SEC Announces '21st Century Disclosure' Initiative to Fundamentally Rethink the Way Companies Report and Investors Acquire Information
William Lutz, Disclosure and Transparency Expert, Tapped to Lead Effort
Securities and Exchange Commission Chairman Christopher Cox today announced the kickoff of an ambitious effort to examine fundamental questions about the way the SEC acquires information from public companies, mutual funds, brokers, and other regulated entities, and the way it makes that information available to investors and the markets.
The aim of the wide-ranging internal inquiry will be to outline the attributes of the disclosure system for the future that incorporates technology, the new ways in which investors get their information, and recent developments in how companies compile and report the information in their SEC-mandated disclosures.
The first phase of the study will be completed by the end of 2008, when a follow-on advisory committee will be appointed to consider the questions in more detailed fashion through a public and consultative process.
"On the 75th anniversary of the SEC, with so much new technology available to improve the quality of information for investors as well as the way investors acquire it, we're initiating a broad, introspective look at our business model," said Chairman Cox. "What hasn't changed in 75 years is the importance of full disclosure - sunlight remains the best disinfectant for problems in our capital markets. We'll be examining how to improve the way disclosure works, including tapping the full potential of today's technology and integrating it seamlessly into our regulatory approach. That could mean fewer confusing forms, and more useful information at investors' fingertips in a form they can really use."
Chairman Cox also announced that the SEC's internal study known as the '21st Century Disclosure Initiative' will be undertaken be a dedicated staff of experts to be led by Dr. William D. Lutz of Rutgers University.
"Bill Lutz is ideally suited to lead this effort," said Chairman Cox. "He will bring an expert and fresh perspective to thinking about the agency's full-disclosure mission, and how it can best serve the needs of America's investors."
Dr. Lutz has a unique background with dual expertise as a securities lawyer and plain-English expert focused on transparency. He has significant experience in working with the SEC on disclosure issues, has participated in several SEC roundtables, and has frequently provided advice on SEC rulemaking. From 1995 to 1999, he played an important role in advancing the SEC's Plain English initiative by preparing the SEC's Plain English Handbook, a manual to help mutual funds and public companies write clear and understandable SEC filings. He is Emeritus Professor of English at Rutgers University, and the author of numerous books and articles on the importance of plain-language disclosure.
The internal study will produce, by the end of 2008, a blueprint for future Commission action to improve the usefulness and timeliness of disclosure for investors, and to streamline and modernize the collection of disclosure from companies and regulated entities. The study will be a fundamental rethinking of financial disclosure, beginning with the basic purposes of disclosure from the perspective of investors and markets. The inquiry will be aimed at identifying the objectives of the ideal disclosure system at the architectural level. Essential to the study will be the determination of how to match the capabilities of today's information technology with the SEC's regulatory aims and the needs of investors.
The study will include a review of all existing SEC forms and reporting requirements, as well as the manner in which information is provided to the Commission, with a special focus on needless redundancy. It will also include consideration of various alternative strategic approaches to acquiring and publishing disclosure information. In addition, the study will consider ways that regulatory requirements for the collection of information might be tailored to get the best real-time distribution of financial and narrative disclosure to investors. Finally, the study will examine how best to integrate public disclosure with the SEC's proposed new post-EDGAR architecture for investor search, assembly, and comparison of data. (Press Rel. 2008-119)
Change in the Meeting: Cancellation of Meeting
The closed meeting scheduled for Thursday, June 26, 2008 has been cancelled.
For further information please contact the Office of the Secretary at (202) 551-5400.
RULES AND RELATED MATTERS
Realpoint LLC Registers with the SEC as a Nationally Recognized Statistical Rating Organization
The Commission issued orders today granting the registration of Realpoint LLC as a nationally recognized statistical rating organization under the Credit Rating Agency Reform Act of 2006 and simultaneously granting a temporary exemption of Realpoint LLC from the Conflict of Interest Prohibition in Rule 17a-5(c)(1) under the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of June 23. (Rels. 34-58000; 34-58001)
Securities And Exchange Commission Orders Hearing On Registration Revocation Against Seven Public Companies For Failure To Make Required Periodic Filings
Today the Commission instituted public administrative proceedings to determine whether to revoke or suspend for a period not exceeding twelve months the registrations of each class of the securities of seven companies for failure to make required periodic filings with the Commission:
In this Order, the Division of Enforcement (Division) alleges that the seven issuers are delinquent in their required periodic filings with the Commission.
In this proceeding, instituted pursuant to Exchange Act Section 12(j), a hearing will be scheduled before an Administrative Law Judge. At the hearing, the judge will hear evidence from the Division and the respondents to determine whether the allegations of the Division contained in the Order, which the Division alleges constitute failures to comply with Exchange Act Section 13(a) and Rules 13a-1 and 13a-13 thereunder, are true. The judge in the proceeding will then determine whether the registrations pursuant to Exchange Act Section 12 of each class of the securities of these respondents should be revoked or suspended for a period not exceeding twelve months. The Commission ordered that the Administrative Law Judge in this proceeding issue an initial decision not later than 120 days from the date of service of the order instituting proceedings. (Rel. 34-58009; File No. 3-13080)
In the Matter of K.W. Brown & Company, 21st Century Advisors, Inc., and K.W. Brown Investments, Inc.
