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.
Kacey -
ReplyDeleteYou definitely had one of the tougher topics to cover because there is so much to cover and the terms are foreign to a lot of non-financial people. You did a great job researching the topic and providing definitions for a lot of key terms.
You mention the importance of this topic in case people become investors, but if you are going into the PR field, there is a good chance that you will have to know these terms and the laws because you will be using them every day. I remember my first week as head of Corporate Communications for a Fortune 300 automotive manufacturing firm and my total panic when the Wall Street Journal called me at home to get a quote about a recent bond rating downgrade. Despite my master's degree in business and the finance courses I had taken, I still had to think through what I could say and the disclosure issues around my statements. If I had said anything material (information that could impact a stock purchase decision) that had not already been made public, then the company would have to make an immediate SEC filing to correct the situation.
Another important issue you mention is insider trading. You point out that: "In order to protect companies and their investors, the SEC mandates that all insiders report their personal transactions." This is true for obvious insiders (corporate board members and executive staff), but there are a lots of ways to be guilty of insider trading without being considered one of those insiders. Just ask Martha Stewart! This is one area that PR people can get into trouble if they don't understand the laws. For instance, you could work at a PR firm and be given insider information to write an early draft of a press release for a planned merger. You might not act on that information, but you might mention the merger to your spouse, who mentions it to a friend who sees the upside potential on the stock and buys some. The SEC is always on the lookout for early trading on companies that were recently in the news, and PR people are the ones who often get the early notice, so they are a prime target to investigate. If you didn't have any personal gain from the transaction, you likely would not have any criminal charges brought against you, but you could have fines and there's a good chance you'd lose your job over your lack of judgment.
So your post has important information for people to know if they plan to work for a publicly traded company or an agency that has corporate clients.
Pat
Professor Whalen-
DeleteThank you for your feedback and added insight. Like you said, this topic was enormous and as I did the research I felt as though the information was never ending so I tried to cover the bare basics to give people a better generalized idea. However, in doing so, I think I lost sight a little bit of the bigger picture, being how does all of this relate back to public relations. But your comment was vert insightful and even got me thinking more so in the PR direction than my original post.
As you also pointed out with your experience with the Wall Street Journal there are so many grey areas and it can definitely get risky. Even if it is something as innocent as answering a question, like in your situation, it is so difficult to think on the spot what is public and what is private. Especially, working with private information all day long, I am sure at some point you forget that not everyone has access to that same information that you do.
Before I started researching this topic I was totally overwhelmed and had no idea where to begin, but at the end of it all I am so glad that this was my topic because it was probably the area I knew the least about and it gave me the opportunity to not only teach myself but to teach others in a more simple way.
Great post, Kacey. As for your question, I think just because social media is available, it doesn't mean it's the best tool or platform. If a company is finding most of its audience for any topic does not respond to a particular social media site then it shouldn't be their main focus. Companies can also cross post the information and have it available on social media as well as more traditional platforms. I don't really see security being an issue with social media. Any site can be hacked and with so much information online and even more trending towards going that route, fear of hackers seems unrealistic. Overall, I think it's not so much catering to investors, it's PR people knowing their audience.
ReplyDeleteKatie-
DeleteI agree with you, I don't think social media is the BEST way for a company to post their public information but it is A way nonetheless. I think it is smart trying to keep up with the times, and obviously social media is booming at this point in all of our lives, but it is not necessarily booming with those who are 50+ as my original post demonstrates. I feel as long as they stick with the traditional means as well, and social media is just an added bonus then it can definitely be beneficial.
Kacey - great post. As professor Whalen said, this was definitely one of the tougher topics, but you made it legitimately understandable.
ReplyDeleteWhen searching for some supplemental real-life examples of insider trading cases, I came across the SEC's battle with billionaire playboy, Marc Cuban. Also known as the owner of the Dallas Mavericks and a judge on the show Shark Tank, Cuban was accused of insider trading when "dumping his stake" in an Internet company. In the article that I read (http://dealbook.nytimes.com/2013/09/29/s-e-c-again-takes-on-mark-cuban-in-insider-case/), the part that struck me most was how Cuban's personality could affect his case. The article mentions a Dallas resident who talks about how Cuban is on the court instead of up in the owners boxes during games, essentially calling him a "common man." Cuban has a feisty personality. People like him. And even if all of the evidence points towards guilt, it's that personality that might save him.
So from a PR perspective, if we are facing a battle with the SEC for any violation of the above Acts, how much does the actual person, not the actions, come into play? I honestly don't have an answer, but I thought it was kind of interesting.
As for your question, I can totally understand the 50+ age demographic being upset. Yes - financial companies should be using progressive measures to convey their information to their publics, but that doesn't mean that they can deny their main stakeholders. If the 50+ crowd makes up the majority of their investors, then keep throwing out those emails to their AOL accounts (officially old school) or calling them on their landline telephones. At some point our social media generation will move up to that 50+ demographic and Twitter, Facebook, and whatever other social media program comes along will be the preferred method of communication. But for now, I would suggest that if a company's main stakeholders - the ones that make them millions and billions of dollars a year - want messenger pigeons or a horse and buggy to carry the company's information to them, then do it.
Teddy-
DeleteAhh good ol' Marc Cuban. You definitely raise an interesting point when asking how much of the actual person not the actions come into play. I remember when I first heard about Cuban's insider trading scheme my initial reaction was "Ugh NO! Not Cuban". I picture his personality just as you described it, just your everyday guy or "common man" as you put it. He is charismatic yet genuine and I definitely would not have pegged him for a "Wall Street Thief". But I absolutely agree with you that his character is going to play a BIG role in his trial.
