SEC proposes new rules to tighten company disclosures, executives' stock sales

WASHINGTON (AP) _ Federal regulators on Wednesday tentatively approved new rules to tighten companies' financial disclosures and stock sales by executives. <br><br>The rules, issued for public review

Thursday, October 31st 2002, 12:00 am

By: News On 6

WASHINGTON (AP) _ Federal regulators on Wednesday tentatively approved new rules to tighten companies' financial disclosures and stock sales by executives.

The rules, issued for public review by the Securities and Exchange Commission, were ordered by Congress in response to accounting scandals that rattled public confidence in the stock market and the integrity of corporate America. The rules probably will be adopted formally after a 30-day comment period.

The vote by the five SEC commissioners was unanimous.

By contrast, they were bitterly divided on party lines Friday when the SEC named former FBI and CIA chief William Webster to head a new board to oversee the accounting industry. The two Democratic commissioners dissented because they had supported another candidate widely viewed as advocating tough regulation of the accounting industry.

In a new development, Webster told The New York Times that shortly before he was appointed to head the board he informed the commission's chairman, Harvey Pitt, that he had recently headed the auditing committee of a company that was facing fraud accusations.

Pitt chose not to tell the other four commissioners who voted on Webster's nomination that day, the Times said, citing unidentified SEC officials. White House officials said they, too, were not informed about the details of Webster's work for the company, the Times reported.

The rules proposed Wednesday would, for example, prohibit a company's officers and directors from buying or selling company stock during blackout periods when employees are unable to sell company stock from their pension accounts.

Top Enron executives as well as directors have been criticized for reaping hundreds of millions of dollars by selling their company stock in 2000 and 2001. Many ordinary employees lost nearly all their retirement savings as Enron stock fell over a period of several months and they were blocked from selling it for about three weeks in the fall of 2001.

The rules would require companies to include in their periodic financial reports a clearly written discussion of all off-balance-sheet transactions and to file their earnings statements with the SEC within two days after they are announced, to make them available to investors more quickly.

Companies that use ``pro forma'' reporting _ a type of financial reporting designed to play down negative results _ would have to ensure that the information was not misleading or false.

``It is a sad commentary on the state of corporate America that the government had to take this action,'' said Frank Torres, legislative counsel for Consumers Union, which publishes Consumer Reports magazine. ``The proposed rules simply require that corporate executives tell the truth and not mislead investors, comply with accounting standards, and make disclosures in plain English.''

Torres said the government's response to the wave of corporate scandals ``is turning out to be much weaker than consumers were promised'' because, among other things, of the SEC's choice of Webster to head the accounting oversight board.

Also Wednesday, the brokerage industry's self-policing group, the National Association of Securities Dealers, announced it had begun a review aimed at increasing the information it makes available to investors and the public.

Pro forma results, especially favored by high-tech companies, are a set of hypothetical numbers supposed to focus on the profits and losses of ongoing operations. They show up in corporate press releases announcing earnings and often paint a much different picture from the official results calculated that are filed later with the SEC.

The SEC warned investors in December to be wary regarding companies that use pro forma reporting.

The agency this month proposed rules prohibiting a company's officers and directors from improperly influencing or misleading its auditors into signing false financial statements. Companies would have to make public an internal control report by management and to disclose whether they have adopted an ethics code for senior officials _ or explain why they did not.