The SEC Is Falling Down on the Job
Financiers ranging from day traders to Warren Buffett rely on quarterly reports to determine investment strategies. These reports are the main method by which publicly traded corporations release information to shareholders, the business community, and the public at large, and they often reveal vital details about the financial life of a company. But what happens if a company litters its quarterly reports with secret redactions? What recourse do investors have? In actuality, very little.
Given the importance of quarterly reports, federal government oversight is required to guarantee accuracy and transparency. That task falls to the Securities and Exchange Commission. Created by the Securities Exchange Act of 1934 near the outset of the Great Depression, the SEC, according to the agency, “was designed to restore investor confidence in our capital markets by providing investors and the markets with more reliable information and clear rules of honest dealing.”
For the most part, the SEC has done its best to carefully monitor the flood of reports issued each quarter by America’s corporations. But the Office of Inspector General has identified potential problems at the SEC, specifically with regard to corporate confidentiality. A 2010 report listed recommendations to address shortcomings identified by the IG.
A company does often need to keep certain information secret to protect the viability of its business. To do so, the company must submit a Confidential Treatment Request (CTR). If the SEC approves the request, the company may legally redact information from its quarterly filing. While most companies do not abuse the CTR process, the IG found enough that did to warrant a recommendation in its 2010 report.
“The [SEC] should revise its internal procedures for processing confidential treatment requests,” the IG noted, “to require additional documentation [that would] detail the specific qualitative and/or quantitative factors considered in assessing the materiality and competitive harm pertinent to the subject matter of the confidential treatment request.” In short, the SEC should require a company to justify a request to keep information about itself secret.
In a recent email exchange, an SEC spokesman would neither confirm nor deny that the agency has made the changes to ensure companies do not withhold information that could be relevant to investors. But if the SEC were doing a better job of monitoring CTR requests, it would likely want to assure the public that it is addressing all relevant concerns.
Many companies are open with their filings, but recently there has been an overall uptick in CTR requests. One company pushing the boundaries of secrecy is Tesla, the electric car manufacturer founded by green guru Elon Musk. Tesla has been plagued by production problems of late, and it has consistently lost money. It’s hard to believe, but Tesla has only posted profits in two quarters ever. For its last reported quarter, ending September 30, 2017, Tesla chalked up its largest quarterly loss yet — $619 million — nearly double the $336 million it lost in the previous quarter. Despite the company’s inability to turn a profit, Tesla’s stock price has remained around $325 a share, much more robust than the stock prices of traditional auto manufacturers such as Ford ($11 a share) and General Motors ($42 a share).
Tesla’s viability depends on a high stock quote, since Musk needs to raise capital constantly to keep the company afloat. The quarterly report is therefore especially important, e.g., to investors who are watching closely to identify clues as to when the company might one day be profitable. But in its last two quarterly reports, in which the company lost $955 million, Tesla made an usually high number of confidential treatment requests, allowing the company to generate almost 3,000 redactions — some 1,300 for the quarter ending June 30 and 1,580 for the quarter ending September 30.
By comparison, in the same two quarters, the quarterly reports of General Motors, Google, Boeing, and Exxon Mobil do not even contain the word “confidential.”
Why would a company make 3,000 redactions in two reports? Is Tesla protecting trade secrets? Covering up bad financial news? The answer is not clear because only the SEC and Tesla know what has been redacted. Investors simply have to trust that the SEC is doing its job and not allowing Tesla to redact information they should be privy to. But, again, it is unclear if the SEC has taken the steps called for to prevent excessive secrecy in corporate public disclosure forms.
What has the SEC done so far about Tesla’s penchant for secrecy? It’s unknown. The SEC will not comment on individual companies, which is its own form of secrecy.
Paul Alexander often writes about politics. He is the author of books on John McCain, John Kerry, and Karl Rove.