Thanks for the response!!
Wow Kacey, that is a lot of detailed information (as your title correctly implies)! This is a very unique topic and one that I sense will be a continuous occurance throughout the PR field. I hadn't ever thought of the challenges PR professionals face with regards to investor relations. However, your post and this article (https://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171484464) greatly added to my understanding. In the article, it talks about how a PR firm president bought shares in a client's stock knowing that it would increase due to an aquisition that was not public knowledge at the time, with intent to sell her shares to make money once the acquisition was announced (which she did when the price jumped 55%, but soon was caught).
ReplyDeleteThe article states - “Fraser’s client entrusted her with highly sensitive nonpublic information, and she tried to turn that into a quick side profit,” said Michele W. Layne, Director of the SEC’s Los Angeles Regional Office. “Consultants in public relations or any career field cannot exploit their client relationships for an illegal payday in the stock market.”
The article also says that Fraser agreed to settle the SEC’s charges by paying $91,530.36, which is more than double what she gained in illegal profits from her alleged insider trading.
That must have been a tough pill to swallow, but it is something that a PR professional must know and follow - especially since the PRSA Code of Ethics outlines safeguarding confidences and conflict of interest.
Your analysis of Selective/Company Disclosure was spot on. It is crazy to think that happens. And I agree that even more so with Facebook and Twitter allowed, this will wreck havoc on the system (what is left of it). George Canellos' statement hit the nail on the head when he says that if people don't know how to use it or there are other restrictions, then it cannot be considered equal. Therefore, I don't agree that social media should be the only means used, but that they must still use the traditional means as well.
Sarah-
DeleteThank you so much for sharing that article!! I had not seen that one before and it gave tremendous insight into insider trading. Insider Trading and Selective/Company Disclosure is so high risk and puts hold so many people responsible for their actions. I had never thought of PR in this context before and it is definitely slightly daunting to think about these types of scenarios happening in your attempted field. But then again, that is where morals, values, and ethics come into play. It is not these types of situations that are scary to me because I know I would never take advantage of information like that but if you read Professor Whalen's comment and the situation she was put in, I just hope that I have the wherewithal to know what is appropriate and what is not when put on the spot.
Thanks for the article!! I hope everyone reads it!
Great post Kacey,
ReplyDeleteAs everyone else has already said you really had a tough topic to discuss but a very interesting and relevant topic. You had to talk about a darker side of public relations that we need to be aware of because at some point or another we may come across a peer who is abusing the system by doing insider trading with information their clients have not made privy to the public. Once again, like the majority of our topics in this class, this topic comes around to making the ethical decision and being that trustworthy practitioner that clients and the public can trust. In the end the profit is not worth the risk. As of your question I have to agree with Katie and Teddy. Of course it is important that companies know how to utilize social media platforms in order to reach as many demographics of people as possible, however you cannot alienate older age groups. Even though we rely on social media more, especially with our generation, we still cannot deny the importance and capabilities of traditional media in terms of not only reaching older audiences, but also hoping to legitimize the press releases or other information we are sending out to the public. Having some information presented to the public through a credible newspaper or station can help certain audiences trust the truth in the information your are putting out about your client. In the end it all boils down to knowing who you want to reach and the best platform or gateway to reach them.
Once again great post Kacey!
Thanks Katherine!
DeleteThis topic was definitely intimidating but I am actually glad I was given the opportunity to research it. I could not agree with you more. The profit will never outweigh the risk (or even the guilt for the matter). I'm not sure if you read Sarah's article that she posted in her response, but long story short the PR President took inside information and bought and sold shares accordingly. When she was caught she had to pay the SEC over $91,000, more than twice the profit she had made from her insider trading. It is definitely scary, but like you said it comes down to ethics and knowing the simple difference between right and wrong.
As far as social media being a legitimate platform for public information I too agree with you, Katie, and Teddy and will quote my response to Katie;"I don't think social media is the BEST way for a company to post their public information but it is A way nonetheless. I think it is smart trying to keep up with the times, and obviously social media is booming at this point in all of our lives, but it is not necessarily booming with those who are 50+ as my original post demonstrates. I feel as long as they stick with the traditional means as well, and social media is just an added bonus then it can definitely be beneficial."
Thanks for the response!!
Kacey, great post! You spoke with conviction and made great points! This is a very intricate and complex topic to not only discuss, but to write about as well. It is something I certainly know nothing about so reading this was very helpful and insightful. It is important to know about the trading and investing world, whether it be as a PR professional or just in life in general. I think that you must cater to the majority, in regard to your question. I couldn't agree any more with Teddy's remark about your question. You have to do what the majority of your audience is doing. So if you've got the 50+ demographic as a majority, send them the letters and leave voicemails on their answering machines at home. If it's 25+, use Twitter, Facebook, Gmail email and all those other "new" avenues. Good public relations professionals can do it across the gamut and cater to the needs of those that are most loyal, and pull in those that are on the fence. Great work, Kacey!
ReplyDeleteThanks Jared!!
DeleteI agree with you. As I mentioned in previous responses to the girls, I think it is important to keep up with the times, and it is no secret that the social media era is booming. With that being said, I am still not 100% convinced that social media should be used as a "professional" platform for information. I think having the option is beneficial to everyone (and those 50+ can disregard it and stick to their old habits). It is important though to recognize that social media is an intricate part of our lives and as of right now the quickest way to get the most up to date, most current information, it's literally available within seconds. I don't think using social media is a poor way to publicise company information, as long as the companies are still willing to recognize they have investors who are not as "up to date" as others.
Thanks for the post!!