SEC Begins Aggressive New Campaigns Under New Chief
By NYSSCPA.org News Staff

WASHINGTON -- President Bush promised Tuesday that the newly installed chairman of the Securities and Exchange Commission would lead "an active and energetic agency" to rebuild investor confidence shattered by last year's wave of corporate scandals, The Associated Press reported.

William H. Donaldson, 71, who replaced Harvey Pitt, said serious violations of securities laws and regulations in recent years had severely shaken public confidence and strict enforcement would not be enough.

"It is time that all those who manage and govern our corporate and financial institutions show true leadership," he said, according to Reuters.

"As chairman of the SEC I will call on them individually and collectively to create a new environment of integrity and accountability that goes well beyond adherence to laws."

Donaldson turned his words into actions on Wednesday as he began pushing new tougher initiatives. According to the Financial Times, the SEC is considering sweeping changes to rules governing "short-selling", a controversial trading practice that has reached record levels during the bear market.

A clampdown could significantly alter the way many stocks are traded in the U.S. and limit the profit potential of hedge funds and other active traders, the Times reported.

Regulators around the world are under pressure to tighten rules on short-selling, in which traders bet that a stock price will fall, amid concern that it is used by professional traders to manipulate share prices, particularly of smaller companies. New rules on short-selling were introduced in Japan last year and the Financial Services Authority in the U.K. is currently looking at stricter rules on disclosure.

Staff at the SEC are expected to present proposals for reform to Donaldson next week.

U.S. regulators say they are being pressed to clamp down on short-selling by politicians who complain that companies in their districts are being hurt by the practice.

"The time has come to address what to do about short-selling but it is going to be political, controversial and complex," a securities regulator told to the Times.

But market professionals argue that short-selling is an effective way to keep wayward corporate management in line, but others say it is too often abused to corner small companies by controlling most or all of a company's publicly traded shares.

Then, in another major move, The Wall Street Journal reported Thursday that the SEC may require two rivals of Merck & Co. Inc.'s Medco Health pharmacy benefits unit to use a Medco accounting method that treats co-payments by individual members to drug stores as revenue.

Citing people familiar with the matter, the paper reported that the SEC initiative could align the accounting practices of Caremark Rx Inc., Express Scripts Inc. and AdvancePCS and Medco. Caremark also books co-payments as revenue but Express Scripts Inc. and AdvancePCS do not. In the past few weeks, the SEC sent letters to AdvancePCS and Express Scripts, according to the report.

Express Scripts said last week in its quarterly earnings conference call that the SEC raised one revenue-recognition issue in its letter -- whether the company should count co-payments paid by members to drugstores for their prescriptions as revenue. It said it does not count those retail co-payments as revenue, but if it did, it would raise reported revenue for 2001 and 2002.

AdvancePCS told The Journal in a statement that it received a letter from the SEC "regarding previous SEC filings" and is in the process of responding. The company told the newspaper that it believes its accounting practices comply with GAAP but if the SEC comment process results in any changes, the company would "address them in an appropriate manner."