Page images
PDF
EPUB

Background and Objectives, Scope, and Methodology

Background

The Securities Act of 1933 and the Securities Exchange Act of 1934
together mandate the principle of full disclosure. Full disclosure
requires (1) disclosure of sufficient information concerning an invest-
ment opportunity to enable prospective investors to make an informed
investment decision, and (2) a continuous flow of information to inves-
tors (ensured by periodic reporting requirements). SEC is mandated by
law to disseminate such information to the public, although the specifics
of how this should be accomplished are left to the agency. SEC makes
information available at public reference room facilities in its Washing-
ton, D.C.; New York; and Chicago offices. These public reference facili-
ties maintain current and historical corporate filings (documents
disclosing material financial and other information companies must file
with SEC), SEC releases, and other public documents in paper and
microfiche format. At these facilities, the public may inspect documents
and obtain copies for a fee.

SEC receives corporate filings in multiple copies in paper form at its
headquarters office in Washington, D.C. It transfers these filings to
microfilm copies, called microfiche, which have served as the official SEC
records since 1979. The agency has a contractor who microfilms, from
paper copies supplied by SEC, all filings it receives. Paper copies are
maintained in the reference room in Washington, D.C., for about 30
days, until the contractor delivers microfiche copies.

When SEC's reference room was moved to its current location at 450 5th St., N.W., Washington, D.C., the microfiche files were initially closed to the public, and SEC staff filled the public's requests. (The files were completely open to the public in the prior location.) However, increased demand for microfiche files without a commensurate increase in SEC staff soon led the agency to open the files to the public again. According to SEC staff, the microfiche files became disorderly. On June 20, 1988, SEC closed direct public access to the microfiche files to regain control of and restore order to the files and to implement a new filing system. Regular users expressed concern over being denied direct access to the files and also expressed dissatisfaction with other aspects of the reference room's operation.

The reference room in Washington, D.C., is used primarily by employees of companies (called regular users) who research and sell to clients copies of and information from corporate filings and other documents. The number of filings made with the SEC has increased significantly in recent years, as has the demand for information from those filings and the number of regular users. Regular users may be assigned space in the

Appendix I
Background and Objectives, Scope,
and Methodology

reference room (designated desks or carrels) at no charge and are permitted to install telephones at their own expense. Of 64 carrels, 48 are assigned to regular users, with the remaining 16 designated for the public.

The microfilm contractor does not charge SEC for the microfiche it produces for the agency. The contractor provides photocopying and microfiche copying machines in the reference room and charges the public (including regular users) SEC-approved prices for these copying services. The contractor also sells information from and copies of corporate filings and other documents to clients in competition with regular users of the reference room. In contrast to regular users, the contractor is not assigned space in the reference room and uses its own copies of filings, received for microfilming purposes, and the copies and microfiche it produces from them to provide these services.

During the interval between the time SEC receives a filing in paper form and the time the microfiche copy is made, a paper copy is available in the reference room for inspection and copying. There is considerable demand for many of these filings, particularly when they are initially received in the reference room. In order to facilitate initial access, paper copies are systematically circulated among regular users who wish to use or copy them (“rotation"). Each regular user may use the paper documents on rotation for specified periods of time, from 1 to 1-1/2 hours, depending on the type of filing.

Demand is especially great for certain filings called Williams Act (82 Stat. 454, as amended) filings. These filings contain particularly timesensitive information relating to mergers and acquisitions that can be extremely valuable to potential investors. Recognizing this demand, SEC makes two copies of these filings available hourly in the reference room for inspection and copying and has provided two separate rotations among users for these filings.

An additional single copy of Williams Act filings is also made available hourly to SEC's contractor for producing microfiche copies, and these copies are placed in a tray separate from the container in which all other filings are placed. The contractor picks up other filings in batches twice daily. The contractor's copies are made available in SEC's document control center, a room across the lobby from the public reference

room.

Background and Objectives, Scope,
and Methodology

Until July 1988, the contractor's copies of Williams Act filings were made available before these filings were delivered to the reference room. Since then, the contractor's copies have not been made available until after copies have been delivered to the public reference room.

