The Disclosure Insight Watch List Warnings Are Improving
We studied 10 years of our data — Here's what we learned.
From John’s Desk …
“A moment’s insight is sometimes worth a life’s experience.”
– Oliver Wendell Holmes Sr.
After 25 Years Following the SEC …
Those familiar with my work know that I’ve spent the past 25 years following public company interactions with the US Securities and Exchange Commission, the SEC.
In the late 90s, I pioneered using the Freedom of Information Act as an investment research tool.
Those analytically-rich SEC comment letters many of you now use in your own research have been freely available online since 2004 – largely because of my early FOIA work.
In my opinion, no one on Wall Street can interpret a disclosed SEC investigation as well as I can.
No one outside of government has the expertise and database my Disclosure Insight research operation has built over these many years.
I’m not telling you this to brag. I’m telling you because it sets the stage for some significant changes we’re making to the DI Watch List—starting with the July update, due out soon. Let me explain.
We wanted to see if we could improve the quality of the warnings appearing on the DI Watch List – those companies with confirmed, undisclosed SEC investigations. I’ve always been happy with the quality of this research product, but could we make it even better—if so, how?
A 10-Year Look-Back Inside DI’s Database.
This past month we conducted an in-depth analysis of the FOIA responses that form the backbone of the Watch List.
Aided by my 25 years of experience focused on the SEC, we studied language and FOIA response patterns going back to 2014—more than a decade of history. We then factored in enforcement trends and shifting SEC priorities observed since the Trump administration returned to office.
The outcome of this exercise was not only revealing – it changed what companies appear – and stay – on the Watch List.
In short, this study has led to a meaningful analytical upgrade to this widely followed report.
What Are We Changing?
In the past, any company with undisclosed SEC investigative activity that was recently confirmed as active and ongoing was eligible for inclusion on the Watch List. Going forward, that’s not enough. The standard for Watch List inclusion is now tighter.
Starting with the July Watch List update, a company will only appear on the DI Watch List if we believe the ongoing and undisclosed SEC investigative activity we find directly pertains to its conduct, transactions, and/or disclosures.
That is, for a company to be on the Watch List, we have to be convinced that the investigative activity is centered on the company itself. That’s long been our goal, only now we think we can better execute on it.
What Companies Are No Longer Eligible For Inclusion On the DI Watch List?
Our review surfaced several scenarios where enforcement proceedings remain active and ongoing, yet available indicators suggest the company is no longer the central focus.
Some were clear; others emerged only when we stepped back and studied language and response patterns across those 10 years of our data included in this analysis.
Examples of Companies No Longer Included on the Watch List:
A company where SEC enforcement proceedings might involve former executives, outside firms, or other third parties related to the company.
Companies that appear to only have post-investigation compliance and/or reporting obligations.
A company included in a broader inquiry that remains ongoing, but the company itself is no longer directly involved. Examples: Cyber intrusions; whistleblower protection rules; and, off-channel communications by financial professionals.
What Does This Mean For You Right Now?
After close review, we expect about 30 companies of the 119 appearing in our June Watch List update no longer meet our higher standard. They’re coming off the list.
What About DI’s Early Signals® Alerts?
Our Early Signals alerts will still come out well before appearing on the SEC’s website, usually weeks later. But they are under review too. The data behind them remain unchanged.
As before, we still expect about 80% of the companies appearing in one of our Early Signals reports will go on to have SEC investigative activity confirmed as active and ongoing.
The percent of Early Signals companies that meet our tighter standard for Watch List inclusion remains to be seen. We doubt it will be 80%. We’ll keep you posted on this.
Again, the July update to the DI Watch List comes out soon. You’ll see all the changes then.
As always, I thank you for your ongoing support. Feel free to share this with others, as well as letting me know your thoughts on this new upgrade. - John
John P. Gavin, CFA, NACD.DC