SEC Chief Tells Need for Tight Reins on Buyouts

Securities and Exchange Commission Chairman David Ruder told Congress today that tougher regulation of leveraged buyouts is needed so that the investing public is not harmed.

The SEC chairman’s comments to a subcommittee of the House Energy and Commerce Committee follow intense criticism of leveraged buyouts, particularly after the record $25-billion RJR Nabisco Inc. deal that lost bond investors millions of dollars.

Ruder said his staff is studying possible new rules to ensure fairness to shareholders and adequate disclosure to bondholders in leveraged buyouts. He said specific proposals are likely in March.

In a leveraged buyout, a group of investors buys a company’s public stock in a transaction financed mainly by borrowing, and it becomes a privately owned company.

Bondholders fear the buyouts because the heavy borrowing depresses prices and credit ratings of existing bonds.

The deals pose a challenge to regulators because there is potential for conflict of interest when managers know more than shareholders and use the information to their own advantage, he said.