SEC bulletin to limit executives' trades

Market-moving information must get out before they act

Securities industry

April 30, 1999|By BLOOMBERG NEWS

WASHINGTON -- The Securities and Exchange Commission will issue legal guidance within a month that directs executives to postpone trading stock until their companies disclose potential market-moving information, officials said yesterday.

The guidance on "materiality," aimed at curbing possible inside trading and increasing corporate disclosure, seeks to clear up confusion about what information is so significant that it needs to be disclosed, said SEC chief accountant Lynn Turner.

The way some U.S. businesses interpret securities rules on disclosure of "material" information, companies must announce only developments that could increase or decrease their profit between 3 percent and 10 percent.

"We think the guidance will rein in the executives playing on the fringes, making intentional errors," Turner said. The long-awaited "staff accounting bulletin" is due to be released in the next month, said SEC General Counsel Harvey Goldschmid. It will clarify that a 1976 U.S. Supreme Court ruling prohibits an executive from trading his company's stock until the corporation discloses any potentially market-moving information, he said.

Questions arose this week about when executives should trade stock when they know information that hasn't been announced. Those questions involve Chock Full O'Nuts Corp. Chairman Norman Alexander, who bought more than 530,000 company shares, at $5 a share, in February. Chock Full O'Nuts hadn't disclosed that the company previously had received buyout offers from Sara Lee Corp. at a higher price.

Money manager Mario Gabelli, who says his funds hold a 15.8 percent stake in Chock Full O'Nuts, has called for Alexander's resignation.

The SEC's definition of "materiality" -- the kind of information that must be disclosed -- will call for a qualitative assessment, rather than a numeric measure, Goldschmid said. As an example, he cited a company that has information -- about an expected merger write-off, a restructuring charge, or research and development expenses -- that is likely to affect its profit by less than 3 percent. If such information could substantially affect the stock price, it is considered "material" and must be disclosed, Goldschmid said.

"Any executive that buys or sells the stock before the disclosure is clearly trading on inside information," he said.

Pub Date: 4/30/99

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