Fiscal Year 2002
The 2002 Fiscal Year has been challenging for the markets and investors alike. This past year included not only the continued effects of the tragedies of September 11, 2001, but also the significant corporate scandals that began with Enron. The Securities and Exchange Commission met these challenges head on and is working hard to restore investor confidence.
Fiscal Year 2002 represented a continuation of the SEC's work on important issues such as market structure, regulatory reform for mutual funds, and improved regulation of research analyst conflicts. In the past year, the SEC has taken unprecedented, aggressive steps to investigate possible wrongdoing, propose tough new regulations, and fully implement the Sarbanes-Oxley Act.
Overall Agency Highlights
- Implementation of the Sarbanes-Oxley Act - The Commission is moving aggressively to implement provisions of the landmark legislation signed into law on July 30, 2002, to reform the accounting industry, including bringing an end to the self-regulation of the accounting industry with the creation of a new Public Company Accounting Oversight Board to oversee the accounting profession and public company audits.
- Response to the September 11, 2001 terrorist attacks - The Commission actively responded to the to the events of September 11. During the attacks, the New York offices of the SEC were destroyed, and the Commission worked quickly to reestablish operations. The Commission continues to work with other U.S. financial regulators - the Federal Reserve Board, the Office of the Comptroller of the Currency and the New York State Banking Department - on a project to strengthen the operational resilience of the financial sector. The Commission has also taken numerous steps to implement the Patriot Act to deter international money laundering and combat terrorist financing.
- SEC, NY Attorney General, NYSE, NASD, NASAA Agreement on Reforming Wall Street Practices - The Commission, the New York State Attorney General's Office, the NYSE, the NASD and the North American Securities Administrators Association announced a joint effort to bring to a speedy and coordinated conclusion the various investigations concerning analyst research and IPO allocations. (October 3, 2002)
- Review of Initial Public Offering Process - The SEC asked the National Association of Securities Dealers and the New York Stock Exchange to review the initial public offering (IPO) process, including IPO allocation practices and the roles of issuers and underwriters in the price setting and offering process. (August 22, 2002)
- In the past year the Enforcement Division of the SEC has taken a record 598 actions, a 24% increase over 2001, and a 19% increase over 2000. (see attachment Record of Enforcement)
- This year's actions include the following significant cases:
- Charged former Enron CFO, Andrew Fastow with fraud. (October 2, 2002)
- Settled fraud charges against Michael Kopper, a former high-ranking Enron official. (August 21, 2002)
- Charged three former senior executives of Homestore Inc. with perpetrating an extensive scheme to fraudulently inflate Homestore's advertising revenues by arranging fraudulent "round-trip" transactions. The defendants agreed to return ill-gotten gains of approximately $4.6 million to be paid to the benefit of shareholders, under the Fair Funds provision of the recently enacted Sarbanes-Oxley Act of 2002. (September 25, 2002)
- Settled with Dynegy for securities fraud charges involving Special Purpose Entities (SPEs) and round-trip energy trades. (September 24, 2002)
- Charged three former top Tyco International executives, including CEO L. Dennis Kozlowski, with failing to disclose multi-million dollar low interest and interest-free loans from the company, and in some cases, never repaid. They were also charged with selling shares of Tyco stock valued at millions of dollars while their self-dealing remained undisclosed. (September 12, 2002)
- Charged Adelphia and Rigas family with massive financial fraud. (July 24, 2002)
- Filed fraud charges against WorldCom within 24 hours of the company's revelation of its massive accounting problems. (June 26, 2002)
- Charged former Rite Aid senior management with fraud in connection with its financial disclosures. (June 21, 2002)
- Settled SEC enforcement action for financial fraud with Xerox, assessing a $10 million penalty, the largest ever penalty against a public company for financial fraud. (April 11, 2002)
- Filed a settled action against Credit Suisse First Boston for IPO allocation practices that violated NASD rules. CSFB agreed to pay $100 million in penalties and disgorgement. (January 22, 2002)
- Brought a settled administrative action charging Trump Hotels with fraud in the first enforcement action based on misleading "pro forma financials." (January 16, 2002)
- Brought a series of significant settled enforcement actions alleging violations of the auditor independence rules against PriceWaterhouseCoopers, Moret Ernst &Young Accountants and KPMG. (July 17, 2002; June 27, 2002; January 14, 2002)
Corporate Disclosure and Accounting Initiatives
- Pro Forma Financial Statements - The Commission issued cautionary advice related to "pro forma" financial information, or information that is not prepared using Generally Accepted Accounting Principles required for financial statements filed with the SEC, and that may be confusing or misleading. The Commission issued an "Investor Alert" that describes how "pro forma financials should be analyzed, including a reminder that they should be viewed with appropriate and healthy skepticism." (December 4, 2001)
- Monitoring Annual Reports of Fortune 500 Companies - The Commission monitored
the annual reports of all Fortune 500 Companies to identify information that may be unclear or conflict with Generally Accepted Accounting Principles or SEC rules. (December 21, 2001)
- Disclosure of Equity Compensation Plan Information - Adopted rule amendments designed to enhance disclosure about equity compensation plans, including stock options. (December 21, 2001)
- Public Accountability Board - Proposed ending the self-regulation of the accounting profession by calling for the establishment of a private sector oversight board, dominated by non-accountants, and overseen by the SEC with mandatory funding. (January 17, 2002 - later included in the Sarbanes-Oxley Act)
- Disclosure Requirements For Public Companies - Called for corporate disclosure of the impact of off-balance sheet arrangements and other obligations regarding liquidity and capital resources. (January 22, 2002)
- Disclosure of Certain Management Transactions - Proposed amendments responding to investors' need for timely disclosure of transactions and other arrangements between companies and their executive officers and directors. (April 12, 2002 - later included in the Sarbanes-Oxley Act)
- Acceleration of Periodic Report Filing Dates - Proposed (April 12, 2002) and adopted (August 27, 2002) acceleration of the filing of quarterly and annual reports to be phased in over three years. These rules require that annual reports be filed within 60 days of the close of the fiscal year and quarterly reports be filed within 35 days of each quarter's end.
