The Securities and Exchange Commission yesterday proposed changes to decades-old rules that would allow companies planning new stock offerings to share far more information with investors about the state of their businesses.
The proposals, approved in a 5 to 0 vote, would scuttle the "quiet period" restrictions that govern what companies can say in the weeks before their stock is sold on the open market.
If the SEC ultimately approves the changes, executives will be able to disseminate electronic versions of their sales pitch to potential investors, respond to rumors, post factual information on their Web sites, and perhaps even advertise on television and in print.
The SEC also yesterday approved in a split 3 to 2 vote new rules requiring hedge funds to disclose more information about their managers and practices.
Under current quiet period rules, companies can publish their prospectuses but must otherwise refrain from written communications with investors for a time span beginning when they hire an underwriter and lasting for nearly a month after their stock starts to trade on the open market.
The new proposals allow companies -- both large and small -- that have filed a registration statement with the agency to "speak as often and as loudly as they like," said SEC Commissioner Roel C. Campos.
The proposed changes would mark one of the biggest updates to the securities laws since they were passed in the Depression era, experts said.
Companies still would be liable under other provisions of the securities laws if their officials improperly hyped the stock or made false statements.
Critics have long attacked the antiquated rules that gagged companies during a public offering of stock or debt -- barring them, for instance, from answering investors' questions via e-mail. Earlier this year, technology companies Salesforce.com Inc. and Google Inc. ran afoul of the rules by speaking to reporters in interviews published during the quiet period. Salesforce.com briefly postponed its stock offering as a result.
"Companies operating under the current . . . restrictions are really unnecessarily restricted in their ability to communicate accurate information to investors and potential investors," said Alan L. Beller, director of the SEC's Corporation Finance Division.
The new approach will be open for public comment for 75 days once it is published in the Federal Register. Companies that have broken securities laws or that are suffering from serious financial trouble would not be able to take full advantage of the more open communication proposals.
A similar plan first was floated in 1998 as part of a massive package of securities reforms dubbed "the aircraft carrier." But the initiative quickly bogged down. Legal experts speculated yesterday that the current proposal would meet with far less backlash, in part because it is actually loosening some rules after companies endured more than two years of new burdens imposed by the Sarbanes-Oxley Act.
"It's welcome news, primarily because it gives extra flexibility to investors and companies," said Brian J. Lane, a former SEC official now in private practice at Gibson, Dunn & Crutcher LLP.
Separately, the SEC voted to approve a plan requiring the sometimes risky investment pools known as hedge funds to open their books for inspection. The issue has been among the most hotly contested in the SEC's recent history, drawing sharp opposition from two Republican commissioners and Federal Reserve Board Chairman Alan Greenspan, among others.
Some opponents also have raised questions about whether the SEC has the legal authority to force hedge fund managers to register. About 40 percent of funds already register with the SEC, said Paul F. Roye, director of the SEC's Division of Investment Management.
"I am befuddled about why we are charging ahead in the face of such a groundswell of principled opposition," said Commissioner Paul S. Atkins, who vowed to take the unusual step of filing a written dissent along with colleague Cynthia A. Glassman.
But SEC Chairman William H. Donaldson insisted the agency badly needed basic information about a largely unregulated industry that manages assets of $870 billion and counting. Donaldson said hedge funds' impact on the markets, and their growing allure for less sophisticated investors, required the SEC to act. The provision applies only to hedge funds with at least 15 clients and $30 million in assets.
"To not do so would be a major dereliction of the commission's responsibility," Donaldson said.