SEC Filings: Common Mistakes and their Consequences

Filing a 10-K for the SEC can feel like just that – a 10K. Getting ready for a 6.21-mile run requires training, preparation, stamina, trust, effort, and a little bit of luck. The same goes for all SEC Filings – there are lots of rules, guidelines, and required information that can be difficult to keep track of. Throughout the years of reporting and filing, there are several items that are frequently missed that result in consequences for the offending companies. In this article, you’ll find some common mistakes, the filings they correspond to, and their consequences.  

Late Filing 

Filing late might not seem like a big deal. Back in high school or college, in a pinch you could email your professor and plead for an extension on the assignment that was due. However, the SEC doesn’t respond to such requests. Filing late not only has large immediate consequences with the SEC, but also has lasting consequences in terms of stockholder satisfaction. 

Companies might file late for several reasons: uncertainty surrounding litigation, a company auditor not having yet reviewed a company’s operations, or a company with emerging bankruptcy needs requiring more time to complete disclosures. Regardless of the reason, filing late usually indicates financial instability for the company. Late filings may also be because of uncertainty surrounding litigation, due to a company's auditor not having yet completed its review of the company's operations, a sign of a company in financial distress, or because a company emerging from bankruptcy needs more time to complete the required disclosures. When filing late, a company must submit a form NT (not timely) that must explain why their report could not be filed on time as well as any significant changes in operations from the corresponding period in the last fiscal year. In 2021, the SEC fined 8 companies a total of $250,000 for failing to file a proper Form NT.  

Additionally, late filers find that their returns suffer even after they successfully submit their Form NT. In the three days surrounding the filing of the form NT, late filers generate an abnormal return of -1.34%. Even after that three-day period, late filers continue to underperform for the following year. Smaller companies suffer more from these effects than larger ones, generating returns up to two and a half times worse after late filing. These companies usually have been established for a shorter period and are less well known, so signs of instability are felt harder by the community. You might think that this type of abnormality mostly applies to companies that have filed late in the past, but this decrease in returns is worse for first-time filers than repeat filers.  

Incomplete Filing 

It seems like there are millions of requirements when it comes to SEC filings, especially when it comes to the annual report. Part of the 2021 $250,000 fine was in part due to there being missing information in the File NTs when they eventually were filed. According to Robert L. Wernli Jr., Sheppard Mullin Richter & Hampton LLP, there are a few sections that are often cited by the SEC for being incomplete. 

Part 1: 

• Item 101(d)(1): Financial Information about Geographic Areas  

This information is often included in financial statements, so it’s easy to forget that it’s required in the 10-K as well. Adding a simple cross reference in the appropriate notes fulfils this requirement.  

• Item 503(c): Risk Factors 

This section tends to check in as “incomplete” when in fact it’s the opposite: too thorough. This section requires risks to be “concise and organized locally,” so including macro-risk factors is unnecessary. Risks should be company-specific, and this section can be cut down be cross-referencing other 10-K sections that make the same risk disclosures (e.g. management discussions). 

Part 2: 

• Item 5: Market Price Information 

Listed companies must report the high and low sales prices for the last two fiscal years, whereas unlisted companies must report high and low bid information. Companies often accidentally report their high and low closing prices, rather than overall high and low prices.  

• Item 7: Increases in Revenue between Periods 

According to Item 307, you don’t just have to disclose significant revenue increases – you also have to provide a “narrative discussion” as to the material reason why these changes occurred.  

• Item 9B: Other Information 

For this section, look through all company press releases to ensure that no Form 8-K trigger event occurred that wasn’t accurately reported. Form 8-K disclosure is often forgotten here.  

• Item 6: Selected Financial Data 

Don’t forget these often-forgotten line items! 

• Net sales or operating revenues 

• Income (loss) from continuing operations 
• Income (loss) from continuing operations per common share 
• Total Assets 
• Long-term obligations and redeemable preferred stock 
• Cash dividends declared per common share 

• Item 201(c)(1): Restrictions of Payments of Dividends 

Companies often have credit facilities with constraints that limit the borrower’s ability to pay dividends. These restrictions must be disclosed or cross-referenced to the financial notes.  

Part 3:  

• Item 201(d): Compensation Plan Table 

You might be thinking – wait a minute, isn’t the compensation plan table in Part 2 Item 5? That’s a common mistake! It should appear in Part 3 Item 12, can be found in the company proxy statements, and incorporated by reference into the Form 10-K.  

Has it happened before? 

In February 2022, the SEC charged 12 firms to pay civil penalties ranging from $10,000 to $97,523 for having incomplete filings. In October 2021, the SEC fined a New York-based registered investment advisor firm $25,000 for allegedly missing the deadlines to send investors the Form CRS. This isn’t even to mention the $1,950,000 fine against the Bank of Montreal, the $2,700,000 fine against Stifel Nicolaus & Co., and the $100,000,000 fine against Standard Chartered PLC, all for various incomplete filings.  

Holy cow…. How am I supposed to catch all of this? 

SEC Reporting and Filing mistakes are so much easier to avoid when your data is cleaned, enriched, and accurate. Making qualitative assessments of quantitative data is more manageable with a data set that you can be confident in. Employing an automated controls software can identify anomalies immediately to provide you with a basis of information to analyze your company’s performance. This way, you can file completely with the SEC and on time.