Some $700 billion in investment decisions last year depended on the huge stacks of paper that fill the office of the Securities and Exchange Commission officials assigned to review corporate disclosures.
"This is the basic information of importance to the economy," said Lee B. Spencer Jr., deputy director of the SEC's Division of Corporation Finance. "This stuff, basically and fundamentally, underlies the whole system."
But the SEC has a problem: how to review the basic stuff.
In 1962, the SEC had approximately 18,000 filings to review and about 142 professionals to do it. Last year, there were approximately 55,000 filings to be reviewedby 100 SEC employes -- or more than double the work to be done by a staff that has been reduced by almost a third.
The paper pours in every day -- registration statements or prospectuses, annual reports, quarterly reports, reports on special developments, proxy statements, tender offers and "going private" papers. Investors, relying on the truthfulness of what goes on file, will decide what to do with their money.
"It's simply disclosure," said Spencer. "Our view is . . . whether you're beating your wife or husband, so long as it's all there, that's fine. We're not arbitrators of how corporations should act."
Making sure that disclosure is accurate is up to the SEC and the workers who review the reports.
To keep up with the increase in workload and to streamline the review process, the SEC has made major changes in the past year in the manner in which it reviews disclosure, changes that include a trade-off: giving up reviewing almost everything for more intense review of some things, random sampling of others and no review of some types of disclosure.
The first step was a 1979 reorganization of the branch offices assigned to review corporate filings. There are 10 such offices now, slightly larger than the 15 offices that existed before the reorganization; each has its own attorneys, certified public accountants and financial analysts to pore over the paper.
Before reorganization, statements were assigned for review randomly, so the reviewers built up little expertise along industry lines. "One day you'd do an airline. The next day you'd do oil and gas," Spencer said. The SEC also had a problem with high turnover among the reviewers.
What the SEC did was to divide the world according to 34 industries, based on the Standard Industrial Code, and assign each of the 10 branch offices three or four industries in which to become specialists.
"They weren't totally confined. They weren't Johnny-One-Note with three or four industries," Spencer said. The new arrangement has allowed the branches to begin to ascertain patterns in industries and to develop an expertise that is being augmented through talks by industry analysts and through industry publications now regularly routed to the branches handling the industry involved.
The Division of Corporation Finance also systematized training and operating procedures. This year it is phasing in a system to check for consistency from branch to branch.
Although those changes were improvements, the review process was still not as efficient as it should be, Spencer said. To meet that problem, the SEC adopted other changes that reduced the piles of paper that had to be filed by corporations, allowing them to incorporate information already filed by reference to earlier documents. And it allowed the branches to be more selective in their review.
"We adopted something called prioritized review," Spencer said. "We said: Where we review, we will do a good review. When we don't, we won't."
The agency replaced a program that instructed officials to choose among "deferred," "cursory," "summary" and "full" review of documents. Because those terms were never completely defined, reviewers would often spend so much time on "cursory" review that little time was left for "full" review.
Now the agency offers a choice of full refiew, sampling and no review, depending on the type of document. Virtually all initial public offerings, tender offers and going-private documents get the agency's full review. Proxy statements, annual reports and other documents are reviewed by a sampling process.
In that process, documents are selected by criteria the SEC won't reveal -- just as the Internal Revenue Service won't reveal its criteria for choosing a sample of income tax returns to audit. Annual reports are only now coming in for scrutiny under the new process. Of proxy statements filed, however, an estimated 20 percent got a good going-over by the SEC under the sampling process.
For still other types of documents, such as employe stock-option plans, there is no review unless special circumstances arise. "We almost never had a problem, yet they were coming in by the thousands," Spencer said. The SEC decided there were better ways to spend sharply limited resources than curling up with an S-8, as such forms are called.
So far, the new procedures have allowed the SEC to speed its review process. "It means basically that we as the government are looking at the filings that need most of our attention," Spencer said. To prompt full and fair disclosure, the SEC also relies on corporate fear of the consequences of improper disclosure, including civil and criminal penalties.
Making those penalties a successful prod requires strict enforcement against corporations that violate disclosure requirements, a requirement now heightened by the simplification of the disclosure process, according to at least some enforcement officials. Last year, the Division of Corporate Finance referred approximately 250 cases to enforcement.
Although the SEC won't disclose the criteria it uses to select at random for review, attorneys in the securities field have noted that small, speculative companies seem to get more intense scrutiny than industrial giants. s"We try to maintain a presence in large companies. We don't prefer large to small, but statistically we're putting our resources where in the past we've had the most comments."