Corp Fin Director White Defends SEC's Disclosure Regime

Corporation Finance Director John White said that the SEC's disclosure regime was one process that did not fail during the credit crisis. In remarks at the American Bar Association Section of Business Law's fall meeting, he said that the disclosure rules work and, while they can be improved upon, should be largelly preserved. Mr. White will end his tenure as Corp Fin Director at the end of the year and return to Cravath Swaine & Moore.

Further, while it may be necessary to create a new regulatory system for complex financial instruments and for financial institutions, noted the director, there is only one agency and one group within that agency that focuses on disclosure. He agreed that regulatory overlaps and gaps should be addressed, but said that prudential regulators have a different focus and different goals than transparency and disclosure for investors. Regarding policy makers who are thinking about what to do with the SEC, he urged them not to "throw the baby out with the bath water."

One of his initiatives during his three years as head of the Division was to update the staff interpretations. He hopes the project will be done by the end of the year, including updates to the mergers and acquisitions interpretations. White reported that Wayne Carnall, the Division's chief accountant, plans to roll out accounting interpretations this month to coincide with the AICPA's annual meeting on SEC and PCAOB developments. The accounting interpretations will also be posted on the SEC's website. Next year, shareholder proposals will be posted on the SEC's website in real time.

The staff is trying to approach the comment and review process in a more forward-looking way, rather than as an after-the-fact process. The idea is to give advice to everyone at the same time in advance of filings. The result is better disclosure for investors a whole reporting cycle earlier, he said. An example of this approach is the three "Dear CFO" letters that have been released by the staff. Mr. White said that two more letters are on the way.

While his predecessor Alan Beller implemented the Sarbanes-Oxley Act rules and securities offering reform measures, Director White faced issues dealing with executive compensation, Sarbanes-Oxley Section 404 internal controls reporting and interactive data. New executive compensation disclosure rules were adopted, but the issue is back as a major topic because of the Troubled Asset Relief Program. White believes the legislation will also affect companies that are not in TARP.

Since Chairman Christopher Cox's number one priority is technology, the director expects that the interactive data proposal will be finalized by the end of the year. The electronic delivery of proxy materials has saved companies millions of dollars, he noted, but also has resulted in a decrease in the direct retail vote. The SEC staff plans to recommend technical changes to improve the electronic proxy process.

Looking forward, Mr. White said that the five major areas under consideration are international financial reporting standards, the recommendations by the Advisory Committee on Improvements to Financial Reporting, proxy matters, technology and beneficial owners. IFRS is also critically important. The SEC will decide in 2011 whether to make mandatory the use of IFRS. For those who are skeptical that IFRS will be adopted in the U.S., Mr. White said that they are mistaken. The case for a single set of standards is compelling. He believes it is a matter of when, not if, but said it will be a challenge and will take leadership and vision.

He referred to proxy matters as "the elephant in the room." He grappled with it, Mr. Beller grappled with, and the next Corp Fin direcror will have to grapple with it. There is little, if any, common ground.

The SEC's 21st Century Disclosure Initiative should produce a blueprint for reform in the near future. Mr. White had two warnings. First, he said technology is not content, it's a delivery vehicle. Second, he said not to lose track of the periodic disclosure system. There is a temptation to rely on technology to disclose information more quickly, but it is important to take the time to get it right. The periodic disclosure system benefits from disclosure controls, internal controls, an independent auditor regime and CEO/CFO certifications, he said.

In closing remarks, the outgoing official spoke about Corp Fin's important role. The SEC is being closely scrutinized because of the market crisis, he said. Calls have been made to restructure the oversight regime for the financial markets, to merge the SEC and the CFTC, or to create a super regulator. These discussions have focused on the appropriate form of regulation for financial institutions of all types and for complex financial instruments.

People are focusing on how to address the failures, said the official, but we must also look at the successes and support the regulatory elements that worked. The U.S. system of providing full, fair and timely disclosure is "head and shoulders above other markets," he said, adding that the Division's review of company filings is a great success and the envy of foreign regulators. Rules are only as good as the extent to which companies comply with them, he said, and the review process is part of that success.