On June 24, the Commission issued an Order Making Findings and Imposing Remedial Sanctions Pursuant to Section 15(b) of the Securities Exchange Act of 1934 and Sections 203(e) of the Investment Advisers Act of 1940 as to K.W. Brown & Company, 21st Century Advisors, Inc. and K.W. Brown Investments, Inc. (Brown Entities) (Order). The Order finds that following a nine-day bench trial, the District Court entered a permanent injunction and final judgment against the Brown Entities and others, permanently enjoining them from future violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, Section 17(a) of the Securities Act of 1933, Sections 204, 206(1), 206(2) and 207 of the Advisers Act and Rules 204-1(a)(2) and 204-2(a)(8) thereunder.
Based on the above, the Order revokes the registrations of the Brown Entities. The Brown Entities consented to the issuance of the Order without admitting or denying any of the findings in the Order. (Rels. 34-58010; IA-2746; File No. 3-12923)
In the Matter of Kenneth Brown
On June 24, the Commission issued an Order Making Findings and Imposing Remedial Sanctions Pursuant to Section 15(b) of the Securities Exchange Act of 1934 and Sections 203(f) of the Investment Advisers Act of 1940 as to Kenneth Brown (Order). The Order finds that following a nine-day bench trial, the District Court entered a permanent injunction and final judgment against Kenneth Brown and others, permanently enjoining them from future violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, Section 17(a) of the Securities Act of 1933, Sections 204, 206(1), 206(2) and 207 of the Advisers Act and Rules 204-1(a)(2) and 204-2(a)(8) thereunder.
Based on the above, the Order bars Kenneth Brown from association with any broker, dealer, or investment adviser. Kenneth Brown consented to the issuance of the Order without admitting or denying any of the findings in the Order. (Rel. 34-58011; IA-2747; File No. 3-12923)
In the Matter of Scottrade
SEC Charges Scottrade for Misrepresentations To Customers
The Commission today charged St. Louis-based broker-dealer Scottrade, Inc., for fraudulent misrepresentations it made to customers relating to the firm's execution of their Nasdaq pre-open orders, which are placed after the day's market close to be executed at the next market opening. Without admitting or denying the Commission's findings, Scottrade agreed to pay a $950,000 penalty to settle the SEC's charges.
By accepting customers' orders, a broker-dealer impliedly represents to customers that it will regularly and rigorously review the quality of execution that it receives on its orders, and take any material differences between the price improvement opportunities offered by market makers into account when deciding where to route its orders. According to the Commission's Order, Scottrade did not conduct a regular and rigorous review of the execution quality of its Nasdaq pre-open orders, and falsely disclosed to customers that it would route orders based on factors including liquidity at market opening when in practice it did not do so.
In 2000, the Commission advised the public that some market makers trading Nasdaq securities offered investors an opportunity to avoid paying a liquidity premium at the market opening. A liquid market allows buying and selling with relative ease and, accordingly, allows market makers to offer opportunities for superior executions. The Commission stated that an example of this is "midpoint pricing"-one price that is offered to both buy and sell orders at the midpoint between the national best bid and offer (NBBO). Another example is a "single price"-one price that is offered to both buy and sell orders somewhere between the NBBO. The Commission further advised that broker-dealers should take these alternative pricing options into consideration when seeking to obtain best execution for their customers' Nasdaq pre-open orders.
According to the Commission's Order, Scottrade did not follow the Commission's advice, and from Jan. 1, 2001, to Dec. 31, 2004, misrepresented in customer account opening documents and statements that it would route its customers' orders based on factors that included "liquidity at market opening," which gave its customers the opportunity to receive executions "that may be superior to the national best bid offer (NBBO) in any one market center." A market center is a market maker that stands ready to buy and sell stocks at publicly quoted bid and offer prices. During the relevant time period, Scottrade had no written policies and procedures to assess liquidity at the market opening provided by market centers and, as a result, did not consider the availability of executions that may have been superior to the NBBO, such as single or midpoint pricing, for its Nasdaq pre-open orders.
As a result of these misrepresentations, Scottrade willfully violated Section 15(c)(1)(A) of the Securities Exchange Act of 1934 (Exchange Act), which prohibits broker-dealers from using manipulative, deceptive or fraudulent devices or contrivances to effect securities transactions. Scottrade has consented to the entry of an Order by the Commission that: censures Scottrade; requires it to cease-and-desist from committing or causing any violations and any future violations of Section 15(c)(1)(A) of the Exchange Act; and requires Scottrade to pay a civil penalty of $950,000. (Rel. 34-58012; File No. 3-13081)
INVESTMENT ADVISERS ACT RELEASES
Slick Enterprises, Inc.
An order has been issued to Slick Enterprises, Inc. under Section 202(a)(11)(G) of the Investment Advisers Act. The order declares that Slick Enterprises, Inc. and its employees acting within the scope of their employment to be persons not within the intent of Section 202(a)(11). (Rel. IA-2745)
Immediate Effectiveness of Proposed Rule Change
The Commission issued notice of immediate effectiveness of a proposed rule change (SR-Phlx-2008-42) filed by the Philadelphia Stock Exchange under Rule 19b-4 of the Securities Exchange Act of 1934 relating to catastrophic errors. Publication is expected in the Federal Register during the week of June 23. (Rel. 34-58002)
Approval of Proposed Rule Change
The Commission approved a proposed rule change (SR-FINRA-2008-009) filed by the Financial Industry Regulatory Authority to amend the chairperson eligibility requirement in the Code of Arbitration Procedure for Customer Disputes and the Code of Arbitration Procedure for Industry Disputes pursuant to Section 19(b)(2) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of June 23. (Rel. 34-58004)
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