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Alan Beller had a two-track plan upon joining the Securities and Exchange Commission in November as corporate finance director: first, overhaul the securities act; next, tweak financial disclosure requirements. But the Enron scandal and other high-profile corporate dramas made mincemeat of his agenda, and now, not surprisingly, revamping disclosure rules is a top priority. “Don’t despair — Securities Act reform, particularly getting instant access to capital for large seasoned companies, is still on the agenda,” Beller said at an SEC roundtable discussion March 21 that included the seven preceding corporate finance directors at the agency. “It’s only been pushed a little bit back by the events of the past three months.” Among the more urgent reforms are for the SEC to require companies to provide more information relative to industry peers, faster disclosure of insider stock transactions and further detailing material change, or 8-K, filings, Beller said. Also, companies must expand the so-called management’s discussion and analysis section of annual reports, which is a key area to better disclosure, he said. “Accounting is not a science that gets down to a single number without a lot of judgment and estimations being involved,” Beller said, adding that companies disclose in the MD&A any per-share or other financial estimates. “You could put 60 percent of current MD&A disclosure into a wastebasket.” Beller also hopes the SEC gets enough federal funding in its fiscal 2003 budget to hire at least 100 additional staff. Specifically, he wants to hire risk management specialists to help the corporate finance division identify “trouble spots” during its review of filings. “We need to do a better job of assessing where the big problem areas arise, and we have to touch as many filings looking for those areas as possible,” Beller said. David Martin, Beller’s immediate predecessor in the corporate finance division, said communications have already improved 10-fold over the past decade. One of the most important developments in the 1990s was the Edgar system, which enables electronic distribution of SEC filings. “It allowed more investors to have access to information and make informed decisions about stocks,” he said. Regulation FD (fair disclosure), which bars companies from selectively disclosing material nonpublic information, also has leveled the playing field for investors, Martin said. “Companies at first thought they would have trouble complying with Reg FD, but so far firms have said they can handle it,” Martin said. Richard Phillips, a trustee of the SEC historical society who worked at the agency in the 1960s, said the biggest technological breakthrough in the 1960s was filing by microfiche. “Before microfiche you would have to go to the exchange where the securities were issued to get paper versions of the reports,” he said. “At that time you couldn’t even get them at the SEC.” According to Phillips, not only were financial reports at the time virtually inaccessible to investors, but only a fraction of the information was required to be disclosed. Alan Levenson, corporate finance director from 1970 to 1976, was instrumental in adoption of quarterly financial reporting. Before 1970, he said, public companies had to file only an annual report and one semiannual report. Another advance came in 1982 when the SEC adopted shelf registration, which allowed established companies to register new shares ahead of issuing them to the public. This gave companies quicker access to capital, yet it also raised the ire of investment banks. Bankers were accustomed to having several weeks for due diligence of stock issues, but SEC shelf registration compelled them to complete reviews more quickly. “A number of the major investment banks came back and said, ‘You guys have lost your minds,’” said Linda Quinn, corporate finance director from 1986 to 1996. The underwriters were shocked at how the new SEC rule meant they would have to complete due diligence on the company in a “few seconds,” she said. “It was an important change for companies, because before it came into effect firms issuing shares were missing their market windows, especially when interest rates changed every week,” said John Huber, finance director from 1983 to 1985. He added that the shelf invigorated competition in the underwriter market because investment banks fought each other to speed the issuance to market. Under Quinn, the SEC also made it easier for non-U.S. issuers to access the American markets. The commission loosened disclosure rules for companies in other countries that wanted to file in the U.S. The general rule was that foreign issuers had to file an annual report in the U.S., and most other disclosure requirements were waived as long as the firms were exempted from having to provide that info in their homeland country. “It opened up the American market to foreign companies and brought a lot of capital to the U.S.,” Quinn said. Copyright (c)2002 TDD, LLC. All rights reserved.

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