SEC Pushes for Fuller Disclosure
Federal regulators proposed rules Wednesday that would force companies to disclose vast new amounts of financial information and to release that data much sooner to the public.
The Securities and Exchange Commission, under heavy congressional and public pressure to restore confidence in a financial system shaken by the scandal-tainted collapses of Enron Corp. and Global Crossing Ltd., said it wants companies to notify investors more promptly about changes in their financial condition.
The agency also wants corporate officers and directors to disclose personal purchases or sales of company stock immediately rather than a year after the fact, as is sometimes the case now.
The SEC proposals, announced by Chairman Harvey L. Pitt, came as legislators in Washington unveiled several bills that also are designed to improve financial disclosure and tighten accounting regulations. The SEC and legislative proposals overlap in many areas.
To help the SEC step up regulation, some in Congress are proposing a 45% boost in the agency’s budget.
Several of the proposed SEC changes--which could take effect without congressional approval--are aimed directly at stitching up loopholes that allowed Enron executives to mask both the depth of the company’s problems and their own financial self-dealing.
One proposal, for example, would require companies to immediately reveal if their boards of directors waive a corporate ethics policy. Enron’s board suspended such a policy to allow then-Chief Financial Officer Andrew S. Fastow to run several controversial outside partnerships from which he reaped at least $30 million, according to a company report.
“The SEC has made a list of everything Enron is guilty of doing and tried to figure out a way to close as many of the loopholes as it can,” said Roy Smith, a New York University finance professor.
Securities experts praised the basic thrust of the SEC plan, which is to have companies present a far more complete overview of their financial conditions--and to do so on a timely basis so that problems can be spotted before they balloon into market-shaking events.
However, critics cautioned that the SEC plan would be only one step in improving a financial infrastructure whose gaping holes have been laid bare by the Enron debacle. They also pointed out that it would take the SEC several months to write its new rules and invite public comment. The final version could differ markedly from what is initially promised, experts noted.
Among the changes the SEC proposed:
* The “significant-event” forms that companies are required to file notifying investors about major developments would be expanded to include many more types of events. For example, the plan calls for the filing of these so-called 8K forms to disclose a credit-rating downgrade or a “lockout” of transactions in a firm’s 401(k) retirement plan. The forms would have to be filed within two business days.
* Companies would have to file quarterly and annual financial reports more quickly. Quarterly reports, for example, would be due within 30 days of the end of a quarter, rather than the current 45.
* Companies would be required to give a more thorough explanation of significant issues in the portion of financial reports where management gives a written analysis of the company’s condition. The goal is to have companies go beyond pure numbers, which critics say can be used to obscure reality.
* Disclosure of stock purchases or sales by corporate officers, directors and major shareholders would be revamped. Currently, their disclosures typically come up to 40 days after a trade is made, and in some cases can be filed a year later.
Investors watch insider stock sales closely because wholesale dumping of shares can be a sign of looming financial trouble. To ensure the delivery of accurate data, the SEC would require companies, rather than individuals, to file the reports. The commission also is considering mandating electronic filing, which would make the reports more accessible to investors.
The SEC is considering forcing such disclosures within two days of a stock trade, said Alan Beller, chief of the agency’s corporate finance division.
Of the proposals overall, Beller said: “It’s a first step, but it’s not a modest step. These rules, if they are adopted, will be the most significant changes in our corporate-disclosure system since the ‘80s.”
The ideas drew some criticism. “I would have hoped that a more comprehensive analysis would have been done after the whole Enron situation had played itself out, because nobody knows the full story today about what happened and who’s responsible,” said Ira Lee Sorkin, a New York securities lawyer and former SEC official. “I’m not saying [the SEC plan] is bad, but to do it piecemeal after every new revelation is not the way to go.”
Others defended the plan, saying it was a good proposal that would yield immediate benefits to investors. “My reaction is, hats off to the SEC,” said Richard Breeden, a former SEC chairman. “They’re saying, ‘Right now, there are some holes and we’re going to step out and fill them.’ ”
In Washington, some members of Congress praised the SEC announcement, but also made it clear that they plan to press ahead with legislation.
Indeed, House Republicans on Wednesday introduced bills that would mandate increased financial disclosure by corporations and provide for greater oversight of accounting firms.
“We’re addressing the core issues that will prevent future Enrons, but we’re not going to crush the entire business sector by putting government in the boardroom,” said Rep. Michael G. Oxley (R-Ohio), chairman of the House Financial Services Committee.
But the bills drew criticism from Democrats who said they didn’t go far enough. Portions of the bills, however, appear to enjoy bipartisan support, such as a proposal to increase the SEC’s annual budget from $480 million to $700 million.
“I welcome the SEC’s efforts to begin making improvement in public disclosure under their existing statutory authority,” said Rep. John J. LaFalce of New York, a top Democrat on the House Financial Services Committee. But “this is only one of many areas in which reforms should be pursued, both by Congress and the SEC,” he said.
One of the most controversial proposals previously announced by Pitt is the creation of a new panel to oversee the accounting industry. It appears to be very similar to the plan put forth by House Republicans.
Noting Pitt’s close ties to the accounting industry from his prior stint as a securities lawyer, some critics have characterized his call for a new accounting-regulation board as aimed chiefly at helping his former clients. A key issue is the level of control the accounting industry would have over the board.
A new proposal put forth by House Republicans on Wednesday would prohibit executives from buying or selling company stock during any period where 401(k) participants are unable to buy or sell securities.
Rank-and-file workers at Enron and Global Crossing were locked out of making trades in their 401(k) plans for lengthy periods before the companies collapsed.
LaFalce said the GOP-sponsored proposals don’t go far enough to correct the problems raised by Enron’s collapse. For example, the Republican plan wouldn’t prohibit accounting firms from providing consulting services to the same corporate client.
“The Republican bill only goes as far as the auditing industry has already announced that it will go voluntarily, allowing auditors to continue to earn significant non-audit fees from their audit clients,” he said.
In another legislative move, a bipartisan group of senators on Wednesday introduced legislation that would require companies claiming a tax deduction for stock options to report that expense on their books. Similar proposals in the past have been defeated by business lobbies.
In a separate proposal, Pitt asked the New York Stock Exchange and Nasdaq to study ways to boost corporate ethics and to ensure compliance with securities laws. In a letter to the markets, Pitt asked that they examine whether companies should be required to adopt ethics codes for officers and directors, institute “ethical training” and set up compliance programs to make sure rules are followed.
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