A Three-Point Plan for SEC Reform
A specter is haunting Wall Street--the specter of Main Street retreating from investments and toward savings, going from stocks to CDs. That's why, as the late, lamented bull market nears its 20th anniversary this summer, "we are on the verge of the greatest overhaul of securities regulation since the SEC was created," Securities & Exchange Commission Chairman Harvey Pitt said recently. "Nothing is off the table."
Pitt was addressing an Investor Summit that he called on May 10 in Washington to air investors' concerns and answer questions. I listened, via the Web, to more than three hours of talk, most of it pertinent. Yet some specific investor demands need amplification. Here's a short list of concrete fixes. If Wall Street and its regulators can't deal with this simple stuff, their reform effort will have failed:
-- FASTER. A CEO today can dump a ton of his company's stock on the first day of the month and need not report it until the 10th day of the next month. Not only should that disclosure be made much sooner--within a day or two of the sale, as now is being discussed--but such insider trades should be disclosed for free via the SEC's Web site, which is not the case today.
Quarterly and annual corporate reports, now required 45 and 90 days, respectively, after each period, will likely be accelerated to 30 and 60 days. That's good, but faster filing should not end there. Mutual-fund holdings should be disclosed at least quarterly instead of every six months, the current rule. Opponents say faster disclosure will make it harder for funds to trade without tipping their hand and ultimately hurting investors. But companies that manage $100 million or more--including most fund advisory firms--already must disclose portfolio holdings 45 days after the close of each quarter. Cut that to 30 days, tops. Short positions, now exempt, should be required as well as longs.
-- FAIRER. The SEC's Regulation FD, or Fair Disclosure, seems to have helped put individual investors on a more equal footing with professionals when companies disclose potentially market-moving information. Before its adoption in August, 2000, the public routinely was barred from management's conference calls with stock analysts. Not so now. There remains, however, a forbidden zone--the "road shows" put on for institutional investors by companies preparing to sell securities, particularly initial public offerings of stock. Just as the SEC was able to invite the public via the Internet to its own recent Investor Summit, investors small as well as large should be asked to attend and pose questions at these pre-IPO presentations. It's one thing to read a prospectus laden with legalese; it's better to hear how management discusses what's in the prospectus.
-- PLAINER. Speaking of legalese, regulators have long encouraged the use of "plain English" in securities filings. A charitable assessment of this initiative would be to say it has achieved limited success. To any who doubt this, I point to the 749-page proxy statement (including Annexes A through N) filed recently by AT&T. If you own AT&T, you're supposed to use this to decide how you'll vote by July 10 on the company's plan to restructure and merge its cable unit with Comcast. Meanwhile, regulators--while trying to make investor communications clear to more than just the securities bar--might also try setting a good example. In SEC lingo, the AT&T proxy is a "DEFM14A." A mutual fund's annual report is an "N-SAR." A tender offer may be a "13E-4" or a "14D-1." Our government can do much better.
Only a fool would expect Washington to solve every problem in today's stock market. As SEC Commissioner Isaac Hunt put it: "The burden rests with individual investors to research the information and make intelligent investment decisions on their own." Fair enough. At the same time, investors don't have to buy what Wall Street is selling. So the burden is equally on Wall Street to show honestly that what it's offering is worth buying. Otherwise, I'd say the intelligent investment decision is a bank CD.