investors don’t know that’s where they need to turn
to get the latest news,” George Canellos, acting director of the SEC’s
enforcement division, said in a statement.
-Gallu, J.
Though
this seems ideal for the era that we live in, a time when most people spend a
majority of their day on the internet as opposed to in front of the television
(my, how times have changed) not everyone is happy with the merge of social
media and company disclosure. A Bloomberg article reports that investors over
the age of 50 are not happy. They feel as though they are not a part of this
“Twitter era” and are being forgotten about.
“Many investors,
especially those over 50, who in the aggregate have the most invested, still do
not use social media,” Turner said in an e-mail. “Telling someone who does not
use Twitter to go to Twitter for significant investment information is one of
the dumber ideas I have heard.”
-Gallu, J.
My
question for you all is: What do you think about social media and how it plays
a part in company disclosure? Do you agree or disagree?
I learned
so much about this topic by conducting the research for this blog posting and I
hope you find it someone insightful as well. There is a high possibility that
at some point in your life you will be an investor and it is so important to
know the ins and outs of the trading world.
References:
·
Securities and Exchange Commission Government
Website: SEC History http://www.sec.gov/about/laws.shtml
Date Obtained: November 27, 2013
·
Securities and Exchange Commission Government
Website: Fair Disclosure http://www.sec.gov/answers/regfd.htm
Date Obtained: November 27, 2013
·
Investopedia Website: Insider Trading http://www.investopedia.com/terms/i/insidertrading.asp
Date Obtained: November 27, 2013
·
InvestorWords Website: Selective Disclosure http://www.investorwords.com/4458/selective_disclosure.html
Date Obtained: November 27, 2013
·
Protiviti.
“SEC Okays Use of Social Media for Company
Announcements if Investors are Alerted”. Web. http://www.protiviti.com/en-US/Documents/Regulatory-Reports/SEC/SEC-Flash-Report-Social-Media-Approved-Company-Announcements-040513-Protiviti.pdf
April 5, 2013. Date Obtained: November 27, 2013
·
Gallu, Joshua. “SEC Approves Using Facebook,
Twitter for Company Disclosure.” Web. http://www.bloomberg.com/news/2013-04-02/sec-approves-social-media-use-for-companies-material-disclosure.html.
April 3, 2013. Date Obtained: November 27, 2013.
