SEC Tightens Its Deadlines for Disclosure
The Securities and Exchange Commission voted Tuesday to shorten the amount of time companies have to report earnings and to require stock trades by corporate insiders to be disclosed within two days. The moves, aimed at shoring up investor confidence in a year racked by financial scandals, were applauded by both industry representatives and shareholder activists.
“These rules are all improvements over existing regulations,” said Ken Bertsch, director of corporate governance services at TIAA-CREF, a major mutual fund company known for shareholder activism. “What they’ve done with insider trading disclosures is very significant. In terms of providing the market with important information in a timely fashion, this is a very big improvement.”
The changes, approved unanimously by the five-member SEC, come on two fronts:
First, detailed quarterly and annual financial statements will have to be filed more quickly with the SEC. That will reduce the risk that companies will issue rosy news releases about their earnings, only to reveal problems important to investors months later in their official SEC filings.
Second, the rules will require company insiders--high-ranking executives, directors and major shareholders--to report the details of their stock trades more quickly.
Industry groups, which had objected to the SEC’s plan to shorten the filing period for financial reports, were mollified by the agency’s decision to phase in new deadlines over a three-year period.
Annual reports will have to be filed within 60 days of the end of a company’s fiscal year. Companies now have three full months--or 90 days--to file. However, the 60-day deadline won’t go into effect until the end of 2004.
This year there will be no change in reporting requirement dates; by the end of 2003, the deadline will move forward 15 days, with filing of annual reports required within 75 days of the end of a company’s fiscal year.
Likewise, quarterly reports, which now must be filed within 45 days of the end of a company’s quarter, will eventually have to be filed within 35 days of the end of a quarter. But there will be no change this year. By the end of 2003, the deadline will be 40 days from a quarter’s end; in December of 2004, it will move to 35 days.
The SEC originally had proposed cutting the quarterly deadline to 30 days, a proposal that drew complaints from a raft of Fortune 500 companies.
“Companies were afraid that if the deadline was shortened too much, it would impact their ability to get out accurate reports,” said Caroline Graves Hurley, tax counsel with AeA, a Washington trade group for technology companies. “I don’t think this will crunch companies too badly.”
The Securities Industry Assn., which had expressed grave concerns to the SEC in May about the new deadlines, also was satisfied with the final rule.
“We feel that the SEC has taken our concerns into account,” said Margaret Draper, an SIA spokeswoman. “We did point out there had to be a balance between the speed of getting the information and companies’ ability to produce accurate information. We are optimistic that this will provide that balance.”
However, the bigger change affects how quickly company insiders must report their stock trades. Starting Thursday, insider stock transactions will have to be reported within two business days, the SEC said.
In the past, companies weren’t required to file a report with the SEC until 10 days following the month in which an executive officer, director or major shareholder bought or sold the company’s stock. That could create a 40-day lag between the transaction and reporting date. And if the shares were sold back to the company, an executive could wait until 45 days after the end of the company’s fiscal year before reporting the sale.
Critics complained that the time lag allowed executives to profit by quietly selling company shares even as their companies were collapsing. Former Enron Corp. Chairman Kenneth L. Lay waited until February to report that he had sold $70 million in stock back to the energy trading company as it slid into bankruptcy in 2001.
Some investors track stock transactions by corporate executives for clues to how insiders view their company’s prospects.
In the next few months, the SEC will consider another rule that would require companies to file their insider-transaction reports electronically, as the agency currently does with many other types of reports filed by publicly traded companies. That rule would help the SEC staff cope with the flood of insider-trading reports, which total about 200,000 annually.
The SEC also is studying ways to use information from electronically filed reports to analyze trading patterns at individual companies, agency officials said.
All of the new rules would apply to any company required to file reports with U.S. securities regulators, including mutual funds and foreign firms listed on U.S. exchanges, the SEC said.
The agency also provided details of what it will expect of officers with respect to “certifying” their financial statements. The SEC said the principal executive and financial officer of each company must state in writing that they have personally reviewed the company’s financial statements and believe the statements to be accurate.
In addition, officers and directors will be held personally responsible for setting up procedures to ensure that any material information about the company’s finances is reported up the chain of command, so top officers can’t claim ignorance when their companies disintegrate beneath them.
The new SEC rules regarding certification, accelerated filing deadlines and quicker disclosure of insider transactions implement portions of the Sarbanes-Oxley Act, which was passed last month in an effort to restore investor confidence after scandals at Enron, WorldCom Inc. and other companies.
“We are determined to give real teeth and meaning to the protections of the new law,” SEC Chairman Harvey Pitt said at the meeting. “We have a large job ahead of us.”
Tuesday’s meeting was the first in more than two years with the SEC’s full complement of five members. Four members were confirmed by the Senate last month, joining Pitt on the commission.
The vacancies on the SEC board had raised concerns when some commission actions were challenged on the ground that the group lacked a quorum.
Reuters and Bloomberg News were used in compiling this report.
