Sent: Saturday, April 13, 2002 5:40 PM
My proposition is simple: Fiduciary responsibility to investors requires that an insider give warning BEFORE engaging in a personal transaction involving the firm's stock or the firm's finances. Doesn't matter how big or small the transaction -- post a warning (similar to Form 144) by 3:00 PM EST on the day before the transaction is planned to execute. What's more, the warning should include data on all insider transactions that person has engaged in during the preceding 90 days. Responsibility for making sure the report is made should rest with the person who stands to benefit from the trade, as the Form 4 responsibility already is. Posting by EDGAR online should be defined as the criterion for satisfying the reporting requirement. Having a warning posted on EDGAR the day before a proposed trade should allow time for it to be picked up and distributed by the various online alert services, as needed to protect the public interest.
By transaction, what I mean follows the language of the proposed 8K rule change of 12 April 2002 (www.sec.gov/rules/proposed/33-8090.htm), including the following:
The reporting requirement should be made retroactive for two years -- with a 30-day grace period for reporting past transactions.
Finally, there must be meaningful penalties for noncompliance. A minimum of three years confinement, plus forfeiture of the stock involved, is suggested as reasonable. Failure to post the warning should NOT be an offense a violator would expect to buy his/her way out of. Transferring responsibility for reporting from the firm to the person eliminates the need for "weasel words" that leave a loophole big enough to drive a tank through (Paragraph beginning "As a practical matter, ..." in Proposed Rule: Form 8K Disclosure... 12 April 2002; www.sec.gov/rules/proposed/33-8090.htm). Should it prove impracticable to transfer responsibility to the individual, it would become necessary to enact legislation that would impose truly Draconian penalties upon noncompliant firms to reasonably ensure full and timely reporting. Why not just report after the fact? How about two days later? Would that report help an investor make a better investment decision? No way. There is nothing older than yesterday's news. In the market, even individual investors like me use real time quotes -- a quote delayed by 20 minutes is ancient history! SEC knows this. Who are they trying to kid? The ONLY way to provide investors the timely information they need is to require a warning of insider trades.
Would the required warning place the insider at a significant disadvantage in trading? Not if the number of shares is small with respect to market volume -- and direction of the trade is consistent with public pronouncements of the firm's spokespersons and insiders (e.g., a buy when pronouncements say the stock is a bargain). If the former is not true (e.g., the proposed trade would move the market), then the market should be warned of an impending disruptive event. If the latter is not true, then perhaps the insider has earned a disadvantage! In either case, the public interest is well-served. Is my proposal too strict? Billions of investor dollars that have recently evaporated in firms like Enron and Global Crossing (to name but two examples) cry out "NO."
Is legislation required? SEC Chairman Pitt seems to be suffering an attack of protectionism -- protect my former clients from legislation that threatens real penalties they cannot evade. The fragrance is nauseating. SEC is paralyzed by the enormity of what its inaction has wrought, and petrified that its protective curtain may be rent to expose the mess it has made of being the investor's advocate. Time has come for the Congress to act. SEC must be given a clear set of marching orders that outline what is required to protect the investing public from insider trading, and set forth specific penalties for noncompliance. Legislation is the only practical way to set out these marching orders in a way SEC cannot ignore or evade. Then, I am afraid that a Congressional Committee will need to provide active and close oversight to ensure that SEC actually issues rules that meet the guidelines, and that these new rules are actually enforced. (Did I forget to mention that SEC needs more money to effectively execute its mission?)
If you have questions or need more information, please let me know.
Thank you very much.
Charles G. Scouten
The Fusfeld Group
29W528 Forestview Drive
Warrenville, IL 60555-2101