Firms to Disclose More to the State Under New Law

A new California law will require public companies to make a host of disclosures to the state starting next year -- disclosures that the law’s sponsors say will help combat corporate fraud and protect investors.

But some critics see the law as creating a new paperwork burden for businesses while duplicating information that public firms already file with the federal government.

The California Corporate Disclosure Act, signed by Gov. Gray Davis in late September, will require every publicly traded company that does business in the state -- regardless of where the company is headquartered -- to disclose to state regulators a number of key facts about its operations, executives and directors.

The information will be filed on expanded forms that companies will provide to the California secretary of state’s office.

Already, all companies, public and private, file a statement providing their firm name, business address and the names of officers and directors.

Privately owned firms will continue to file that basic form but now will be required to update the information each year, instead of every other year.

The new form to be filed by publicly traded companies each year will require:

* The name of the company’s independent auditor and whether that auditor has provided any other services for the company or its affiliates in the last two years.

* The annual pay of each member of the board and each of the five most highly compensated officers.

* A description of any loans made to a member of the board at a “preferential” interest rate during the last two years, including the rate and terms.

* A statement indicating whether the company or any of its executive officers or directors had filed for bankruptcy protection or were convicted of fraud during the last 10 years, and a statement indicating whether the company violated any federal securities laws or state securities or banking laws in the last 10 years.

The new law is “all about shining light on corporate activities and allowing investors to make informed decisions,” said Assemblyman Kevin Shelley (D-San Francisco), who sponsored the statute.

For public companies, most of the information the state wants already is available in filings required by federal securities regulators, Shelley acknowledged. The problem is finding it, he said.

Currently, information about auditors, fraud convictions and bankruptcies must be included in voluminous annual 10-K reports filed with the Securities and Exchange Commission, and officer and director compensation and loan agreements are in annual proxy statements filed with the SEC.

California’s new law requires that the information be reported on one form that the secretary of state’s office must make available online within two years. This will allow investors to gain access to the data without spending hours poring through massive, often technical documents, Shelley said.

He is the Democratic candidate for secretary of state on this week’s ballot. Whichever candidate wins will be required, under the new law, to collect the information and set up the electronic database for public viewing.

The law also creates a compensation fund for victims of corporate fraud. The fund will be financed through filing fees imposed on all companies registered in the state, public and private.

Companies now pay $20 to file their information documents with the state. That will rise to $25 in 2003. Half of the extra $5 in fees will finance the online database. The other half will go to the victims’ fund.

State officials, who say about 540,000 firms will be subject to the filing fees, expect to collect $1.3 million for the victims’ fund annually. But how the money would be distributed to defrauded investors isn’t clear.

The law requires the secretary of state’s office to come up with rules stipulating how and when companies must file the newly required documents and who could qualify for victims’ compensation.

Although the law doesn’t break new ground in terms of the information it will make available, some experts believe it will be helpful to investors.

“More disclosure is basically good,” said Ken Bertsch, vice president and director of corporate governance at Moody’s Investors Service in New York. “If it’s in a place where more people can pick it up, that’s helpful too.”

But not everyone is enthusiastic about the law.

“If it were ours to control the world, we would have preferred that it not have been enacted,” said Fred Main, senior vice president and general counsel at the California Chamber of Commerce. “We think Sarbanes-Oxley [the new federal corporate disclosure law] is more significant. But in the end, we were neutral.”

Lance Kimmel, partner with Los Angeles law firm Foley & Lardner, said the law is creating confusion for companies because details on the filing process haven’t been spelled out.

“I receive several calls a day from California companies and out-of-state companies that will be subject to this law because they don’t know what to do to comply,” Kimmel said.

“At this moment, all we can tell them is we have to wait and see.”