Investor Relations 101

[Tina]

Issue Date: IR Alert - July 15, 2009

SEC May Get Budget Hike to Incorporate “Whistleblower” Fund to Pay Insiders for Information that Curtails Investor Fraud
A key lawmaker this week said he is developing a bill based on the Obama administration's proposals for the Securities and Exchange Commission, including a measure that would set up a fund to pay whistleblowers for information that leads to enforcement actions. "Of the many suggestions already proposed, one important one stands out: We ought to put in place new standards that reward whistleblowers when their tips lead to catching fraudsters," said House Financial Services securities subcommittee chairman Paul Kanjorski, D-Penn., to SEC chairwoman Mary Schapiro, MarketWatch reports.

"By encouraging whistleblowers to come forward when they know of wrongdoing, we will leverage the commission's limited resources and increase the number of cops on the beat," said Kanjorski, reports MarketWatch writer Ronald D. Orol.

Kanjorski also said Congress should seriously consider raising the SEC's 2011 budget by 20%, beyond the 8% increase the House will soon consider for the agency's 2010 budget.

The lawmaker's legislative efforts come as the SEC itself is moving forward on key initiatives to reform problematic credit rating agencies, limit abusive naked short selling and other endeavors.

Responding, in part, to concern by some lawmakers on Capitol Hill, Schapiro said the agency is examining whether "additional regulation" is needed to protect investors from abusive short selling, such as "naked short selling," the practice of selling a stock short without first borrowing the security or ensuring that the security can be borrowed as is done in a conventional short sale. Critics argue that naked short selling was a major contributor to expediting a number of aspects of the financial crisis.

Schapiro pointed out that the agency is focused on the issue of abusive naked short selling since before she arrived at the agency in January. She pointed out that the commission has taken regulatory actions to limit failures to deliver securities on time following a short sale, a key characteristic of a naked short sale, and that those efforts have led, in part, to a "significant decline" in failures to deliver. The SEC's enforcement division has a "number of active investigations" involving abusive short selling, she added.

However, critics argue that a key reason the SEC is witnessing a decline in failures to deliver is because the markets have improved in recent months, limiting naked short selling opportunities. A major down market could likely lead to a hike in naked short selling. Some lawmakers are seeking to require investors to pre-borrow shares, which is to arrange formally to borrow shares, before engaging in a short sale.

Schapiro also said the agency is exploring new regulations for credit rating agencies, including an approach that would have corporations disclose "pre-ratings" obtained from credit rating agencies before the company selects a firm to conduct a rating. Such an approach seeks to limit the practice of ratings shopping, the current prevalent practice where a corporation shops around for best rating.

"I have directed the commission staff to explore possible new regulations in this area, including limiting the potential for rating shopping," Schapiro said.

Schapiro added that she has allocated additional resources to create a group of examiners dedicated to oversee credit rating agencies.

The agency is also looking at other trading and market related practices, such as "securities lending." However, she did not provide additional details in testimony.