For investors who are paying attention, staying on top of companies’ annual reports, 10-Q and 10-K regulatory filings and incorporating changes into trading decisions may help yield significantly higher overall returns than overall market performance.
Reported data on these types of required filings tends not to differ much from quarter-to-quarter or year-to-year.
However, as a recent Wall Street Journal article noted, shares of companies that had significant changes – particularly to the “risk factors” section of their 10-K filings – performed worse than the shares of companies whose filings didn’t vary much. An investor who reads these filings and reacts to them may have a leg up on investors who ignore that type of data.
Regulators are Watching – Even if Clients Are Not
From a compliance standpoint, there’s also a general perception that investors and firm clients don’t read or care about the regulatory filings your firm makes. Form ADV updates, Form 13-F, 13-G and 13-H filings, Form PF, U4 amendments, changes to Form BD, UK filing requirements and other notices likely go largely unread by most of the public.
Of course, the regulators are reading them. Both the SEC and FINRA use reported data and updates in helping determine their target list of firms to examine each year, and in identifying whether there is a need to focus those examinations on a particular area within a firm.
Interpreting the Data
Much of what you are required to report through periodic regulatory filings is numbers-based. Those numbers tell a story to the regulators and anyone else who reads them. Your AUM, number of employees, number of investment accounts and other data can provide a picture of a firm that is thriving – or struggling. A firm whose AUM goes down when the market as a whole has gone down likely wouldn’t raise any eyebrows. However, when the market is growing and a firm’s AUM is flat or has fallen, those numbers may be indicative of other problems within the company.
Similarly, your filings also paint a picture through required disclosures of material information, which may include changes to the way your firm does business, changes to the senior leadership team, disclosing legal actions, regulatory fines and sanctions.
Firms required to file Form ADV also have an opportunity to weave a narrative, one that may help the investing public understand what makes your firm tick and why they should choose you over another advisory firm. While nobody is likely to argue that your regulatory filings are part of your marketing toolbox, you can use filings to supplement your other efforts. When they’re done right, your regulatory fillings provide a complete and clear picture of the products and services the organization and its representatives offer.
Recommended Best Practices
Ignoring or not giving enough attention to your filing requirements is not a smart strategy. Financial services companies whose regulatory filings and disclosures are not complete or are materially inaccurate face regulatory risk, as well as potential loss of client confidence.
As a best practice, someone in the compliance department should have overall responsibility for each type of regulatory filing your firm is required to make. Those designated people should have processes in place to both meet deadlines and to ensure filings are complete and accurate – every time.
Finally, when planning filings, be sure to leave an adequate amount of time for review by legal, compliance and business units, as appropriate, to ensure consistency and accuracy of messaging.