“Current Disclosure Issues”

  *      The views expressed herein are those of Commissioner
         Roberts and do not necessarily represent those of
         the Commission, other Commissioners or the staff.

I.      Introduction

        I appreciate the opportunity to address this 10th Annual SEC
Reporting Forum with respect to some current disclosure issues
which I hope are of interest to you.  It is my intention today to
touch upon three areas of particular interest to public companies.
First, the financial reporting issue surrounding employee stock
option accounting.  Second, the issues surrounding a new “safe
harbor” for disclosure of so-called “soft” information.  Finally,
I will address the heart and soul of the Commission’s disclosure
rules, Item 303 of Regulation S-K, which is known as the
Management’s Discussion and Analysis (“MD&A”) section.

II.     Stock Option Accounting
        Let me start with the most controversial topic first.  As all
of you are aware, the Financial Accounting Standards Board (“FASB”)
has been struggling since 1984 with the notion of whether, and to
what extent, employee stock options should be reflected on a
company’s income statement.  After many long years of consideration
and a firestorm debate, the FASB issued an exposure draft which
called for a charge to earnings for the present value of employee
stock options, as of grant date.

        This represents a significant departure from the current
accounting treatment espoused in Accounting Principles Board
Opinion No. 25.  Under the present treatment, only the spread
between a fixed option’s exercise price and the current market
value of the underlying common stock on the date of grant is
expensed.  Thus, if an option is granted with an exercise price
equal to the stock’s current market price, there would be no
expense.

        Supporters of the FASB project argue that the present
treatment of option awards is inconsistent with the treatment of
stock awards, which are expensed.  They also argue that options are
compensatory and have inherent value, as of the grant date.  I
believe they are correct.  They further argue that investors need
to know the financial impact of the company’s aggregate option
awards.  Again, I have no disagreement with such an argument,
although I should point out that there do not appear to be very
many supporters of the FASB project at the moment.  The major
concern that I have with the current situation is the solution now
offered by the FASB.  They apparently seek a formula to value stock
options on grant date, requiring footnote disclosure during a
phase-in period, and culminating in a charge to earnings.

        The first, and largest problem, with this approach is
determining how to value stock options.  Should they be valued at
grant date, vesting date, or exercise date?  The later in the
process, the greater the certainty of the valuation, but the less
accurate the picture that something of value has been given to
employees at date of grant.  There has been no consensus on the
timing or the formula.  While the Black-Scholes and binomial
pricing models are the most popular formulas for valuing exchange-
traded options, they are less effective in valuing options that are
not transferable.

        The Commission went through a similar, difficult exercise as
part of its executive compensation disclosure project in 1992.  In
the end, we decided to provide flexibility to companies to use any
model they wanted, or a table that disclosed the value of options
at assumed rates of market price increase.  I believe such an
approach was a sound choice, and this concept has worked well as
a disclosure approach.  However, I am not inclined to believe that
this approach would work well as a basis for a charge to earnings.

        A new accounting standard for employee stock options imposing
a charge to earnings could potentially have a substantial adverse
impact on small, fledgling companies.  Therefore, any standard
imposing such a charge should be very carefully drawn, or it could
have a negative impact on our capital formation system to the
detriment of both companies and investors.  The problem is that it
appears that no one can agree on a formula, and I am not sure that
a good one exists for this purpose at the present.

        Given that most everyone can agree that there is a need for
greater financial information in this area, there has been a
growing call for a decoupling of the disclosure and charge
initiatives.  Investors appear to want more information about
aggregate employee stock option expenses; therefore, it seems
appropriate for the FASB to mandate enhanced footnote disclosure
to the financial statements.  This has been suggested by many
groups of companies, practitioners, and institutional investors.
There seems to be no reason to wait until the quest for the
penultimate charging formula is complete.  I am not even sure if
the intense effort underway into seeking such a formula is worth
the furor that has resulted.  It seems to me that a formula derived
for disclosure purposes would prove an interesting test case in
measuring the utility of this information.

        The phrase “the enemy of the good is the perfect” appears to
be especially relevant here.  Footnote disclosure appears to me to
be a good objective to accomplish.  Why delay or ignore the good
for what in all likelihood will be a futile search for a perfect
solution?

III.    Safe Harbor for Soft Information

        Another debate that has been ongoing for over a decade
concerns the use of so-called “soft” information.  This includes
less certain information known to an issuer, such as projections
and other forward-looking information.  Until the early 1970’s, the
use of soft information in a disclosure document was prohibited
because it was thought that such information was inherently
unreliable and therefore misleading.  Over the years, there grew
a greater appreciation for the use of soft information by
sophisticated investors.  As a result, the prohibition was lifted
and disclosure of soft information was permitted, but not required
generally.  The view prevailed that disclosure of such information
would provide investors with the ability to see a company through
the eyes of management because management often made strategic
decisions based on internal projections.

        Companies were reluctant to share their projections primarily
out of fear that they would be sued by angry shareholders if the
projections turned out to be too optimistic.  The Commission
responded with two safe harbor rules for projections, Securities
Act Rule 175 and Exchange Act Rule 3b-6.  These Rules provide
protection from lawsuits to the extent that the projections were
made in good faith and upon reasonable grounds.  Unfortunately, it
appears that over the years these safe harbors have not provided
sufficient protection for many companies, and there remains a
continued reluctance to disclose such information other than
selectively.

