Continuous Surveillance, U.K. Regs, More

The Securities and Exchange Commission’s inspector general has recommended that the agency’s Division of Corporation Finance implement a program of continuous surveillance for large companies, as part of a larger effort to improve the SEC’s preliminary review process.

In a June 22 report on the Division of Corporation Finance’s Preliminary Review Program, the inspector general’s office recommended that the Division consider using an approach similar to that used by the SEC’s Compliance Inspection and Examination Program, which assigns staff to monitor developments continuously at the largest investment advisory groups. A similar approach “involving large capitalized companies could help the Division improve its focus on company quality,” the report said (see box at right).

Noting that companies in the Standard & Poor’s 500 Index represent roughly 80 percent of the total U.S. market capitalization, the inspector general’s office said the Division could assign staff to maintain continuous surveillance of developments such as corporate press releases, trading data, and 8-K filings at those companies.

“Because of their enhanced knowledge of large companies, the staff assigned to surveillance would be better able to identify timely material issues affecting the companies when they perform preliminary reviews of filings,” the report said.

The report also recommended that the Division enhance its consideration of company risk factors and other risk-based information, such as financial ratios and analyses and trading data, during the preliminary review process; consult with other Commission offices; and provide guidance to its staff as appropriate, such as by including company risk factors on the Division’s preliminary review sheets.

It also recommended that the Division further incorporate all six factors set forth in Section 408(b) of Sarbanes-Oxley into its timing of filing reviews and issue appropriate guidance to its staff.

What the SEC will now do with the inspector general’s report is unclear. Via email, Commission spokesman John Nester said: “While the Division’s selective review criteria are non-public, the Division will seriously consider the recommendations.”

SEC OKs Rule Changes For Nasdaq

In what it hailed as a “critical step” in the Nasdaq’s transition to a national securities exchange, the SEC has approved proposed rule changes reflecting the registration of the Nasdaq Stock Market Corp. as a national securities exchange.

Among the recently approved rules is a proposal to establish he Trade Reporting Facility Corp., jointly owned by the National Association of Securities Dealers and the publicly traded parent company of the Nasdaq Stock Market, which will operate the NASD facility for reporting of over-the-counter trades in Nasdaq securities.

The SEC also issued an order modifying the conditions for the operation of the Nasdaq Stock Market as a national securities exchange, enabling Nasdaq to begin operating as an exchange in Nasdaq listed securities separately from other exchange-listed securities, pending the completion of conditions set forth in the original order granting exchange registration.

The SEC also said intends to act “soon” on a proposal to integrate the operations of three Nasdaq facilities: the Nasdaq Market Center and Nasdaq’s Brut and INET facilities, into a single book.

The SEC approved Nasdaq’s application to register as an exchange in January.

U.K. Group Publishes Updated Combined Code

The United Kingdom’s Financial Reporting Council has updated its Combined Code on Corporate Governance, the voluntary code by which many British-listed companies currently operate.

The changes in the new version affect remuneration committees and the treatment of “votes withheld” and proxy voting at shareholder meetings, and also include the publication of board committee terms of reference. The FRC also reiterated its commitment to a “light touch framework for promoting good governance,” according to risk consulting firm Chase Cooper.

While noting that the changes are small, “there are enhancements to the need for Web site information and this release is likely to strengthen the case for the Combined Code becoming the legal requirement,” Chase Cooper wrote in a regulatory alert about the code.

The updated code replaces the original, issued in 2003, and follows a review of the implementation of the code and subsequent consultation on possible amendments.

The FRC noted that the Financial Services Authority (Britain’s counterpart to the SEC) must carry out a separate consultation before listed companies can be formally required to disclose how they have applied the new version of the code. That consultation is expected to begin in September; subject to views received, the FSA’s listing rules could incorporate the new version of the code by spring 2007.

Meanwhile, the FRC said, it would “encourage” companies and investors to apply the revised code voluntarily for reporting years beginning on or after Nov. 1, 2006.

Listed companies have to make a two-part disclosure statement related to the code. They must report on how they apply the principles in the code, and they must either confirm compliance with the code’s provisions or provide an explanation where they don’t, known as a ‘comply or explain’ approach.