Supplementary News Material:
Statement of Chairman Arthur Levitt on Audit Committee Oversight, Selective Disclosure, and Insider Trading
Open Commission Meeting,
December 15, 1999
Good morning. The Commission meets today to adopt rules designed to improve the quality of oversight in the financial reporting process, and to consider proposals that promote the full and fair disclosure of financial information. Quality information is the lifeblood of strong, vibrant markets. It is at the very core of investor confidence.
For over sixty years, our markets have been a model for transparency and integrity. This is due, in no small part, to the professionalism of corporate management, financial analysts, accountants, and members of the legal community. Sixteen months ago, I voiced concerns over what I saw as an emerging culture of gamesmanship within the financial reporting process. A culture that allowed the pressure to meet earnings expectations to come before long established precepts of financial reporting, and ethical restraint.
I would like to thank those in corporate America who took to heart – in both practice and in purpose – the call for greater integrity and accountability in the financial reporting process.
The rules we will consider implementing today are positive steps in the direction of even greater integrity in the financial reporting and public disclosure process. The recommendations of the Blue Ribbon Panel, modified through the rulemaking process, help shine the light on the integral oversight role played by audit committees. Our action today, in conjunction with efforts of the NYSE, NASD and the accounting profession as a whole, will increase the effectiveness and accountability of boards, outside auditors and management.
Now, we recognize the need to balance liability exposure and the impact it may have on board members willing to serve on audit committees with the imperative for strong, assertive oversight. I believe today's rules strike that balance. The remote possibility of increased liability exposure must not be used as an excuse to shirk an audit committee's duty to investors. There is no reason why every public company in America shouldn't have an audit committee that is not afraid to dig beneath the surface, to reject easy answers, to ask tough questions.
It is the very same principles of integrity, transparency, and fairness which underscore our actions today on the insidious practice of selective disclosure. The all-too-common practice of selectively disseminating material information is a disservice to investors and undermines the fundamental principle of fairness. This practice leads to potential conflicts of interest for analysts and undermines investor confidence in our markets. In a time when instantaneous and free flowing information is the norm, these sort of whispers are an insult to the principles of free and open disclosure upon which the success of our capital markets is based.
A new proposal, Regulation FD, would require that when a company discloses material information, it does so through public disclosure rather than limiting initial access to that information for the benefit of a privileged, select few. And, when a company learns that it has made an unintentional selective disclosure, it must make that information known to the public in short order.
Now I anticipate that some will argue that these rules will "chill" the flow of information as companies respond by providing less disclosure altogether. I disagree. These proposed rules exemplify the "best practices" standards of investor relations and analyst groups. They will provide issuers with a great degree of flexibility in the way they distribute information – including the use of new technologies over the Internet to offer extraordinary broad access at minimal cost. While these rules don't require this, I strongly urge corporate America to open up your conference calls to all investors. Place them on the Internet. The basic principle of fairness deserves no less.
Finally, today we will consider two amendments which will clarify and enhance existing prohibitions against insider trading. The first addresses an important but unsettled issue of whether insider trading liability arises when a person trades while "aware" of material nonpublic information. The second addresses what types of family or other non-business relationships can give rise to liability under the misappropriation theory of insider trading.
Today's investors are more informed, more demanding, and more in touch with financial activity than ever before. As we enter a new century, the future of our capital markets depends on the integrity of financial information and the comfort and confidence it brings to our investors.
I would like to thank the staff in the General Counsel's office, the Office of the Chief Accountant, and Market Regulation for their hard work on a task that truly required a cooperative and dedicated effort.
As I look down at the presenter's table, I can't help but be a little nostalgic and philosophical. Thirty years ago, a young Columbia professor authored groundbreaking work in the area of corporate governance. He argued that an independent, engaged and informed board with access to important operating and financial information could provide "a meaningful, independent" review of corporate management.
Harvey, you've come full circle and then some. I couldn't think of a more fitting last meeting for you as General Counsel. We will miss your passion, your intellect and your abiding sense of fairness and decency. With that, I turn for the last time, unfortunately, to Harvey Goldschmid.