        The practical effect of this evolution has been that companies
continue to provide soft information to analysts and large
investors who request it, but not to retail investors who must base
their investment decision upon the information contained in the
prospectus or in periodic reports.  The Commission has been
concerned about this disparity of information and is considering
methods to elicit more soft information for the benefit of all
investors.  One obvious solution would be to provide a stronger
safe harbor rule so that companies would be more comfortable with
the prospect of disclosing soft information.  However, it is my
opinion that the Commission also should be confident that any such
expanded safe harbor does not protect selective or misleading
disclosure.  I anticipate that these two sometimes conflicting
objectives will make it difficult for the Commission to develop an
appropriate stronger safe harbor.

        On October 13th, the Commission issued a concept release
concerning this topic, and we need your thoughts on this subject.
The deadline for comments is January 11th, and I do encourage the
members of this audience to review the release carefully and to
provide the Commission with the benefit of your suggestions.
Further, the Commission expects to hold a public hearing on this
project on February 13th.

IV.     Derivatives Disclosure

        My final topic is perhaps one of the greatest interest to the
members of this audience.  As the use of derivatives financial
products has increased, the concern of U.S. and international
financial regulators has increased as well.  Hardly a day goes by
without another development pertaining to the topic of derivatives.
Earlier in the year, the news was filled with stories of companies
declaring multi-million dollar charges against earnings as a result
of losses incurred in various derivatives activities.  In
September, the impact of derivatives activities on the part of some
money market mutual funds came to the fore when an institutional
money market fund “broke a dollar” due to losses incurred as a
result of certain aggressive derivatives activities.  In October,
witnesses representing a Texas college, a Maryland county, and an
Indian tribe described to Congress their accounts as to how various
imprudent investments in derivative financial instruments resulted
in losses for their respective organizations.  In these early days
of November, the news is of lawsuits on the part of dissatisfied
derivatives institutional investors.  And thus far in December, the
news has been centered around the aggressive investment philosophy
and ensuing bankruptcy of Orange County which utilized derivatives
extensively in designing its investment portfolio.

        Now, other than with respect to money market funds, I am
inclined to believe that, as a general proposition, the marketplace
and not the Commission should determine the success or failure of
the various potential investment products available, even if those
products are highly volatile.  But the experiences I recited should
make it clear how important accurate and adequate disclosure of a
company’s derivatives activities is to the marketplace.  Potential
investors need to know what the derivatives activities of a company
are and the nature and level of risks involved in order to make an
informed investment decision.

        The first disclosure-related regulatory development of
interest that I intend to mention is the October issuance by the
Financial Accounting Standards Board (“FASB”) of Statement No. 119,
entitled “Disclosure About Derivative Financial Instruments and
Fair Value of Financial Instruments” (“Statement 119”).  Statement
119 requires improved disclosures about derivative financial
instruments, which would include futures, forwards, swaps, options
contracts, or other financial instruments with similar
characteristics.

        Statement 119 amends FASB Statement 105 to require the
disaggregation of information about financial instruments with off-
balance sheet risk of accounting loss by the class of the financial
instrument, business activity, risk, or any other category
consistent with the entity’s management of those instruments.  For
derivative financial instruments not subject to FASB Statement 105
because they do not result in off-balance-sheet risk of accounting
loss, Statement 119 requires disclosure about the amounts, nature,
and terms of the instrument, including their credit and market risk
and cash requirements.  Entities also are encouraged, but not
required, to disclose quantitative information about interest rate
or other market risks of their derivative financial instruments as
well as certain other assets and liabilities.

        I must admit that I was disappointed with this part of the
statement, as I believe that such quantitative information should
be required rather than just be voluntary.  Please be aware that
the Commission’s staff is suggesting disclosure of such
quantitative information as a part of the filing review comment
process for financial institutions and other companies heavily
involved in derivatives activities as end-users.

        Of course, Item 303 requires disclosure of known uncertainties
that are reasonably likely to result in material effects on a
company’s liquidity or results of operations as well as on material
trends in a company’s capital resources.  In the context of risk
management products and strategies, the direction and magnitude of
future price movements represent an uncertainty which management
of a company should evaluate.  Management should evaluate whether
it is unlikely that future market price movements could occur which
could have a material impact on the financial condition or results
of operations of the company.

        I understand that there has been some improvement recently in
disclosure by companies in Commission filings of their derivatives
activities, and further improvement should result from the FASB’s
issuance of Statement 119.  However, the staff of the Commission
is inclined to believe that further disclosure guidance is
necessary to ensure consistent and comprehensive disclosures to
enable investors to better understand the business purpose and
effects of a company’s derivatives activities.  Thus, the staff is
currently considering recommending that the Commission issue an
interpretive release that, among other things, would discuss the
requirements of MD&A as they relate to a company’s exposure to
market risks and to related policies and procedures for managing
those risks.

        In the interim, companies should take care to consider what
disclosures should be made concerning their derivatives activities
to comply with the MD&A requirements.  I expect that this will
continue to be an area where the staff of the Commission involved
in reviewing filings will be focusing quite a bit of attention.

V.      Conclusion

        There are many other accounting and financial reporting
initiatives ongoing at the Commission these days, but time does not
permit me to mention them.  I have chosen two of the more
controversial subjects that have been with us for the past decade
or so, and I fear may remain with us for another decade as well.
Further, I felt compelled to review the MD&A disclosure
requirements in light of one developing area of concern --
derivatives activities.  If you are not sensitive to potential
pitfalls in this area, you may be inviting unwelcome scrutiny from
the Commission or from disgruntled investors.