Do we need an SEC?

KENNETH KEITH

Sir Kenneth Keith is chairman of the merchant bankers Hill, Samuel and the City's representative on the NEDC.

It was, of course, predictable that the Leasco/Pergamon affair should set off yet another rash of demands for a body like the American Securities and Exchange Commission in this country. There will always be those whose instinctive remedy for any situation is more government control.

I am not against new statutory bodies as such. But equally I do not regard them as the all-purpose antidote for every ill. They are, only too often, the easy way out. In this case the advocates of a new govern- ment authority have neither pinpointed precisely enough the deficiencies in our system of control over takeovers and mergers, nor asked themselves what it is that we really require. If they did so, they might not be anything like so enamoured of the SEC or a British equivalent.

The first essential is to put the whole question in perspective. Although trans- actions which call in question the be- haviour of the parties involved are. in- frequent, they provide excellent copy for journalists. As a result, this small aspect of the City scene is much overpublicised and much overplayed. The steady stream of cases being satisfactorily dealt with week after week gets ignored. As the Takeover Panel pointed out in its first report, only five cases out of 500 handled by it in its first year of operation reached the point where a formal public statement by the panel was required.

If we retain this perspective, we will be prevented from making hasty law on the basis of a tiny minority of cases -which we will certainly later have cause to ?egret. Why, then, the call for an sEc? Its pro- tagonists claim that investors will only feel confident that their interests are being truly protected if a fixed set of rules is provided by legislation; that it is essential, as in America, that these be administered by a government department set up for this purpose, and not by City bodies with no statutory jurisdiction; and that this depart- ment must have legal sanctions with which to deter or punish potential or actual offenders.

In fact these protagonists often confuse the issue by assuming that an SEC and a statutory body are one and the same thing. So let us be quite clear at the outset that an SEC would not be a sensible prototype for this country. The conditions in which it was set up, following the 1929 Wall Street crash, are so different from ours today.

Even more important, the SEC has no direct control over the conduct of take- overs and mergers—which is what we are bothered about. Its influence is confined to ensuring that offer documents meet its normal disclosure requirements and that its general rules regarding stock market deal- ings are not infringed. The most broad- minded City operators would throw up their hands in horror at some of the prac- tices employed in contested situations in the us. The City code has barred most of these practices. The SEC is unable to control them.

Granted, then, that we can dispose of the SEC as such, what about the case for a statutory authority on British lines? I believe the arguments against it are substantial.

One of our greatest needs in this country is to speed up the rationalisation of industry. The bureaucratic procedures of such an authority would be bound to slow it down. This is our experience of other such bodies. It is also the lesson--a pertinent one in this case--of the SEC, which is an extremely cumbersome and restrictive apparatus. It is not in the nature of a statutory body, working through well-observed procedures and to a fixed set of rules, to act with the speed which takeover situations require. Commercially desirable mergers and acquisitions could collapse in the face of movements in market prices during the extended time lag between the announce- ment of a deal and its implementation. The legalistic paper work and expenses involved in takeovers would be increased. Any in- crease in complexity could result in share- holder paralysis rather than protection. It might be a bonanza for the lawyers. But it would not be a bonus for British industry.

It is, too, virtually inconceivable that a parliamentary draftsman could produce statutory rules of conduct to cover all the situations likely to arise, or that a govern- ment department would retain the initiative or flexibility to deal adequately with situa- tions not covered by the book of rules. Once the rules had been produced, the task of the civil servants—conscientious but not versed in corporate practice—would simply be to -ensure that they were not infringed. The panel, retaining its flexibility and staffed by men with practical experience of take- over situations, will be much more effective.

Finally, with a statutory body the most vigorous minds would yet again be em- ployed on their clients' behalf in search of avoidance procedures and loopholes in the rule book, rather than in more constructive directions.

If, of course, it could be shown that a statutory body was the only method of overcoming such deficiencies as still exist, then the case for it would look somewhat stronger. But in fact it is not. The problems can be tackled more effectively in other ways, without the disadvantages I have described. The objective, on which we are all agreed, is to provide a system which enables investors to take decisions in the light of full and up-to-date disclosure of a company's affairs; and in which they are

protected against financial damage result

from any attempts to indulge in • practice'. This can best be achieved in

ways; first by raising the standards disclosure of information; and seo by improving the operations of the pj and the Stock Exchange.

In certain respects our criteria corporate disclosure are clearly inadeq and they need to be extended into o areas. The sort of things I have in m are that year-end profit and loss accou and balance sheets should be published later than three months from the end the financial period; that details should disclosed of trading arrangements, • resulting profits, between a company • any other company in which its direct are substantial shareholders; and that dealings in the securities of a company any of its officers should be disclosed the following day.

Allied to this is the question of h expressions of opinion in takeovers • mergers, particularly profit forecasts, sho be dealt with. The City code results boards giving considerable thought, xx their financial advisers and accountants. published forecasts in takeovers. This is difficult area; profit forecasts or ot expressions of opinion are by their flat imprecise and imperfect articles. 0 quarrel, therefore, is not with the for- given in good faith and realistically ma on the basis of the available facts—even it turns out to be wrong; but with the to cast or comment which reflects the bou less optimism convenient to a board directors at a particular time. The arts might be to give all documents issued shareholders the legal status of a pros tus so that investors would have a right action against directors where it can shown that any statements were made %%i out due care and attention in the light prevailing circumstances.

Legislation on these points would go long way to rectifying some of the r troubles. As for the enforcement bod the panel even in its infancy has made significant and professional contributi and a useful start has already been m• in building up case law. Time and ex ence will enable it to improve its perfo ance. It deserves a longer period of It to prove itself. It has two great advanta over a statutory body. It can act in knowledgeable and incisive manner A the flexibility which highly fluid situan require. And, most important, it can that the spirit as well as the letter of , Code is observed.

Its critics question the effectiveness of sanctions and the area of its jurisdic On the first I have no doubts. It alre has very effective sanctions against institutions. In practice it will also h sanctions over corporate clients who re against the advice of their City advisers, act within the rules of the game. For if a result their quotation on the stock ma is withdrawn, they will soon find themse in trouble with their shareholders. possibility of being debarred from capital markets and the financial achiC the City in the future would be an more potent deterrent. Such a penalty needs to be suffered once to stop an) else from following suit.

On the second, the recent ruling of panel's own appeal committee that scope can be extended outside the of a particular deal to a wider inves

of City practices will, I believe, strengthen the panel as now constituted by showing that it can be an adequate watchdog of City affairs in general.

The Stock Exchange carries out the function of vetting documents to be issued in connection with prospectuses or take- overs. These activities could be extended to policing the statutory disclosure required in all corporate documents. Liaison with the Board of Trade with a view to prosecution in those cases where it discovered non- disclosure of statutory information would make it a truly effective controlling body.

To conclude, substantial progress has been made in recent years in policing take- overs and mergers, although there are still areas where tightening up is required. But neither an SEC nor any other statutory body is an appropriate mechanism for British law and practice. Our need is legislation as to content, not legislation as to conduct.