Prevention the Best Cure for SEC 'Remedies.' (Financial Institutions Should Institute Internal Accounting Controls along Securities and Exchange Commission Guidelines) (Column)

Article excerpt

From the banking industry perspective, the Securities and Exchange Commission has joined the big league of regulators using hardball tactics to enforce federal law.

The potent SEC has given itself the mission of investigating possible securities violations by publicly held financial institutions.

Those companies, particularly en route to mergers, are discovering increased SEC emphasis on maintenance of internal controls to assure accurate and adequate disclosure of obligatory information.

In late 1989 - with considerable publicity and a record budget - the SEC announced the creation of the financial institution disclosure task force. Its new - and largely untested - remedies include the ability to ask a judge to bar certain individuals from serving as officers or directors of a public company.

So all public financial institutions - and their directors and officers - should remember and consider the SEC as a significant regulator, particularly in preparing periodic filings.

Central Focus of Investigations

Public disclosure by financial institutions, particularly management's discussion and analysis, is a central focus of task force investigations.

The SEC requires the discussion and analysis to provide historical and prospective textual disclosures that will enable investors to assess current and future financial conditions and results.

These disclosure duties apply to currently known trends, events, demands, commitments, and uncertainties that are reasonably expected to have material effects on the company.

This duty prevails when a trend, demand, commitment, event, or uncertainty is known to management and reasonably likely to have material effects on an issuer's financial condition or operating results.

An exception is made for an objectively reasonable decision (viewed at the time made) that the trend, demand, commitment, event, or uncertainly is not likely to occur.

Recent enforcement actions have resulted in increased emphasis on the procedures all types of companies use to assure compliance with these standards.

Inadequate Procedures Cited

A recent enforcement proceeding against Caterpillar Inc. was the first SEC action involving solely the discussion and analysis requirement.

It centered on Caterpillar's failure to disclose in quarterly and annual reports that nearly 25% of 1989 net earnings came from a Brazilian unit - and that such a level of earnings probably would not occur the following year.

In a footnote to the administrative decision, the SEC noted: Caterpillar did not have adequate procedures in place designed to ensure compliance with the [management discussion and analysis] requirements. …