NEW YORK: Ten months into the stewardship of chairman Harvey Pitt, the Securities Exchange Commission has already proposed some of the most sweeping changes to corporate disclosure in decades. Many of the moves have come as part of Pitt's "current disclosure initiative, which is designed to force companies to report material developments as they happen.
"Current disclosure is something Harvey Pitt started talking about shortly after he took office, said National Investor Relations Institute (NIRI) president Lou Thompson. "However, the speed with which this is happening is unprecedented."
So far this year, the SEC has proposed making corporations file quarterly reports, known as 10-Qs, 30 days after their fiscal quarter ends, down from the current 45-day window. The SEC has also proposed reducing the annual filing - or 10-K - window to 60 days, versus the current 90 days.
Both types of reports are traditionally densely packed with detailed financial disclosures and discussions of the firm's overall business.
Some have questioned the value of the proposal, saying that faster disclosure of financials doesn't necessarily translate to better disclosure.
Indeed, a survey of IR officers conducted by NIRI found that a majority of respondents were concerned that the new filing windows would present "significant problems. Among IR officers' concerns were problems stemming from a shortened auditing review process, and increased costs due to current lack of time and resources.
NIRI itself has come out in favor of a compromise position that would shorten the 10-K window to 80 days, and the 10-Q period to 40 days. NIRI has also suggested that firms be urged to increase disclosure in press releases that announce earnings results. However, the SEC has limited jurisdiction over such releases.
"The world is working much faster than it used to, and you shouldn't have to wait the 45 days to file when there is so much technology to help you close your books, said Jenny Lee, newly appointed SVP of IR at Sloane & Company, and the former head of IR for eBay. "If a company's house is in order, it shouldn't be an issue."
The period for public comment on the proposals closed in late May. The SEC would not comment on when a final decision could be expected on the proposal.
In June, the SEC announced its proposition that the between-quarter filings, or 8-Ks - which are designed to report to shareholders material events that occur between quarterly filings - should be filed within two days of a so-called "material event, down from the current window of five to 15 business days.
The SEC also proposed a list of 11 new items, or material events, that it now wants reported in 8-Ks (see box above).
The new disclosure list looks to be at least a partial effort to circumvent the types of corporate scandals that have erupted recently.
For instance, the rule that demands disclosure of an "entry into a material agreement not made in the ordinary course of business could be an attempt to prevent the insider-dealing scandals that have imperiled companies from Enron to Adelphia to Tyco.
The proposal on increased disclosure via 8-Ks may be the one with the greatest impact on corporate disclosure.
"While the 10-K comes once a year, and 10-Qs come four times a year, the 8-K can potentially come many more times, said SEC spokesman Michael Robinson. "So the idea is to make sure that investors have access to the information they need on a timely basis."
For the most part, the wrangling that has arisen from the SEC's proposals designed to revamp corporate governance and accounting standards has overshadowed its current disclosure efforts.
Nevertheless, the new disclosure regime is taking place under a chairman who has been decried as being too cozy with corporate America. Moreover, when Pitt, a former accounting firm attorney, took the reigns of the SEC last year, some wondered if it would be the end of the investor-friendly SEC that many felt had evolved under former chairman Arthur Levitt.
Levitt had championed such proposals as Reg FD, a rule designed to ensure information is disseminated to all investors in a fair and timely manner.
While the recent wave of high-profile corporate scandals has surely helped put a tailwind behind the SEC's agenda of increased disclosure, some say that the proposals are coming at a remarkable rate.
"Arthur Levitt got a lot of credit in the media for being a champion for the individual investor, said NIRI's Thompson. "Yet Harvey Pitt - because of his previous affiliations with accounting firms - has taken a tough hit in the press. However, in my view, the SEC is taking a more revolutionary approach to creating a better and more understandable information environment for individual investors than it has for years."
SEC proposal of 11 new items that must be reported in 8-K filings
- The company enters into a material agreement not made in the ordinary course of business
- There is a termination of a material agreement not made in the ordinary course of business
- There is a termination or reduction of a business relationship that impacts company revenues
- There is a creation of a direct or contingent financial obligation that is material to the company
- Events trigger a direct or contingent financial obligation, including any default
- The company participates in exit activities, including any material write-off or restructuring
- The company suffers any material impairment
- A debt-rating agency changes a rating, issues a credit watch, or changes its outlook on the company
- The company moves its shares from one stock exchange to another, is delisted from its exchange, or is out of compliance with the exchange's listing standards
- The company receives a notice from its current or previous auditor that it is withdrawing a previously issued audit report
- A company must report the beginning or end of any limitation, regarding the sale of stock by employees and insiders.