Maloney calls on SEC to end outrageous policy that allows inside investors early access to public filings

Oct 28, 2014
Press Release
Maloney plans bill to mandate equal access to public filings

NEW YORK -- Congresswoman Carolyn B. Maloney (D-NY) today called on the Securities and Exchange Commission (SEC) to alter the way public filings are disseminated to eliminate a timing advantage provided to inside investors. A new academic study shows that prices, volumes, and spreads all move approximately 30 seconds prior to public filings being made available on the SECs website, proving that a set of Tier 1 subscribers to SEC’s privately contracted Public Dissemination Service (PDS) are trading on public information they are able to obtain prior to it being made available to the general public. Maloney is the Ranking Member of the Subcommittee on Capital Markets and Government Sponsored Enterprises, which has jurisdiction over the issue.

“It is extremely distressing that insiders have been getting and early look at public filings for so long,” said Maloney. “It violates the basic principles of fairness that underpin our markets, and I urge the SEC to put a stop to this as soon as possible. The SEC already has the authority it needs to address this problem, but I have drafted a bill that would require the SEC to act. Inside investors shouldn’t get an early look at public filings.”

The SEC has the authority to eliminate the timing advantage. SEC contracts with a private vendor for its PDS. The statute allowing SEC to contract with the vendor states that information disseminated “shall be equally available on equal terms to all persons.”

Maloney’s bill would clarify the law to prohibit select insiders from receiving early access to public filings. Maloney’s bill would only allow for a direct interconnection to the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system, provided that such a direct interconnection does not result in a purchaser obtaining such information prior to the publication of such information on the Commission’s public website.

The study authored by Jonathan L. Rogers, Douglas J. Skinner, and Sarah L. C. Zechman, looked at Form 4 insider trading filings. A Form 4 is filed whenever a director, officer or owner of more than ten percent of a class of equity securities purchases a security. The study found that while it has been generally assumed that SEC’s PDS process is instantaneous, Tier 1 subscribers to the PDS typically get a 40 second head start.

Background:

  • Public companies are required to upload all of their filings (e.g., earnings releases, quarterly financial statements, etc.) to the SEC’s public website, and the SEC manages the dissemination of these filings through its EDGAR system.
  • Once a filing is accepted by EDGAR, it is transmitted to both the SEC’s website and to the Public Dissemination Service (PDS), which is managed by a private vendor. The PDS has a direct feed from the EDGAR Host.
  • The PDS transmits the public filings to its Tier 1 subscribers immediately, and the Tier 1 subscribers receive most filings before they are published on the SEC’s public website.

From the Study:

  • “We use Form 4 insider trading filings to provide detailed evidence on the process through which public company filings are publicly-disseminated through the SEC’s EDGAR system. While the casual observer may assume that the EDGAR dissemination process is effectively instantaneous, we show that in fact this process takes some time, typically around 40 seconds.”
  • “We further show that the news is available to certain intermediaries before it is posted to the public SEC website (when public users first have access): for 57% of insider purchases (sales are very similar), the filings are available to at least one Tier 1 subscriber before they are posted to the SEC EDGAR website (the number for sales is similar).”
  • “We also show that prices, volumes, and spreads all move 15-30 seconds in advance of when the news is posted to the SEC EDGAR site (and so first becomes “public”). This implies that the process through which company filings are disseminated via EDGAR provides certain intermediaries and their clients with a significant timing advantage and that some market participants trade on this advantage.”

Key Findings:

  • “[Our findings] show that the SEC’s process for the dissemination of insider filings (and likely other types of filings as well) is not a level playing field, in that certain intermediaries and investors have access to insider filings submitted to EDGAR before others, and that prices, volumes, and spreads move in the direction of the news in advance of it being posted (and publicly-available) on EDGAR.”