SEC to CEOs: Details, Details, Details

Commission wants more info from corporate filers; real-time 8-Ks on their way. Elsewhere: CBO sees yawning government deficit, sour market straining pension insurance, and Tyco critic can't beat 'em--so he joins 'em.

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Several Securities and Exchange Commission officials warned Corporate America it may require more data, detail, and analysis in quarterly and annual reports, according to Dow Jones.

SEC corporation finance division director Alan Beller also said at a Northwestern University Law School conference in San Diego that the SEC may issue new rules that would require companies to include more key events in 8(K) reports within 2 business days instead of the current 5 to 15 days.

This move to “real-time reports” would provide investors with more information and a “truer picture” of what’s going on within a company, Beller reportedly told his audience. These reports would also result in fewer surprises for investors, he added, which could reduce market volatility.

Beller also said the SEC plans to propose reforms to ease restrictions on communications about securities offerings and reduce delays for companies seeking to access capital markets, according to the Dow Jones account.

In his urging for more-detailed quarterly and annual reports, Beller criticized companies for not offering enough information in the management discussion and analysis (MD&A) section, and complained that information on important trends and corporate performance is either missing or confusing.

He added CEOs should give the same care to writing the MD&A section as they’ve shown meeting new laws requiring top executives to certify the accuracy of the company’s financial results.

Beller reportedly said he recently reviewed quarterly reports from Fortune 50 companies and was “stunned” to find that about half of them still fill the management discussion with “elevator music,” such as reporting sales went up or down by a certain percentage without providing any explanation, said the Dow Jones account of the conference. Other financial reports offered a blizzard of data on such things as the number of subsidiaries the firm has or the number of countries in which it operates, he added.

“That is not the way to provide meaningful disclosure to investors,” Beller told corporate lawyers on Wednesday, adding it is “reasonably likely” the regulatory agency will offer guidance on the subject.

“Don’t just report, but analyze,” Shelley Parratt, a deputy director in the SEC’s corporation finance division, reportedly told the conference on Thursday, addressing the same issue. She suggested executives provide a more in-depth description of what a company does, how it makes money, and whether it had a good or bad year and why.

CEOs should also candidly admit the problems or risks that keep them up at night, added Parratt.

Beller also challenged companies to offer more forward-looking information, reminding them that they need not fear being sued since SEC rules include a safe-harbor that, he said, offers “a lot of protection” against lawsuits, according to the published accounts.

Meanwhile, SEC commissioner Cynthia Glassman urged companies to hire a “corporate responsibility officer” to help comply with the slew of new rules adopted in the past few months in the aftermath of 2002’s rash of accounting scandals.

A corporate responsibility officer would signal that a company is serious about meeting the new laws, she reportedly told the conference.

Congressional Budget Office Sees Wider Deficit

The Congressional Budget Office Wednesday forecasted a gradual improvement in the gross domestic product (GDP). But it also predicted that the budget deficit will swell to $199 billion in 2003.

Specifically, the CBO expects that the slow economic recovery will continue, with real (inflation-adjusted) GDP growing by 2.5 percent in calendar year 2003 and 3.6 percent in 2004. “That growth is comparable to the pace following the 1990—1991 recession,” it added.

The report was released before Thursday’s news that GDP grew by just 0.7 percent in the fourth quarter of 2002, way off from the 4 percent growth rate rung up in the third quarter. It was also the weakest quarter of the year.

In 2002, GDP expanded by 2.4 percent, much better than the anemic 0.3 percent growth rate during the bleak days of 2001, but much lower than the 3.8 percent growth posted in 2000.

When news of the widening budget deficit hit the newswires on Thursday, the stock market plunged.

The CBO expects the unemployment rate to stabilize in 2003 at 5.9 percent and then edge down to 5.7 percent in 2004.

It also predicted that as the recovery firms up, the Federal Reserve will gradually shift monetary policy from its current accommodative stance toward a more-neutral one. As a result, the CBO expects both short- and long-term interest rates to rise in late 2003 and during 2004. And inflation will remain below 2.5 percent for the next two years.

Indeed, on Wednesday the Fed left interest rates unchanged. It added in its accompanying statement: “Oil price premiums and other aspects of geopolitical risks have reportedly fostered continued restraint on spending and hiring by businesses. However, the Committee believes that as those risks lift, as most analysts expect, the accommodative stance of monetary policy, coupled with ongoing growth in productivity, will provide support to an improving economic climate over time.”

If current policies remained in place, the CBO said the federal budget deficit would grow from $158 billion in 2002 to $199 billion in 2003. In nominal dollars, this would be the largest deficit since 1994.

