Cox Calls For SRO Consolidation

In a speech to the Securities Industry and Financial Markets Association on November 10, 2006, SEC Chairman Cox endorsed current efforts to fold the member regulation functions of the NASD and NYSE into one regulatory body noting, “I’m firmly convinced that, done properly, this can make our self regulatory system more efficient and more robust from an investor protection standpoint.” http://www.sec.gov/news/speech/2006/spch111006cc.htm The SEC Chairman offered four reasons for his support: 1) there are inherent conflicts between current SRO regulatory operations; 2) multiple SRO operations impose needless costs; 3) increases in cross-market trading make market surveillance increasingly difficult; and 4) questions concerning whether a SRO devotes sufficient resources to its regulatory operations. The Chairman’s comments were cast as a follow up to an SEC Concept Release, Concept Release Concerning Self-Regulation (Release No. 34-50700), in November 2004. http://www.sec.gov/rules/concept/34-50700.htm

New Study May Cause Option Probes to Expand

In a speech on October 30, 2006 Enforcement Chief Linda Thomson reviewed the current status of the expanding option scandal, noting that the good news is that accounting and regulatory changes have probably caused the death knell of the practices. http://www.sec.gov/news/speech/2006/spch103006lct.htm

Perhaps not. There may be a new round of investigations into option practices coming. A new study cited in a recent issue of Barron’s suggests that there is a correlation between option price and the late filing of an SEC Form. The Sarbanes Oxley Act of 2002 requires that Form 4 be filed within two days as Ms. Thomson noted in her comments. The new study on post-SOX option grants concludes that when Form 4 is filed significantly late, the options tended to be priced at the low price for the stock.

As Ms. Thomson noted, it had been thought that most problems with option pricing related to the time period before SOX. That is because before SOX Form 4 did not have to be filed after the end of the year. The old, longer filing period created a much larger window in which to take action like backdating while still filing on time. The earlier studies which triggered the initial round of options inquiries supported this view by suggesting that problems with options were concentrated in the pre-SOX period. Filing late, however, negates the impact of the 2-day SOX filing requirement. Filing lapses and enforcement deficiencies may however spark a new round of cases.

To date the SEC and DOJ have each brought two cases based on option backdating. Both the SEC and DOJ are widening their probes and now reportedly well over 100 companies are under investigation. This new study may cause those probes to widen even further.