SEC Secrets Governance

The SEC recently announced that they wanted to crack down on rumours; particularly if you are passing around bad rumours which contain inaccurate information. One wonders what the penalty would be if you passed on a good rumour with accurate information. That constitutes the inherent conundrum of financial information.
The SEC has authored and facilitated a vast body of legislation and regulation which has allowed the current climate to develop. Why do rumours have the power that they do? The answer is: the rumours, ugly as they are when uttered, are plausible at the time. Financial reporting, derivatives, collaterized obligations, accounting standards etc. have all created a wall of worry that investors do not seem to be able to surmount.

Financial communications is more about message strategy than actually reporting results candidly. So called bad news is bled out into the market place after market close, frequently on Friday before a long weekend. So called good news comes out before market opens affording trading opportunities. Good news usually has more details. Bad news is more clipped and lacks depth.

Ugly rumours take root in confusion. When companies are hard to understand and fathom, rumours will provide the emotional guessing that straight financial information should have quenched. It’s not a surprise that financial institutions are having a very rough ride.

Be honest now. When was the last time you felt you understood the financial statements of a large commercial bank or i-bank. Everyone is looking at proxy metrics to analyze these puppies. Housing starts and consumer spending are better tracking metrics for consumer lending than anything the consumer lender may say about itself. And then we have to listen to pundits and experts to decipher.
Now take a look at oil companies. We know the price of oil. We know our economies are energy inefficient. That basically is the investment model for energy stocks. Wasn’t that easier.

Rumours are a manifestation indicating a lack of confidence. Sure the SEC can chase down some of the more egregious offenders who have deliberately either created or passed around false information. But in an environment of uncertainty so much of the bad news is really undisclosed truth.

If the SEC wants to change the culture it needs to deal with the root causes. Too many companies do not explain themselves and purposefully avoid the truth until it is an eleventh hour crisis. Right now we can trade the VIX and take a view on market volatility. The rumour mill trading allows investors to take a view of market credibility.