Objectives, Scope, and
Methodology

As stated previously, our objectives were to (1) identify the concerns of regular users of SEC's Washington, D.C., public reference room, (2) obtain SEC staff views on these concerns, (3) provide any observations and recommendations we had on areas of concern, and (4) identify and give opinions on relevant legal issues.

In August 1988, we interviewed nine regular users of the reference room who contacted us or were referred to us. The regular users related many complaints. We identified six areas that were of concern to more than one regular user, that is, at least two of the nine users had the same complaints. (See app. II.)

After changes in the reference room rules became effective in November 1988, we again interviewed regular users. We broadened our contacts to include all regular users of the reference room who were assigned carrels (21 firms) plus 2 other regular users. Eighteen regular users responded, and they indicated that two of the original six areas of concern remained after November 1988. To qualify as a remaining area of concern, a complaint had to be common to at least 4 of the 18 regular users, equivalent to the same proportion used for identifying the earlier six concerns.

The same two remaining areas of concern would have emerged if the threshold level of commonality had been three instead of four. We also note that each of the two remaining areas of concern were common to 10 or more regular users.

Appendix II

Earlier Concerns of Regular Users

Six areas of concern emerged from our interviews with regular users in
August 1988. According to them:

Closed microfiche files forced users who needed such materials quickly
to buy them from SEC's microfiche contractor.
SEC's contractor for producing microfiche copies of corporate filings
received paper copies of certain time-sensitive filings (Williams Act fil-
ings) before they were available in the reference room. This provided
the contractor with an unfair advantage over other vendors in market-

ing this information.
• SEC did not provide sufficient notice and opportunity for comment on

changes in reference room procedures.
• The rotation system for circulating paper copies of new filings among

regular users in the reference room was not a true rotation but a fixed
routing favoring older, established regular users.
SEC did not establish clear and fair criteria for assigning carrels in the
reference room to regular users. Those users assigned carrels were
allowed to install phones (at their own expense), thereby facilitating
their ability to market information to customers.
Staff was insufficient and inadequately trained.

.

SEC Actions and Remaining Concerns of
Regular Users

SEC Actions

About the time we began our work, management of the reference room
was transferred to SEC's Office of Applications and Report Services.
Staff in that office have many years of experience in managing SEC's
"staff only” microfiche files. SEC hired and trained new employees to
work in the reference room and established goals for filling microfiche
requests within specified times. The room was extensively remodeled
and two electronic boards were installed to display titles of Williams Act
filings about to be delivered in the reference room.

SEC reallocated carrels in November 1988 to provide at least one
assigned space for each regular user who requested carrels and whose
primary business was information research and dissemination of refer-
ence room materials. Additional carrels were allocated on the basis of
the number of years a firm was located in the reference room, the
number of employees per firm using the reference room, and the number
of times those employees were actually in the reference room. Carrel
allocations are temporary. Depending upon the number of applicants
and other considerations at the time, different criteria may be used
when SEC reexamines carrel allocations in July 1989.

SEC also adopted new rules for the operation of its reference room in November 1988. Among the changes in rules was a new system for rotating filings among regular users. This system eliminates the fixed routing system that favored older, established regular users. SEC now prepares lists governing the order in which each regular user will receive a copy of each type of paper filing. Regular users must apply in writing for this privilege. Each week SEC issues a new rotation list for each filing type such as corporate annual reports (10K) or quarterly reports (10Q). Each week the regular user that was first to receive the particular filing type the prior week moves to last place on the list for that filing type, and in each succeeding week the user will move up one place on the list.

When we again interviewed regular users after the SEC actions described above became effective, we found that the number of areas of concern had declined to two. In these latter interviews, regular users frequently commented favorably upon management efforts and changes in the reference room. While they were opposed to closed microfiche files, many users noted a more rapid turnaround for microfiche requests. Many firms also noted the fairness of the criteria for allocating carrels, improved staffing, and the fairness of the system for rotating filings.

« PreviousContinue »