What Is a 10-K Wrap?

A 10-K wrap is a summary report of a company’s annual performance that bundles the 10-K report required by the Securities and Exchange Commission (SEC) with additional commentary from the company, covering such things as the corporate vision, letter to shareholders, and business overview, among other topics.

The 10-K wrap is often released instead of a traditional annual report and generally contains fewer images and comments from management.

Understanding a 10-K Wrap

Form 10-K is a detailed annual report that is required to be submitted to the U.S. Securities and Exchange Commission (SEC). The filing provides a comprehensive summary of a company’s performance for the year. It is more detailed than the annual report that is sent to shareholders during the annual meeting to elect directors. SEC filing 10-K outlines the company’s history, equity, subsidiaries, organizational structure, audited financial statements, and other relevant information.

The most significant difference between the traditional annual report and the 10-K wrap is how the information is presented and how much additional information is included above the required 10-K information.

The traditional annual report has a greater focus on comments from the company, and the document includes more images and graphs to communicate performance, as well as a list of corporate objectives of the company.

By contrast, the 10-K wrap is essentially the 10-K filed with the SEC and some additional editorial from the company—but not nearly as much as the annual report. It usually has a lower production cost because it is often printed on lower-quality paper.

Elements of a 10-K Wrap

The basic elements of a 10-K wrap typically include a summary of the company’s financial results for the previous year and an overview of its plans for upcoming quarters, including spending and debt level forecasts.

A 10-K plan can also include an elaborate cover design, with perhaps a theme that focuses on investors and analysts involved in the company’s projects for the upcoming year.

Graphics in the 10-K wrap will usually provide a brief overview of the company’s financials, including revenue, net profit, costs, income, and any highlights from the previous year. The graphics may also outline the company’s geographical reach or other elements of growth.

Special Considerations

As the 10-K wrap has evolved, it has come to include more images and content, such as a shareholder letter and high-quality photographs. However, pictures will often be kept to a minimum.

The 10-K wrap document is usually no more than four pages long and could be even shorter, depending on what company executives want to see from the 10-K wrap report.

What Is an Alternative Investment?

An alternative investment is a financial asset that does not fall into one of the conventional investment categories. Conventional categories include stocks, bonds, and cash. Alternative investments can include private equity or venture capital, hedge funds, managed futures, art and antiques, commodities, and derivatives contracts. Real estate is also often classified as an alternative investment.

Understanding Alternative Investments

Most alternative investment assets are held by institutional investors or accredited, high-net-worth individuals because of their complex nature, lack of regulation, and degree of risk. Many alternative investments have high minimum investments and fee structures, especially when compared to mutual funds and exchange-traded funds (ETFs). These investments also have less opportunity to publish verifiable performance data and advertise to potential investors. Although alternative assets may have high initial minimums and upfront investment fees, transaction costs are typically lower than those of conventional assets due to lower levels of turnover.

Most alternative assets are fairly illiquid, especially compared to their conventional counterparts. For example, investors are likely to find it considerably more difficult to sell an 80-year old bottle of wine compared to 1,000 shares of Apple Inc. due to a limited number of buyers. Investors may have difficulty even valuing alternative investments, since the assets, and transactions involving them, are often rare. For example, a seller of a 1933 Saint-Gaudens Double Eagle $20 gold coin may have difficulty determining its value, as there are only 13 known to exist and only one can be legally owned.

Regulation of Alternative Investments

Even when they don’t involve unique items like coins or art, alternative investments are prone to investment scams and fraud due to the lack of regulations.

Alternative investments are often subject to a less clear legal structure than conventional investments. They do fall under the purview of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and their practices are subject to examination by the U.S. Securities and Exchange Commission (SEC). However, they usually don’t have to register with the SEC. As such, they are not overseen or regulated by the SEC as are mutual funds and ETFs.

So, it is essential that investors conduct extensive due diligence when considering alternative investments. In some cases, only accredited investors may invest in alternative offerings. Accredited investors are those with a net worth exceeding $1 million—not counting their primary residence—or with an annual income of at least $200,000 (or $300,000 combined with a spousal income). Financial professionals who hold a FINRA Series 7, 65, or 82 license may also qualify as an accredited investor.

Strategy for Alternative Investments

Alternative investments typically have a low correlation with those in standard asset classes. This low correlation means they often move counter to the stock and bond markets. This feature makes them a suitable tool for portfolio diversification. Investments in hard assets, such as gold, oil, and real property, also provide an effective hedge against inflation, which hurts the purchasing power of paper money.

Because of this, many large institutional funds such as pension funds and private endowments often allocate a small portion of their portfolios—typically less than 10%—to alternative investments such as hedge funds.

The non-accredited retail investor also has access to alternative investments. Alternative mutual funds and exchange-traded funds—also called alt funds or liquid alts—are now available. These alt funds provide ample opportunity to invest in alternative asset categories, previously difficult and costly for the average individual to access. Because they are publicly traded, alt funds are SEC-registered and regulated, specifically by the Investment Company Act of 1940.

Example of Alternative Investments

Just being regulated does not mean that alt funds are safe investments. The SEC notes, “Many alternative mutual funds have limited performance histories.”

Also, although its diversified portfolio naturally mitigates the threat of loss, an alt fund is still subject to the inherent risks of its underlying assets. Indeed, the track record of ETFs that specialize in alternative assets has been mixed.

For example, as of January 2022, the SPDR Dow Jones Global Real Estate ETF had an annualized five-year return of 6.17%. In contrast, the SPDR S&P Oil & Gas Exploration & Production ETF posted a return of –6.40% for the same period.

What Is an Alternative Trading System (ATS)?

