The Securities and Exchange Commission proposed Thursday that corporate officers and directors be forced to disclose almost immediately when they buy or sell company stock or borrow money from their employers.
The proposed rule, which is expected to be adopted later this year, comes three months after it was disclosed that Kenneth L. Lay, then the chairman and chief executive of Enron, sold US$70 million of Enron shares to the company in 2001. Some sales were made on the same day he was publicly proclaiming that the stock was cheap.
Under existing rules, the sales did not have to be disclosed until Jan. 15 of this year, six weeks after Enron filed for bankruptcy.
"It is clear that investors are demanding this information on a more timely basis," said Alan L. Beller, the SEC's director of corporation finance. He said that some disclosures could indicate that the interests of executives were not in line with those of shareholders and that it was important for investors to be able to make that determination.
The proposed rule would also affect companies that lend money to their executives. WorldCom, for example, has allowed its chief executive, Bernard J. Ebbers, to borrow US$375 million as the company's share price has declined. Such loans have been disclosed in varying ways and often with long lag times.
The new disclosures would affect all derivative securities. If executives cancel their options in expectation that new options will later be issued, as Continental Airlines officials did last October, the public would have to be informed quickly. Continental waited months to make the disclosure. Similarly, additional option grants would have to be disclosed immediately.
The new rules also would force companies to disclose something that some suspect has sometimes not been disclosed in the past: transactions in which corporate officials hedge their stakes in their companies but do not sell them. Such transactions often take the form of "zero-cost collars," in which an executive uses options transactions to protect himself against a fall in the price of the stock while giving up some profits if the stock rises.
The SEC also proposed that most companies be required to file their annual and quarterly financial reports with the commission more quickly, within 30 days of the end of the quarter and 60 days of the end of a company's fiscal year. The current rules call for deadlines of 45 days and 90 days, respectively.
The rules calling for faster disclosure of corporate financial reports would put more pressure on auditors to complete their assessments of companies and could provoke complaints that more time is needed. But because most companies now announce the results of operations well before the new deadlines, even though they often delay making the required filings until close to the deadline, compliance with the new proposal appears possible.
The longer periods would be kept for companies with less than US$75 million in stock in public hands or new companies that have not yet filed an annual report.
The commission also said that annual reports must tell shareholders how to get access quickly to financial reports, by saying if they are available on a company Web site, for example.
The SEC is allowing only 30 days for comments before it acts on the proposal to require faster filing of quarterly and annual reports. It provided a 60-day comment period on the proposed rule regarding insider transactions.
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