The Securities and Exchange Commission yesterday addressed issues that have become sore spots for many investors, especially over the past couple of years of corporate scandal.
One involves so-called "pro forma" accounting, used by companies to exclude one-time or other extraordinary items from their earnings figures. While very useful when applied in the right manner, many used such figures to make their financial pictures appear better than they actually were.
The new SEC rule demands pro forma numbers are "not misleading" and that they clearly show their relationship to generally accepted accounting principles (GAAP). Although companies that use the pro forma method have always been required to include GAAP numbers, the new regulation should make it easier for investors to understand the true nature of their financial statements.
The other significant measure prohibits company officers and directors from buying or selling stock during "pension plan blackout periods," when employees are unable to trade. This issue hit the national spotlight when the public learned some insiders sold stock during part of Enron's collapse, while its employees were locked out.
There is somewhat of a loophole, however, as the regulation only takes effect if the blackout period lasts more than three consecutive business days and affects at least half the plan's participants. That troubled at least one SEC commissioner, Roel Campos, who said it presented "an opportunity for mischief."
The SEC took this action under a mandate from Congress, which passed the Sarbanes-Oxley Act last year.
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