Statement by SEC Chairman:
Remarks at Commission Open Meeting
Chairman Harvey L. Pitt
U.S. Securities and Exchange Commission
January 15, 2003
Good Morning. This is an open meeting of the U.S. Securities and Exchange Commission on January 15, 2003.
This week's open meeting, and next week's, quite possibly will be the busiest two weeks of rulemaking in this Agency's history. By the end of next week, we will have considered nine final rules and produced four major studies related to our obligations under the Sarbanes-Oxley Act. This is in addition to a host of other actions already taken, and yet to come. Despite the compressed time frame imposed upon us by Sarbanes-Oxley, we received numerous and thoughtful comments on all of our rule proposals, and the recommendations before us today show that the Staff has considered them all carefully, and made appropriate modifications where warranted.
All three recommendations before us today are from the Division of Corporation Finance, led superbly by Alan Beller. Alan's Division has taken the lead on many of the rulemakings under Sarbanes-Oxley, but Staff from virtually every Division and Office of the Commission has been working tirelessly to implement the many facets of the Act. I know my colleagues share my pride in, and admiration for, the Staff's incredible efforts toward completing this task in record time. The tasks we were assigned are daunting, and the time frames for action ungenerous, but our Staff never flinched in meeting our obligations.
The first item on the agenda today is Regulation G, which addresses the use of pro forma financial information and implements Section 401(b) of the Act. The Commission has long recognized the need for investors to better understand the use of so called "pro forma" financial information - or information that is not prepared using the Generally Accepted Accounting Principles required for financial statements filed with the SEC. Over a year ago, we issued cautionary advice about the use of such information,1 as well as an Investor Alert describing how "pro forma financials should be analyzed, including a reminder that they should be viewed with appropriate and healthy skepticism."2
The rules we are considering here today, go even further by setting out conditions for the disclosure of material non-GAAP information by public companies, both within and outside of SEC filings, as well as requiring that public earnings releases and other material non-GAAP information be provided to the Commission.
Second, we will consider Regulation BTR (for Blackout Trading Restrictions), which has been prepared in consultation with the Department of Labor pursuant to Section 306 of the Act. Section 306(a) prohibits directors and executive officers of publicly-held companies from trading company securities if employees in the company's pension plan are subject to a plan blackout period preventing them from trading through their plan accounts. Regulation BTR provides definitions and clarifying rules for Section 306(a) to ensure that it will operate as Congress intended.
Finally, we will consider two new types of disclosures in annual reports to implement Sections 406 and 407 of the Act. The first requires public companies to disclose whether they have at least one financial expert serving on their audit committee, if not, why not, and, if so, the person's name and whether they are independent of management. The second requires public companies to disclose whether they have adopted a code of ethics that applies to principal executive officers and senior financial officers - and, if not, why not.
We received a great deal of comment on our original proposal's definition of financial expertise, and I believe the Staff has responded to the legitimate criticisms raised with a very thoughtful, and workable, proposal.
1 Cautionary Advice Regarding the Use of "Pro Forma" Financial Information in Earnings Releases, Release No. 34-45124, FR-59 (Dec. 4, 2001).
2 "'Pro Forma' Financial Information: Tips for Investors" available at www.sec.gov/investor/pubs/proforma12-4.htm .