October 8, 2008

Today’s “21st Century” Roundtable: Another Ten Cents

A few weeks ago, I blogged about the SEC’s new “21st Century Disclosure Initiative,” including a summary of a proposal from Joe Grundfest and Alan Beller – as well as my ten cents on the entire idea. Today, the SEC is holding a roundtable on the idea – and has posted these FAQs and this strategic plan.

Trotting this new initiative out now seems like a bad idea when it won’t really bear on any of the problems associated with the current credit crisis. Bizarrely, the SEC issued this press release yesterday that revised the title of this roundtable so it’s framed as if it’s dealing with transparency in the credit crisis (here is the original press release).

At least, this illustrates that the SEC understands the need to tackle the credit crisis topic – unfortunately though, this roundtable isn’t about it. During the roundtable, if one was to hold a drinking game with “credit crunch” as the trigger term, I fear there wouldn’t be much action outside of the Chairman’s opening remarks. This perceived inaction by the SEC in the face of a major crisis will continue to provide fodder for folks like those over at “The Conglomerate” blog, which recently wrote a daily list of regulatory actions to combat the crisis – with the SEC penciled in as “The SEC did nothing.” The SEC should be in crisis mode and setting aside any unrelated projects.

Is This Project Dealing with “Form over Substance”? – When I read the SEC’s strategic plan, I was disappointed that the direction of the initiative clearly seems to be in the vein of “form over substance.” The SEC’s vision of this project seems to consist of creating a “Company File System,” where all the core information about a company would be in a centrally and logically organized interactive data file. When you read that description, a fair question might be: “Isn’t that what Edgar does today?” And a straight-faced answer would be: “For the most part, yes.”

As I mentioned in my last ten cents on this topic, I believe the SEC should be focused more on updating its substantive requirements – without that kind of meat involved in this project, I find the phrase “21st Century Disclosure Initiative” to be undeserving. This rulemaking simply doesn’t carry that kind of importance and it’s misleading.

Nothing personal about Bill Lutz (who is leading this initiative), but as his biography shows, he is an English Professor – and that’s not the best background to lead us down the path to better substantive requirements. At this point, this is Chairman Cox’s baby and I don’t feel a heavy Corp Fin presence in this project – and it’s supposed to be about disclosure.

Why a “Hash Mark System” Might Not Work – Putting aside my reservations about the timing of this initiative, I do have some thoughts about a “Company File System.” I think it’s important for companies to be required to file their core information – whatever the format (ie. HTML, XBRL) – on a single government site that is common for all reporting companies, like EDGAR is today. It’s very efficient to be able to go directly to one site and type in the name or trading symbol of a company and go directly to a company’s filings.

One of the ideas being considered is that companies would fill out online questionnaires and then they wouldn’t file their questionnaire responses directly with the SEC – rather they would post the responses on their own websites, with a ‘hash’ that authenticates the document as well as the date and time of posting. I have three concerns regarding this idea:

1. Challenges of Maintaining Content – I think this “hash mark” idea may be challenging for companies to implement. They would be required to ensure that those links stay active. You would think that this would be easy to accomplish, but I find that companies change the URLs of their IR web pages much more frequently than you would think. (I know this because I try to maintain a list of links to the IR web pages of widely-held companies and it requires constant updating).

2. Security Considerations – Another consideration for companies is the fear that the “official” documents now required to be on their servers would get hacked.

3. Investor Trust – Finally, and most importantly, investor studies show that investors trust documents filed – and found – on a government website more than documents found on a company’s site. Rightfully so, investors tend to view documents posted on corporate websites as marketing material.

The SEC: Under Fire

Even before Senator McCain was calling for SEC Chairman Cox to be fired, the SEC has been under attack. The latest is a claim that the SEC censored a report to hide its role in the Bear Stearns implosion. According to this Bloomberg article, the SEC’s Inspector General released a report a few weeks ago that “deleted 136 references, many detailing SEC memos, meetings or comments, at the request of the agency’s Division of Trading and Markets that oversees investment banks” (the SEC’s IG also released this companion report regarding the SEC’s broker-dealer risk assessment program). An unedited version of this report is posted on Senator Grassley’s website.

The SEC’s Inspector General has issued another report – also requested by Senator Grassley (see his letter from yesterday) – regarding the 2005 firing of Gary Aguirre, an SEC lawyer who claimed superiors impeded his inquiry into insider trading at hedge fund Pequot Capital Management. This report was released by the Senate Finance Committee yesterday, but is not yet posted on the SEC’s website – the articles states that the report “said the agency should consider punishing the director of enforcement and two supervisors over the firing.”

Perhaps in response to the pressure, Chairman Cox hired a former head of the Congressional Budget Office as a senior adviser yesterday – and according to this article, recently hired two new public relations officers.

Treasury Department: Implementing TARP ASAP

As required by the Emergency Economic Stabilization Act, the Treasury Department is moving quickly to choose advisers, issue regulations, and hire companies to serve as asset managers for its “Troubled Asset Relief Program” (known as “TARP”).

The first big move by Treasury was issuing a number of interim guidelines (egs. asset manager selection process; conflicts of interests) – as well as three “solicitations for financial agents,” which have a deadline for comments by 5:00 pm today.

Neel Kashkari – age 35! – has been named the interim head of the new Office of Financial Stability, which will implement the TARP (he was the Assistant Secretary for International Economics and Development and has been a key adviser to Hank Paulson). This office will hire a small staff with expertise in asset management, accounting and legal issues.

– Broc Romanek