What Is the Division of Corporation Finance?
The Division of Corporation Finance is a branch of the U.S. Securities and Exchange Commission (SEC) that has oversight of disclosure practices of registered firms that offer securities to the public. The division is responsible for ensuring that publicly-traded firms provide the required level of disclosure of material information to investors so that they can make informed investment decisions.
The Division of Corporation Finance reviews required documents issued to investors, including Form 10-K, Form 10-Q, proxy materials, and other ongoing filings. Furthermore, the division provides interpretive assistance to companies regarding SEC rules and forms. It also makes recommendations to the SEC on ways to enhance the agency's effectiveness for public investors.
- The Division of Corporation Finance is a division within the SEC that oversees disclosure practices of registered issuers of securities to the public.
- The Division serves as a regulatory watchdog for most filings required by the Securities Act of 1933 and the Securities Exchange Act of 1934.
- When a filing is found to be deficient or unclear, the Division will mandate that a company satisfy its requirements or else face sanctions.
- Because of its oversight role, the Division aids in the SEC's goal of improving the transparency, trustworthiness, and efficiency of U.S. securities markets.
Understanding the Division of Corporation Finance
The Division of Corporation Finance acts as a watchdog over filings made under the Securities Act of 1933 and the Securities Exchange Act of 1934. There are thousands of filings over the course of a year, but limited human resources. As a result, the division selectively reviews filings to check for compliance with disclosure and accounting rules. However, the Sarbanes-Oxley Act of 2002 calls for "some level of review" of each reporting company at least every three years. The group does not publicly disclose the criteria used to select filings for review to protect the integrity of the process.
When it is determined that there exists deficiency or lack of clarity in filings, the staff will take the necessary steps to compel a company to satisfy requirements. Known as a comment process, the oversight action by the division allows the company some time to respond to the comments made by the division regarding disclosures in a filing. The result is typically revisions to financial statements or amendments to disclosures to make them clearer and more useful for investors. However, it should be noted that the overall review process is "not a guarantee that the disclosure is complete and accurate," according to the division. That responsibility always rests with the company providing the filing.
A review of documents by the Division of Corporation Finance does not shield companies from potential legal liability for incomplete or inaccurate information.
The Division of Corporation Finance also provides guidance on the web about how to handle disclosure for new risks as they arise. For example, the division provided guidance on disclosing risks involved in the economic crisis and lockdown in 2020. In 2019, they offered guidelines on intellectual property and technology risk disclosure requirements for companies with international operations. Past topics also included confidential treatment of applications, disclosures of small financial institutions, and European sovereign debt exposure.
Benefits of the SEC's Division of Corporation Finance
Investors can get better information about companies because of the Division of Corporation Finance. In many cases, firms seek to obscure or bury negative information in reports rather than engage in obvious fraud. Up to a certain point, they are merely using the tools available to them to provide a positive interpretation of negative events. Past that point, the Division of Corporation Finance will have questions about filings that companies will have to answer. Since the division asked the questions, investors reading the reports will have the answers readily available. That saves investors significant efforts to get the company to answer those questions.
The Division of Corporation Finance's work also helps companies to provide more accurate information to investors and potential investors. Investors and others in the financial industry often fall into psychological traps and have difficulty seeing their own mistakes. For example, confirmation bias can cause an individual or even a team to find support for previous preconceptions and ignore contrary information. The Division of Corporation Finance is outside the company, so they provide a different perspective that is free from some of these errors.
Taken as a whole, the actions of the Division of Corporation Finance enhance the quality of information available, which increases market efficiency. Ultimately, it is not positive or negative information, but accurate information that markets need to work.
Consider a hypothetical example of what might happen without the Division of Corporation Finance. A company will typically want to promote positive stories and limit disclosure of unfavorable information. However, by doing so, they might attract more momentum investors who will sell the stock as soon as the negative information comes to light.
The Division of Corporation Finance ensures that companies disclose unfavorable facts early on, so their shares could initially drop when bad news comes out. That might make those shares more appealing to long-term value investors willing to stick with companies in troubled times. The Division of Corporation Finance helps guarantee accurate information, which is essential for markets to match stocks with the right investors.