SEC Looking Into Derivatives Trading : Regulation: The agency wants to know if companies reporting losses adequately warned shareholders of the risks.

The Securities and Exchange Commission is examining public reports of companies announcing losses on derivatives trading to see if shareholders were adequately warned of the risks, according to government sources.

The companies being scrutinized include Procter & Gamble Co., which lost $157 million in derivatives trading this year, the largest such loss ever reported by a U.S. industrial company.

The SEC is concerned that P&G; and other companies may not have adequately disclosed to shareholders the magnitude of their derivatives activities and the risks associated with them.

Financial derivatives are instruments so named because their value is “derived” from underlying securities such as stocks and bonds or from underlying indexes such as interest rates.

Companies often use them to hedge business risks such as interest rate or foreign exchange rate movements.

But several prominent companies have lost money on positions that in retrospect appear to have been speculations rather than hedges.

After the SEC completes its review it will likely either stiffen reporting standards or step up enforcement of existing rules, the sources said.

Disclosure violations can lead to fines and consent orders in which a company agrees to improve its reporting. A spokeswoman for P&G; declined to comment on any SEC review.

The SEC action underscores the woeful state of public disclosure of derivative positions by major U.S. companies, according to industry analysts. Although they have been improved, accounting and reporting standards still are too low to capture the evident risks associated with derivatives, analysts said.

Other companies burned by derivatives this year include Gibson Greetings Inc., Dell Computer Corp., Mead Corp., Marion Merrell Dow Inc. and Eaton Corp.

The $10-trillion market in derivatives has grown up largely beyond the purview of regulators. But as more companies use derivatives, regulators are concerned that companies are not keeping their shareholders well informed.

A company that trades publicly is required to tell shareholders about events “material” to its earnings and financial strength.

But such information is routinely relegated to obscure footnotes in annual and quarterly reports to shareholders.

Even if shareholders take the time to go to the footnotes, they learn little, according to Joe Kolman, editor of Derivatives Strategy & Tactics, an industry publication.

“The simple truth is that efforts to improve disclosure so people can actually understand what is going on have failed,” Kolman said.