- Mandated EDGAR Filing for Foreign Issuers - Adopted rule amendments to require foreign private issuers and foreign governments to file their securities documents electronically through the EDGAR system. (May 8, 2002)
- Critical Accounting Policies - Proposed amendments to enhance investors' understanding of the application of companies' critical accounting policies. (May 10, 2002)
- Additional Current Disclosure Requirements and Acceleration of Filing Date - To provide investors with up-to-date information, proposed additional items and events that must be reported on Form 8-K within two business days of the action. (June 17, 2002)
- Certification of Disclosure in Companies' Quarterly and Annual Reports - To increase the accountability of senior company officers, proposed rules to require certification of a company's reports by the CEO and CFO. (June 17, 2002 - later included in the Sarbanes-Oxley Act)
- SEC Order to Largest Publicly Traded Companies - Ordered the 947 largest publicly traded companies to certify the accuracy and completeness of their filings. (June 27, 2002)
- SRO Listing Standards on Corporate Governance - In response to the SEC's request in February, the NYSE and NASDAQ have come forward with proposals that will produce the most substantial corporate governance and listing standards reform in decades.
Market Regulation Initiatives
- Commodities Futures Modernization Act (CFMA) Rulemakings - Conducted extensive rulemaking, much of it jointly with the Commodities Futures Trading Commission, to permit for the first time trading in security futures products, including single stock futures.
- Analyst Conflicts of Interest - Approved NASD and NYSE rules that address potential conflicts of interest by research analysts. Launched a thorough examination of analyst conflicts of interest. Proposed Regulation AC, requiring research analysts to certify the truthfulness of their views in research reports and public appearances and disclose whether they have received any compensation related to the specific recommendation provided in those reports and appearances.
- Rating Agencies - Launched a thorough examination of the role of rating agencies in the U.S. securities markets.
- Significant Progress on Options Market Linkage - Approved an amendment to the Linkage Plan filed by the options exchanges that, among other things, requires the intermarket linkage to be fully implemented no later than April 30, 2003. The intermarket linkage is an important step in improving options customers' ability to receive the best prices available. (May 29, 2002)
Investment Management Initiatives
- Investment Adviser Public Disclosure - Launched website which provides investors a valuable tool to help compare the business practices, services and fees of investment advisers online, free of charge. The website also contains disciplinary information regarding advisers. (September 25, 2001)
- Mutual Fund Advertising Proposal - Proposed amendments to modernize the mutual fund advertising rules. (May 14, 2002)
- Hedge Funds Investigation - Launched a formal fact-finding investigation to provide the Commission with a better understanding of the issues currently affecting private investment funds, including Hedge Funds. (May 29, 2002)
- Disclosure of Proxy Voting by Mutual Funds and Investment Advisers - Proposed amendments that would require mutual funds and other registered management investment companies to file with the Commission, and make available to shareholders, their proxy voting records relating to portfolio securities and disclose the policies and procedures they use to determine how to vote proxies. The proposal would require advisers to adopt proxy voting policies, to disclose these policies to clients and how clients can obtain information on how the adviser has voted on the proxies. (September 19, 2002)
- Fixed Income Exchange-Traded Funds - Approved the first exchange-traded funds based on fixed income indices, giving investors another option to invest in a basket of fixed income securities, providing lower expenses and intra-day pricing.
Investor Education and Assistance Initiatives
- Fake "Scam" Site Initiative - Launched three fake "scam" Web sites that warn investors about fraud before they lose their money. http://www.mcwhortle.com (January 30, 2002)
- Roundtables and Investor Summit - Held three Roundtables on Accounting and Auditing: New York (March 4, 2002), Washington, DC (March 6, 2002) and Chicago (April 4, 2002) and held the first-ever Investor Summit. (May 10, 2002)
- Investor Assistance - Provided individual responses to over 82,000 complaints and questions from investors. Additionally, the interactive "Fast Answers" database on the SEC's Web site provided instant answers to nearly 206,000 questions from the public.