An alternative trading system (ATS) is a trading venue that is more loosely regulated than an exchange. ATS platforms are often used to match large buy and sell orders among its subscribers. The most widely used type of ATS in the United States are electronic communication networks (ECNs)—computerized systems that automatically match buy and sell orders for securities in the market.

Understanding an Alternative Trading System (ATS)

ATS account for much of the liquidity found in publicly traded issues worldwide. They are known as multilateral trading facilities in Europe, ECNs, cross networks, and call networks. Most ATS are registered as broker-dealers rather than exchanges and focus on finding counterparties for transactions.

Unlike some national exchanges, ATS do not set rules governing the conduct of subscribers or discipline subscribers, other than by excluding them from trading. They are important in providing alternative means to access liquidity.

Institutional investors may use an ATS to find counterparties for transactions, instead of trading large blocks of shares on national stock exchanges. These actions may be designed to conceal trading from public view since ATS transactions do not appear on national exchange order books. The benefit of using an ATS to execute such orders is that it reduces the domino effect that large trades might have on the price of an equity.

Criticisms of Alternative Trading Systems (ATS)

These trading venues must be approved by the SEC. In recent years, regulators have stepped up enforcement actions against ATS for infractions such as trading against customer order flow or making use of confidential customer trading information. These violations may be more common in ATS than national exchanges because ATS face fewer regulations.

Dark Pools

A hedge fund interested in building a large position in an equity may use an ATS to prevent other investors from buying in advance. ATS used for these purposes may be referred to as dark pools.

Dark pools entail trading on ATS by institutional orders executed on private exchanges. Information about these transactions is mostly unavailable to the public, which is why they are called “dark.” The bulk of dark pool liquidity is created by block trades facilitated away from the central stock market exchanges and conducted by institutional investors (primarily investment banks).

Although they are legal, dark pools operate with little transparency. As a result, dark pools, along with high-frequency trading (HFT), are oft-criticized by those in the finance industry; some traders believe that these elements convey an unfair advantage to certain players in the stock market.

Regulation of Alternative Trading Systems (ATS)

SEC Regulation ATS established a regulatory framework for ATS. An ATS meets the definition of an exchange under federal securities laws but is not required to register as a national securities exchange if the ATS operates under the exemption provided under Exchange Act Rule 3a1-1(a). To operate under this exemption, an ATS must comply with the requirements in Rules 300-303 of Regulation ATS.

To comply with Regulation ATS, an ATS must register as a broker-dealer and file an initial operation report with the Commission on Form ATS before beginning operations. An ATS must file amendments to Form ATS to provide notice of any changes to its operations, and must file a cessation of operation report on Form ATS if it closes. The requirements for filing reports using Form ATS is in Rule 301(b)(2) of Regulation ATS. These requirements include mandated reporting of books and records.

In recent times, there have been moves to make ATS more transparent. For example, the SEC amended Regulation ATS to enhance “operational transparency” for such systems in 2018. Among other things, this entails filing detailed public disclosures to inform the general public about potential conflicts of interest and risks of information leakage. ATS are also required to have written safeguards and procedures to protect subscribers’ trading information.

The SEC formally defines an alternative trading system as “any organization, association, person, group of persons, or systems (1) that constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange within the meaning of Rule 3b-16 under the Exchange Act; and (2) that does not (i) set rules governing the conduct of subscribers other than the conduct of such subscribers’ trading on such organization, association, person, group of persons, or system, or (ii) discipline subscribers other than by exclusion from trading.”

What Is SEC Release IA-1092?

SEC Release IA-1092 is a release from the Securities & Exchange Commission (SEC) that provides uniform interpretations of how state and federal adviser laws apply to those that provide financial services.

SEC Release IA-1092 builds on the Investment Advisers Act of 1940 or the Advisers Act that Congress enacted to protect persons who rely on investment advisers for advice on purchasing and selling securities.

Understanding SEC Release IA-1092

SEC Release IA-1092 is the result of a 1987 collaboration between the Securities & Exchange Commission (SEC) on the federal side and the North American Securities Administrators Association (NASAA) on the state side.

These organizations issued IA-1092 in 1987 as a memo in response to the proliferation of financial planning and investment advice professionals in the 1980s. The act reaffirmed the definition of an investment adviser (IA) as described in SEC Release IA-770 and added some refinements:

• First, pension consultants and advisers to athletes and entertainers were included as providers of investment advice.
• Second, in some cases, firms that recommend investment advisers also had to register themselves.
• Even if an IA did not render investment advice as their principal business activity, simply doing so with some regularity in many cases was enough to require registration.
• If a registered representative of a broker-dealer set up a separate business entity to provide financial planning or investment advice for a fee, they were not allowed to rely on the broker-dealer (BD) exemption from registration. (This became known as a statutory investment adviser.)
• Compensation did not have to be monetary to fall under the definition. Simply the receipt of products, services, or even discounts was also considered compensation.

With regard to sports or entertainment agents, those individuals that negotiated contracts but did not render investment advice were excluded from the definition of an investment adviser.

SEC Release IA-1092 and the Investment Advisers Act of 1940

The Investment Advisers Act of 1940 defines an investment adviser as any person who, either directly or indirectly through writings, engages in the business of advising others on the value or profitability of securities and receives compensation for this.

Guidelines for the Investment Advisers Act of 1940 can be found in Title 15 section 80b-1 of the United States Code, which notes that investment advisers are of national concern, due to:

• Their advice, counsel, publications, writings, analyses, and reports being in line with interstate commerce.
• Their work customarily relating to the purchase and sale of securities that trade on national securities exchanges and in interstate over-the-counter (OTC) markets.
• Their connection with securities issued by companies engaged in interstate commerce.
• The volume of transactions often materially affecting interstate commerce, national securities exchanges, other securities markets, the national banking system, and even the economy as a whole.