SEC Plan Would Protect Firms With Risky Derivatives From Suits

The Securities and Exchange Commission on Wednesday proposed giving companies that own risky derivatives a “safe harbor” from lawsuits if they make forecasts of investment risks that are accompanied by cautionary statements.

The SEC plan, which is open for public comment until May 20, seeks to incorporate a new law aimed at curbing investors’ fraud suits into a pending rule proposal requiring disclosure on derivatives.

Derivatives are contracts whose value is tied to the price of some other asset, such as a stock, bond, commodity, currency or index. They can be used to guard against swings in the value of an asset or to make leveraged bets on price or yield changes.

Wednesday’s proposal, which applies to “forward-looking statements” by companies and underwriters, also seeks public comment on whether certain issuers and transactions should be excluded from protection against suits.

Congress sought to limit shareholder suits against companies and their professional advisors by passing the Litigation Reform Act in December over President Bill Clinton’s veto.

The “safe harbor” section of the law reduced companies’ liability for financial predictions if they also make “meaningful, cautionary statements” about events that could undermine these forecasts.

SEC’s proposal seeks to interpret the safe harbor provision and apply it to derivatives, a spokesman said.