SEC chairmen, including current chair William Donaldson, have had a propensity to quote Justice Louis Brandeis in speeches. So allow me to throw one back at the Commission: “Our government is the potent, the omnipresent teacher. For good or ill, it teaches the whole people by its example.”

Contrary to Brandeis’ counsel, however, if the SEC was graded on compliance with its own regulations, it would fail. And miserably.

Its disclosure practices are at best irresponsible, and, at worst, negligent. I claim “negligent” because, in its own words, the Commission is “concerned primarily with promoting disclosure of important information.” But time and again, it fails at communicating those disclosure requirements on a timely basis to those who must abide by its will.

Neither Rapid Nor Current

For example, the Commission’s own Form 8-K amendments require that companies disclose material information “on a rapid and current basis.” That means four business days. And for some items, like insider trades, the deadline is two business days.

So why does the Commission takes its own time regarding its own band of “material” information? The SEC voted to adopt “internal control” rules as directed by Section 404 of Sarbanes-Oxley in May of 2003, but the Commission didn’t release a basic FAQ about the rules for over a year. At that point, less than 5 months remained before the compliance date.

Not exactly “rapid and current.”

Now, the Commission would surely argue that they were waiting for the final standard from the Public Company Accounting Oversight Board (which, of course, they did argue). But the delay goes deeper than that; after all, the Commission could have released an FAQ based on the draft, with caveats that some issues might change. That seems reasonable, considering the SEC staff was already involved in the PCAOB process. No, the real problem is that the SEC is more process-oriented than the issuers it oversees. Couple that with political dynamics between the Commission and the PCAOB, and you get a situation in which public companies don’t get the information or guidance they need on a timely basis.

Fair Disclosure, Or Non-Disclosure?

How about the SEC’s compliance with Regulation Fair Disclosure? The rule basically says that when a company discloses material information to certain interested parties, it must make public disclosure of that information.

Here the SEC fails as well, consistently making “selective disclosure” of important policies in letters, speeches and briefs that most companies rarely hear or see.

For example, the SEC clarified some important expectations regarding “disclosure controls and procedures” in its recent complaint against Siebel Systems. Securities lawyers and industry Web sites have been abuzz about the topic ever since, and several law firms like Wilmer Cutler Pickering Hale and Dorr have dedicated significant ink to the topic. According to a newsletter published by the firm July 16, the complaint “embodies a novel theory” regarding the connection between disclosure controls and Reg. FD.

Did the SEC widely disseminate the information to those who might be impacted? Nope. Unless your outside counsel sent you a notice—much like Wilmer Cutler did to its clients—you were likely in the dark. And good luck finding that Siebel complaint on the Commission’s Web site (more on that later).

Further, the SEC is as guilty as the Siebel executives themselves for selective disclosure in speeches. At the ABA’s Business Law Section meeting in April, for example, SEC General Counsel Giovanni Prezioso clarified the Commission’s position on its “noisy withdrawal” proposal, but you probably never heard it. Unless, of course, you happened to visit the Web site of the Washington State Bar Association, where a similar position was posted in the form of a letter from the SEC. The same type of “selective disclosure” was demonstrated by SEC Division of Enforcement Director Stephen Cutler, who outlined the Commission’s approach to penalties in an April speech you likely never heard.

Of course, people attend those ABA meetings specifically to hear information that, in the words of one former SEC staffer, “the unwashed masses don’t have.” However, that Commission veteran goes on to acknowledge that “significant policy statements should be made public.”

And, by the way, the new Public Company Accounting Oversight Board is no better. At least the SEC posts the text of commissioners’ speeches on its Web site. The PCAOB basically has no record of who said what. In June, for example, a Compliance Week subscriber inquired about an important policy speech made by PCAOB Chief Auditor Douglas Carmichael on May 21 at the American Law Institute, and another March 29 at a luncheon hosted by the New York State Society of CPAs. When we inquired with the PCAOB, we were told they didn’t have the speeches, and that in fact Carmichael didn’t even have a copy of his speech. “He spoke off-the-cuff,” a spokesman told CW via email.

While we’re on the topic of SEC speeches, I find it absurd that commissioners and staffers preface public statements by saying, “What I’m about to say is my personal opinion and doesn’t necessarily reflect that of the SEC.” With all due respect, if you aren’t representing the SEC, then what are you doing there? If you can't authoritatively discuss the very issues you were invited to address, then you should probably get off the stage. Or in the words of one expert, “How, when you speak in an official capacity, can you separate yourself from the organization you work for?”

But speeches aren’t the only form of “selective disclosure” that the SEC makes. In late May, the Commission issued a no-action letter to Egan-Jones Proxy Services that could impact many of the public companies that receive advice on corporate governance issues from proxy voting firms. Have you heard anything about it? Probably not. Same with an amicus brief filed by the SEC in a case involving Merrill Lynch, which clarified the Commission’s position on certain disclosures. Yet another example of “material” information that’s nowhere to be found. Or how about the clarification of certain equity compensation disclosure issues outlined in a no-action letter from SEC special counsel Anne Krauskopf? See that one?

Burdensome Access

Now, experts we talked to noted that those complaints, speeches and briefs are usually posted on the SEC’s Web site. But that site is not compliant with rules to which public companies must adhere.

According to the SEC's Web posting rules, companies must post certain reports on corporate Web sites “by the end of the business day after filing,” and must make sure that access to the forms “is not so burdensome that the intended users cannot effectively access the information provided.”

Okay. Let's start with the timeliness factor. A quick assessment of the SEC's Web site shows that some of the most critical sections for public companies are completely outdated.

The section of the SEC’s Web site called “Current Accounting and Disclosure Issues,” for example, hasn’t been updated since Aug. 31, 2001. The “Spotlight On Sarbanes-Oxley” was last updated in August of 2003. The Division of Corporation Finance’s “Current Issues and Rulemaking Projects” outline is from Nov. 14, 2000. And the section containing “Independence Reference Materials” for auditors is nearly a year old, and doesn’t even contain the critical opinion recently communicated by SEC Chief Accountant Donald Nicolaisen about disclosure of contingency-based tax fees to audit committees.

And as far as “burdensome” access, the Web site is extraordinarily convoluted.

Go to www.sec.gov and try to find the SEC’s new FAQ on internal controls. Just try. You likely won’t find it by clicking around, nor will you find it by searching for it. We couldn’t. That’s one of the reasons why we’ve reprinted some of the questions and answers in our August print print edition (click here for the FAQs).

In fact, the SEC's Web site doesn't even differentiate content based on the needs of its users. Information for filers, investment advisors, accounting firms, and investors is all jumbled together, making it, well, burdensome. The "Final Rules" section, for example, is an unusable list of every rule dating back nearly a decade. To find rules governing the disclosure of proxy voting policies, for example, you'd have to scroll past literally dozens of irrelevant items on mutual-fund breakpoint discounts and cancelled security certificates before you found the information.

As far as the SEC’s Web site goes, it’s basically impenetrable. There’s not even a “what’s new” section for, well, what’s new.

Now, of course the Commission is not required to abide by its own regulations—it’s not a public company. But the Commission should be the “gold standard” when it comes to disclosure, thereby making it easier for companies to understand what is required of them. Doing so would further the SEC’s mission to “protect investors and maintain the integrity of the securities markets.”

Ironically, the Commission’s argument against Siebel is exactly the point I’m making here: “The fact that information could be discovered somewhere in the public domain does not mean it can never be materially misleading to omit that information from a disclosure document or other statement.”

You said it.

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