Dramatic Reforms Likely In Wake Of Enron
Regulators, Legislators Fast-Track New Investor Protections
(RIVERWOODS, ILL., February 15, 2002) – Responding quickly to investor concerns following Enron’s collapse, both Congress and the Securities and Exchange Commission are introducing significant reforms that will have a sweeping impact on how publicly-traded companies operate and are regulated, according to CCH INCORPORATED (CCH), a leading provider of securities and business law information, software and services. This week marked the beginning of what is expected to be a landslide of rules and legislation, with the SEC and House of Representatives’ Republican leaders separately proposing changes to rules for corporate disclosure, accountants' oversight and insider transaction reporting.
"The proposals, taken as a whole, send a strong signal that a serious effort is under way to reform the securities regulatory regime that was primarily created in the 1930s and has begun to show its age," said James Hamilton, an attorney and securities law analyst for CCH.
"The SEC proposals mainly focus on disclosure and reporting issues, while the House bill goes further. The House measure gives the SEC significantly more resources to conduct more audit reviews, and establishes a new public regulatory board for the accounting industry with strong oversight capability, under the SEC’s direct authority," Hamilton said. "However, these are really just the initial steps. Both the SEC and lawmakers have clearly said that there is much more to come."
Below CCH provides an overview of the proposed House bill and SEC rules.
SEC Proposed Rules Call for Faster and Increased Disclosure
The SEC – charged with protecting investors in the securities markets – is developing a range of regulations that are expected to be put on a fast-track to final adoption. Many of the SEC’s intended reforms are also addressed by the proposed legislation.
One major reform would be to expand the list of significant events that companies must disclose on Form 8-K. For example, the SEC is thinking of including such events as changes in rating agency decisions, derivatives transactions with company executives and the departure of senior officers such as the CEO and CFO.
Another significant proposal is to require disclosure about critical accounting policies in a company’s MD&A, as well as judgments and uncertainties about applying those policies.
The SEC also supports a legislative solution that would dramatically shorten the time period in which the trading activities of company insiders are reported. In the meantime, the Commission intends to propose that companies, as part of their reporting duties, disclose significant transactions in company stock by their executive officers and directors. The Commission further proposes rules mandating accelerated filing of quarterly and annual reports.
"With these proposals, the Commission recognizes that technological advances over the last three decades demand a change in the timing of mandated disclosures," said Hamilton.
House Republicans Plan to Introduce CARTA Bill
House Republicans are expected to introduce legislation designed to ensure the SEC has the resources needed to keep a closer eye on both corporations and their auditors, including the establishment of a new public oversight board for the accounting industry. The legislation also calls for establishing greater safeguards to ensure auditor independence and requires companies to more quickly disclose information about their financial health.
Specifically, under the Corporate and Auditing Accountability, Responsibility and Transparency Act (CARTA), House Republicans propose beefing up the SEC's budget by almost half to enable it to perform greater oversight. Along with the increased budget, the Commission would be directed to step up audit reviews of large companies.
The bill also would create a new public regulatory organization (PRO), under the SEC's direct authority, two-thirds of whose members cannot be associated with the accounting industry. The PRO would have to certify any accountant wishing to audit corporate financial statements and would have the statutory authority to punish accountants who violate securities laws, standards of ethics, competency or independence. The bill would also make it unlawful for anyone associated with the company to interfere with the auditing process.
"Establishing an entirely new oversight organization and giving it real authority to both certify those that want to conduct audits as well as to sanction those auditors that don’t comply with the regulations is a significant change in law," said Hamilton.
The proposed bill also addresses the long-time controversial issue of auditors providing non-audit services to their audit clients. Under the bill, accounting firms would be prohibited from offering certain consulting services to companies they are also auditing. Specifically, the draft bill provides that an accountant will not be considered independent of its audit client if it provides the client with financial information system design or implementation services or internal audit services.
Disclosure rules also would be tightened under the proposed House Republican bill. Among the most significant changes, corporate insiders would have to inform the SEC within one business day, and the public within two business days, when they sell their own company stock. As part of this, companies also would be required to publish these disclosures on their web sites by the end of the day following the day the disclosure is received by the SEC. Currently, insiders can wait for as many as 40 days after they sell to make a disclosure.
About CCH Securities Group
CCH has been tracking, reporting and analyzing securities law since the creation of the Securities and Exchange Commission. CCH is publisher of industry-standard reference works such as Federal Securities Law Reports, and also offers SEC Compliance Desktop software for administering and complying with SEC regulations relating to insider trading, employee stock purchase plans and stock option plans. The CCH Securities Group site can be accessed at business.cch.com/securities.
About CCH INCORPORATED
CCH INCORPORATED, founded in 1913, has served four generations of business professionals and their clients. The company produces approximately 700 print and electronic products for securities, tax, legal, banking, securities, human resources, health care and small business markets. CCH is a wholly owned subsidiary of Wolters Kluwer North America. The CCH web site can be accessed at cch.com.. The CCH Business and Finance Group web site can be accessed at business.cch.com.-- ### --
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