Concerned About a Possible Recession? Here’s How You Can Protect Your Investments

By Julia Osmolia

The U.S. Treasury Bond Market issued a warning three months ago about a possible recession. A recession is defined as “a period of significant economic downturn that lasts longer than two consecutive quarters.” During a recession everyone is subject to risk, but the level of risk varies depending on how much a person has invested and the strategies used for those investments.

On August 14, 2019, the U.S. Treasury Bond market experienced an inverted yield curve where the 2-year short-term bonds paid more interest than the 10-year long-term bonds. The last inversion occurred in December 2005, two years before the Great Recession in 2007 and three years before the financial crisis in 2008. Since 1985, there have been three inversions, each preceding a recession by 13 to 17 months. As a result, the inverted yield curve is widely regarded as a warning sign that a recession is looming.

An inverted yield curve, however, is just that—a warning sign. It does not mean a recession will happen or indicate how long a recession will last. When an inversion occurs, investors should not panic and make rash decisions about their investments. Instead, investors should evaluate their portfolios to assess any possible damage if a recession occurs.

Below are some ways investors can protect themselves against a possible recession:

  • Evaluate Investment Strategies & Define Achievable Goals – Investors should evaluate and discuss with their financial advisors their investment goals, asset allocation, risk tolerance, and time horizon. Someone close to retirement may want more conservative investments in the wake of a recession, whereas younger investors may have different goals and higher risk tolerances because they likely have more time to recover from losses suffered from an economic downturn.
  • Understand Potential Risks – Investors should know or ask their financial advisor what their portfolio looks like amid an economic downturn to understand the risk they are taking on.
  • Diversify Your Portfolio – Investors can mitigate damages suffered from a recession by diversifying their portfolios. Diversification reduces the volatility of the portfolio because different assets react differently during a recession.
  • Calculate Personal Cash Flow – Calculating personal cash flows helps investors determine how much cash they should have during a recession. This decreases the chances of investors having to sell their investments at the worst possible time to scrape up some extra cash.
  • Confirm Your Broker or Financial Advisor Made Any Necessary Changes to Your Accounts – Investors should contact their financial advisors to ensure the necessary changes have been made to their accounts and that these changes are documented. If a financial advisor completed documents, read through and confirm that the information on the forms is correct before signing any documents.

There is no telling when a recession will happen or how long it will last when it does. Therefore, if you’re concerned about a possible recession, the best safeguard is to ensure you have an investment plan that is tailored to your specific needs to decrease potential losses.

On Track to Modernize SEC Disclosures

By Arda Barlas

Recent Development

On August 8, 2019, the Securities and Exchange Commission (“SEC”) announced a proposal for amendments to update Regulation S-K. The new set of rules is intended to simplify compliance efforts of registrants and improve disclosures for investors. The rationale behind these new rules is the dramatic change in the world economy and markets over the past 30 years when public companies’ business disclosure rules were adopted.

The SEC plans to achieve this rationale by modernizing the description of business, legal proceedings, and risk factor disclosures under Regulation S-K.

According to the proposal, the SEC considered input from comment letters received in response to these disclosure modernization efforts, the staff’s experience, and changes in the regulatory and business landscape since the adoption of Regulation S-K.

What Does the Proposal Say?

Mainly, the proposal foresees amendments for the following items:

General development of the business (101(a))

The proposed revision for Item 101(a) requires the disclosure of a topic to the extent such information is material to an understanding of the general development of a registrant’s business. In such cases, the information will be deemed material if there is a substantial likelihood that a reasonable investor would consider the information important in deciding how to vote or make an investment decision.  Moreover, providing a prescribed time frame for this disclosure is intentionally avoided. Also, the proposed revision for Item 101(a) provides a non-exclusive list of the types of information that a registrant may need to disclose.

Another important update is that the proposed revision for Item 101(a) allows a registrant, in filings made after a registrant’s initial filing, to provide only an update of the general development of the business that focuses on material developments in the reporting period. However, such update should be accompanied with an active hyperlink to the registrant’s most recent filing and along with the update, the full discussion of the general development of the registrant’s business must be present.

Description of the business (101(c))

The proposed revision for Item 101(c) includes human capital resources as a disclosure topic. This topic includes any human capital measures or objectives that management focuses on in managing the business. Again, the extent of such disclosures are limited to materiality. Moreover, the regulatory compliance requirement was extended, as against being limited to environmental provisions, by including new material government regulations.

Legal proceedings (103)

The revision proposed for Item 103, which deals with legal proceedings is designed to encourage registrants to avoid duplicative disclosure. The required information about material legal proceedings may be provided by including hyperlinks or cross-references to legal proceedings disclosures located elsewhere in the document. This will provide more reader-friendly legal proceedings sections and reduce the complexity or confusion significantly.

Moreover, the $100,000 threshold for disclosure of environmental proceedings to which the government is a party to is proposed to be raised to $300,000. The rationale behind this threshold raise is to adjust for inflation.

Risk factor (105)

The proposal requires a new structure for risk factors to be organized under relevant headings, along with any risk factors that may generally apply to an investment in securities disclosed at the end of the risk factor section under a separate caption. Also, the disclosure standard is proposed to be changed from the “most significant” factors to the “material” factors. Also, if the risk factor section is longer than 15 pages, the summary risk factor disclosure will be required to be disclosed.


Heightened Duty of Care Under Regulation Best Interest

By Katie Black

Investors often face overwhelming decisions in deciding if and how to enter the market. In addition to the types of investments in which they might be interested, retail investors must also determine who they trust to help them invest their money. By adopting changes to its program of Regulation Best Interest, announced as of June 2019, the United States Securities and Exchange Commission (“SEC”) is working to implement industry-wide protocols that give investors more security in and knowledge of the firms with which they might choose to invest. Set to go into effect on September 10, 2019, the new Regulation Best Interest rule bolsters the standard of conduct broker-dealers owe their retail investor customers through a two-pronged “general obligation” of requiring heightened protection of their customers’ best interests, while also mandating thorough disclosure policies regarding broker-dealer conflicts of interest.

Though the Regulation Best Interest rule acknowledges the fundamental conflict of interest that occurs given the commissions received as compensation in the relationship between a broker-dealer and their investor customers, the rule endeavors to mitigate conflicts of interest that arise when broker-dealers recommend specific investment-related actions for their clients. More specifically, the SEC breaks the Regulation Best Interest rule down into four “component obligations”: disclosure, care, conflict of interest, and compliance.

The disclosure component requires broker-dealers to be up-front with their customers about any investment recommendations, as well as the relationship that broker-dealer has with the customer they are advising. Relative to this process, broker-dealers must disclose costs, services, and limitations regarding their position as investment brokers. Further, the disclosure obligation facilitates enforcement of the conflict of interest and compliance obligations, which call for the creation of and strict adherence to protocols and procedures to disclose and mitigate any conflicts of interest that exist regarding broker-dealers and the investment recommendations they may make.

In addition to the disclosure-related obligations is the new care obligation, which creates a heightened standard of “diligence, care, and skill” in broker-dealer engagements with their investor clients. Moreover, under Regulation Best Interest, broker-dealers are charged with a renewed duty to consider their clients’ exposure to risk, balance that against the potential for reward, and factor in the potential costs that may come of any investment recommendation.

Ultimately, the Regulation Best Interest rule serves to better inform investors, as well as ensure broker-dealer compliance with higher standards of care relative to their clients. Broker-dealers must comply with this Regulation Best Interest mandate by June 30, 2020 at the latest, which gives broker-dealers just over a year from the rule’s announcement to bring their practices into compliance with the new standards.