The Securities and Exchange Commission, which has required full disclosure of many types of illegal and unethical corporate behavior, will confine its enforcement actions mostly to direct violations of SEC rules, such as management self-dealing and activities that directly affect a company's financial well-being.
John M. Fedders, director of the SEC's bureau of enforcement, is scheduled to tell securities lawyers in a speech today that, although the agency can deal effectively with conduct considered "quantitatively" material, it generally should not require disclosure of what he calls "qualitatively material" behavior.
Fedders said that, when unethical or illegal behavior has a measurable impact on a company's earnings, assets or debts and is not disclosed by the company as required by SEC regulations, the agency would have no difficulty in taking enforcement actions.
But if that illegal behavior has no measurable impact on a company's performance -- and is not otherwise prohibited by securities regulations -- the agency will find it more difficult to move.
In his speech, Fedders maintains that, although some investors want their companies to behave in a specific way -- for instance, not offering bribes to get business -- the only common thread that runs through investor desires is the wish to earn a return on investment. He said court decisions tend to run the same way.
Fedders is referring only to actions the SEC might take using the general antifraud provisions of the securities laws.
He did not preclude the possibility that other federal or state agencies -- or even foreign governments -- might prosecute company officials for "qualitatively material" misconduct.
Early this year the SEC refused to take an enforcement action against Citicorp. The big bank company had been accused of engaging in a wide variety of foreign exchange practices designed to avoid local taxes in Europe and elsewhere during the 1970s. Citicorp, which owns Citibank, paid fines and back taxes in several European countries after a former employe publicly charged the bank with many tax avoidance schemes abroad.
Although several members of the SEC's enforcement staff urged the five commissioners to take action against Citicorp, they refused. Even if the practices were illegal, they said, they were done with the bank's best interest in mind, had no material impact on the bank's assets or earnings and in no way do federal laws require a company to assert that its management is honest.
Fedders's scheduled speech is the first attempt to address the issue of unethical or illegal corporate conduct since the Citibank decision.
Stanley Sporkin, head of the enforcement bureau until last year, generally held that the SEC should attack such conduct even if it does not have a specific impact on the corporation because it undermines the corporation's status.
In another SEC development yesterday, the agency voted to streamline its reporting requirements for big foreign companies, making it easier for them to sell their bonds in the United States.