• Finding omissions in every disclosure



    RESPONDING to a query may not be easy especially on an issue which is for regulatory authorities to resolve. An example of this is the rising cost of corporate research, which the public considers a major service of the Securities and Exchange Commission (SEC) but it is not.

    Unknown to the public, the SEC library that keeps the files of companies registered with it is only a unit within a department. It urgently needs overhauling to keep up with the increasing needs of researchers, particularly businesses.

    Since a reader of The Manila Times pointed to a piece (“Layers of ownerships make corporate research expensive”) I wrote on May 8, 2014, I had to explain why this is so. I cited Ayala Corp. only to illustrate both the difficulties and the cost of researching on ownership of both listed and unlisted companies.

    Researching on who owns a company is expensive because holding companies are usually listed as stockholders. To identify the respective stockholders of these holdings companies, you find yourself facing another set of holding companies. In not a few cases, the layers of ownerships would be so thick that you would end up spending much more than your budget for a research project.

    This brief introduction brings me to an email from GF, which along with another reader’s poser appeared in this space in last Friday’s Due Diligencer. I will respond to GF’s query: How reliable are the disclosures posted on the website of the Philippine Stock Exchange?
    In the past, I may have written about “full” disclosure as a policy that governs listed companies. The adjective is meant for emphasis that filings should be “complete” and “total”. But, are they?

    The use of “full” to describe “disclosure” may be redundant. There is no such thing as either “full” or “total” disclosure” because in practice, disclosure even if “full” connotes only what is disclosable.

    From the tone of his letter, GF knows that disclosures may not be as reliable as listed companies make them appear.

    Try deciphering postings on the PSE website. Like GF, be wary of disclosures which may neither be “full” or “total.” The public should be warned not about filings but about omissions in each of them.

    Be curious—and wary—about omissions because the SEC relies only on what are disclosed and are disclosable in accordance with its policy of “full disclosure.” As a regulatory authority, it should it take the initiative of scrutinizing disclosures for any possible omissions in each of them. But does it have a plan to do so?

    When listed companies resort to omissions of disclosable facts, their insiders enjoy the distinct advantage of trading big on hidden information. Who engages in big buying and selling in blocks unless he or she knows something undisclosed s about to happen inside the boardroom?

    The following questions on PSE disclosures need some answers that may not be forthcoming:

    1. Why do listed companies buy back their own shares but do not retire them? Do they wait for a good market to be able to sell them back to the public? They must know something that the public does not know.

    2. Why do listed companies report block sales only on their “daily quotations report” but do not post them on their respective website on edge.pse.com.ph? Why are only the buyers in these transactions identified?

    3. The disclosure on big trades may be limited to a certain percentage of outstanding common shares. Shouldn’t the rule be changed so that both sellers and buyers would be identified for the public’s benefit?

    4. Why do some listed companies report the public as majority stockholders in public ownership reports when said attribution of majority ownership is never reflected by their election to the board.

    5. Why do the SEC and the PSE allow listed companies to hide their majority stockholders behind PCD Nominee Corp. to the point that PCD becomes the majority and controlling stockholder?

    A caveat
    To paraphrase the oft repeated cautionary warning to consumers, “buyers beware,” the public should also assume a similar attitude when trading on listed stocks. They should read the filings and study what could be missing from them. Listed companies may be required only to file disclosures that they find “necessary.”

    Here is a warning to the public: What they may consider “necessary” may not be among the disclosures posted on the PSE website.

    Even audited financial statements may not be as complete as they are expected to be because of the limited access by external auditors to auditable numbers. Listed companies may decide which are “necessary” and which are not for audit purposes.

    The public must be made aware of the dangers of relying only on PSE postings. They conduct more additional research to enhance their knowledge of listed stocks they include in their portfolio.

    Finally, I am tossing back to the public this poser: How many among them have read financial filings and the accompanying footnotes that explain certain entries that they contain?



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