Observations from a review of the SEC budget.by Spindel, Fred S.
As expected, the major resources of the agency are directed to the review of registrants filings and the enforcement activity against violators of securities laws. shows the allocation proposed for the budget to operate the agency during fiscal 1991.
The breakdown by programs of the 2,267 positions held by SEC staff during 1989 and the 1991 estimate.
The following summary of the present and proposed activities of two major programs described in the 1991 budget is of particular interest to accountants dealing with the SEC.
The program identified as Full Disclosure principally involves the review of issuers' filings under the 1933 Securities Act and the 1934 Securities and Exchange Act, and the related rulemaking activities conducted by the Division of Corporation Finance and certain organizational support offices. Presents a comparative breakdown of the actual and proposed positions involved in this program as contained in the 1991 budget.
The report provides extensive statistics on the workload of Corporation Finance. It points out, for example that the division processes approximately 325,000 filings each year and that during 1989, 11,894 issuers filed annual reports with the SEC. The report further points out that the division's goal is to review the financial statements and related disclosures of one-third of the issuers filing annual reports under the 1934 Act. This goal, however, is not expected to be achieved in the coming year, primarily because of the demands of the full conversion to electronic filing under EDGAR. (EDGAR is the acronym for the Electronic Data Gathering, Analysis and Retrieval system designed to automate documents filed with the Commission.)
To facilitate the handling of the significant workload, the Division of Corporation Finance separates its processing of documents filed into four categories:
1. A full review, including an in-depth examination of the accounting, financial, and legal aspects of the issuers' filing;
2. A review limited to the financial information contained in the document;
3. A review limited to one or more specific items in the document; or
4. No review at all.
The report points out that during 1989 the staff made full reviews of the filings of 2,227 reporting issuers and financial reviews of 388. The regional offices of the Division of Corporation Finance received and reviewed during 1989, 561 Form S-18 and 88 Regulation A filings, exclusive of reviews made of post-effective amendments. It is staff policy to review all such filings.
The evident emphasis placed on the financial information contained in filings has prompted the Division of Corporation Finance to strive for an increasing complement of accountants among its staff. The level sought is 50%, an objective the division finds difficult to achieve in view of turnover and competition by accounting firms and private industry. The report points out that as a result of the 1989 review process, 40 issuers were required to restate quarterly or annual financial statements and over 100 issuers were required to amend the MD&A disclosure contained in the filings. Further, 119 matters were referred to the enforcement staff and 65 resulted in investigations being opened or other action being taken.
Rulemaking constitutes a significant portion of the staffs activity and the report cites the following significant proposed projects:
* Internationalization of the securities markets, including implementation of a multi-jurisdictional disclosure system and adoption of regulations clarifying the transnational application of 1933 Act registration requirements;
* Adoption of a safe harbor registration for institutional resales;
* Review of the proxy rules and the appropriate interrelationship between federal and state law governing shareholder voting process; and
* Accommodation of electronic filing under the EDGAR system.
Most of these projects have been the subject of proposals, which the SEC has published for the purpose of receiving comments. The EDGAR pilot program has been in effect for some time, and fiscal 1991 is expected to be pivotal to its success.
In 1987, the Office of EDGAR Management was created to coordinate and monitor the implementation of the EDGAR system and to facilitate a smooth transition to electronic filing. Some companies have voluntarily participated in the pilot program. The mandatory conversion to the EDGAR system is scheduled for fiscal 1991, when the first 2,500 non-pilot registrants are scheduled to begin filing all documents electronically. These new filers plus 1,300 pilot filers are expected to generate approximately 23,000 electronic filings during the year. Also, filers preparing for phase-in during 1992 will generate an additional 1,500 test filings in 1991. As in the pilot program, registrants in the mandatory program will be able to submit filings by any one of the following three methods:
1. Direct transmission of the filing over telephone lines or public networks;
2. Submission of diskettes prepared on various types of word processors or personal computers; or
3. Submission of magnetic tapes.
Filers who wish to transmit their filings directly from an IBM- compatible workstation will receive special PC support software furnished by an EDGAR contractor at no cost.
Prevention and Suppression of Fraud
Law enforcement being one of the SEC's principal functions, it is not surprising to note that a significant part of SEC resources is directed towards that activity. A comparison of the 1989 staff engaged in this function with that proposed for fiscal 1991.
The numbers indicate that a large part of the enforcement activity is handled through regional offices. The office of International Affairs has only been in existence since December 1989, and was created to facilitate the increasing need to coordinate the Commission's international investigations. In discussing the sequence of the enforcement effort, the report describes the various functions such as intelligence analysis, investigations and proceedings.
Intelligence analysis is the evaluation of information obtained from a variety of sources, both external and internal, to determine whether a possible violation of the federal securities laws may have occurred. The information may be gathered for the SEC's review and surveillance activities or externally from investors' complaints and informants, self-regulatory organizations, news media and other federal, state and local agencies. When the intelligence information obtained is incomplete or insufficiently conclusive to warrant an investigation, a Matter Under Inquiry (MUI) file will be opened. Staff may spend up to 80 hours on an MUI before a final decision is made to open an investigation.
The investigation commences when it is concluded that a matter warrants further attention to determine whether a violation exists and what enforcement action may be appropriate. Staff may conduct an informal investigation or may order a formal investigation. The distinction depends on the willingness of witnesses and others to cooperate with the staff. If information is easily attainable on a voluntary basis, then the investigation can proceed informally. However, where it is necessary to compel witnesses to testify or provide requested documents, a formal investigation is ordered utilizing subpoenas to obtain the necessary evidence.
In citing the subject matter of the various investigations during 1989, the report indicates that 59% of the cases involved fraud in the offer, sale, or purchase of securities, 39% in failure to disclose information and 16% as a result of accounting problems. (Total percentage exceeds 100% because some cases involve more than one violation.)
A proceeding commences when the Commission, based on the investigation, concludes that an action is warranted. The alternatives in such case may consist of: 1) the commencement of an injunctive action in a U.S. District Court; 2) the institution of a proceeding before an Administrative Law judge; or 3) the referral of the matter to the Department of justice for criminal prosecution. Where appropriate, the matter may also be referred to state or local authorities or self- regulatory organizations. In describing the direction of the existing and anticipated enforcement effort, the report points to the increasing need to devote resources to uncovering fraudulent activity in penny stocks and investigating potential violations by thrift associations.
As to external intelligence sources, the report states that in 1989, the SEC received 44,977 complaints and inquiries from investors representing a 260% increase since 1982. In 1989, the SEC opened 377 new investigations; filed 140 injunctive actions involving 420 defendants; instituted 155 administrative proceedings involving 236 respondents and filed 15 civil and contempt actions. In projecting 1991 activity the SEC estimates that 54,500 investor complaints and inquiries will be directed to the staff and that 1,300 MUI files will be opened.
The foregoing are highlights from the published 1991 budget related to two of the principal SEC programs. More detailed information on these programs as well as information on the other programs max, be obtained by direct reference to the report.
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