At 1.9 percent of GDP, however, the deficit would be well below the percentage that deficits accounted for in the 1980s through the mid-1990s, the nonpartisan group added.

What’s more, the CBO projects that from 2004 through 2008, if current policies remained unchanged (and the economy followed the path of the CBO’s projections), deficits would diminish and surpluses would reappear, leaving the budget roughly balanced. During the 2004—2008 period, the cumulative deficit would total $143 billion, or 0.2 percent of GDP.

From 2005 through 2013, the CBO predicts that real GDP will grow at an average annual rate of 3 percent. For that period the CBO projects that the unemployment rate will decline to 5.2 percent (which equals CBO’s estimate of the nonaccelerating inflation rate of unemployment), the interest rate on three-month Treasury bills will reach 4.9 percent, the 10-year note rate will average 5.8 percent, and the CPI inflation rate will average 2.5 percent annually.

Pension Agency Reports Huge Deficit

The Pension Benefit Guaranty Corp.’s insurance program for pension plans sponsored by a single employer lost a net $11.37 billion in 2002, according to the agency’s annual report released Thursday.

The PBGC fund went from a surplus of $7.73 billion at the end of fiscal 2001 to a $3.64 billion deficit at the end of fiscal 2002.

“The PBGC has sufficient assets to pay benefits to workers and retirees for a number of years,” assured executive director Steven A. Kandarian in a statement. “But given the amount of underfunding in pension plans sponsored by financially troubled employers, we must examine every available option to strengthen the pension insurance program for the long term.”

The PBGC single-employer program insures the pensions of 34.4 million Americans in 30,660 plans. Of the $11.37 billion in losses for 2002, completed and probable pension plan terminations accounted for $9.31 billion, or more than 80 percent of the total, the report said.

The program was also hurt by the decline in interest rates, which increased the program’s liabilities by $1.65 billion.

On the investment side, the program recorded a small gain from its portfolio of roughly two-thirds Treasury bonds and one-third stocks.

Overall, the single-employer program had $25 billion in assets to cover $29 billion in liabilities. The previous year the program had $22 billion in assets to cover $14 billion in liabilities.

Under generally accepted accounting principles, the PBGC said it recognizes as a loss both actual and probable pension plan terminations. In 2002, $5.91 billion of the $9.31 billion in losses were from “probables.”

The steel industry accounted for the lion’s share of the PBGC’s shortfall. The agency said its assumption of the responsibility for the pension plans of just National Steel and Bethlehem Steel combined to account for $5.16 billion of the probable losses.

The PBGC also absorbed a $1.85 billion loss from the underfunded pension plans of LTV Corp. and another $396 million in losses from the pension plans of other steel companies. All told, the steel industry accounted for $7.57 billion of the $9.31 billion in losses from completed and probable pension plan terminations.

The PBGC did go out of its way to point out that despite record losses and continued exposure to a number of highly underfunded pension plans, the insurance program’s $25.43 billion in assets assure that it will be able to continue paying benefits.

The PBGC is a federal corporation created under the Employee Retirement Income Security Act of 1974. It spent the first 21 years of its existence in deficit. From 1996 through 2001, however, the agency recorded a surplus.

Former NY Comptroller Joins Tyco Board

Former New York State comptroller H. Carl McCall has been nominated to join the board of directors of Tyco International, a company he once criticized for incorporating in Bermuda.

McCall is expected to be one of the new directors who will replace the current slate of members when the board resigns at or before the conglomerate’s annual meeting in March.

Back in the summer, McCall was one of a number of pension funds that pledged to pressure companies not to reincorporate offshore.

Tyco said in a proxy filed last week it opposes a shareholder proposal to reincorporate in Delaware. However, it did say it would periodically evaluate whether to reincorporate Tyco from Bermuda to Delaware or another state in the United States. “The Board intends to evaluate the potential benefits, costs and disadvantages of such a move,” it added.

In fact, as trustee of New York State’s Common Retirement Fund, McCall voted against the reincorporation in Bermuda of Nabors, an oil and natural-gas drilling company, last June, according to published reports, noting that reincorporation would “compromise the accountability of the company’s officers and directors, and threaten the long-term interests of shareholders.”

McCall began his term as New York State comptroller in May 1993, was reelected to his second term as in November 1998, and served until November 2002, when he became the Democratic nominee for governor of the state of New York.

As chief fiscal officer of the state, McCall was responsible for governmental and financial oversight and pension fund management. He was also responsible for investing a pension fund valued at $122 billion.

Prior to becoming comptroller, McCall was a vice president of Citicorp for eight years.

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