SEC too lenient with secrecy requests, says watchdog

Introduction

The Securities and Exchange Commission’s corporate finance unit is too quick to rubberstamp its approval when publicly-traded companies ask to keep certain information secret from investors, the agency’s watchdog says.

Companies can request so-called “confidential treatment” of information required by the SEC’s disclosure rules when they believe it could hurt their competitiveness. Such information often involves big contracts and their prices, terms, technical specifications, and milestone payment dates.

But the SEC inspector general found that the agency’s corporate finance unit failed to do a thorough review of more than 90 percent of the secrecy requests out of the 3,381 analyzed. In fact, the SEC denial of a request for confidential treatment “is a rare occurrence” that happened only once during the two-year review, the watchdog said in a report.

“As a result, the OIG [Office of Inspector General] believes there is an increased risk that material information to investors may not be disclosed,” the report said.

Many of the secrecy requests from companies flatly stated that disclosure of the information would cause competitive harm. But the SEC should require companies to provide documentation that details specific factors used to assess the potential competitive harm, the report said.

FAST FACT: Because SEC research specialists do a quick screening of every secrecy request, companies often “mimic” certain regulatory language in their applications to win approval, the watchdog said. “We found an extraordinary level of consistency in the form and presentation of a number of confidential treatment requests that we examined.”

Other new watchdog reports released by the Government Accountability Office (GAO), various federal Offices of Inspector General (OIG), and other government entities:

FINANCE

• IRS needs to better detect noncompliance with mortgage debt forgiveness, which lets taxpayers exclude from taxable income forgiven mortgage debt used to buy a home; the exclusion will mean lost federal revenue of $1.4 billion through fiscal 2013 (OIG)
• Export-Import Bank, which financed more than $21 billion in exports in fiscal 2009, faces tough challenge to help double U.S. exports while operating at little or no cost to the taxpayer (GAO).
• HUD should file civil fraud charges and take administrative action against two mortgage lenders that didn’t comply with FHA underwriting standards; Pine State Mortgage Corp. cost the FHA insurance fund more than $1 million, while First Tennessee Bank N.A. cost it $435,574 (OIG).
• IRS should improve its telephone assistance to hearing- and speech-impaired taxpayers (OIG).
• Three Florida thrifts – Turnberry Bank, Olde Cypress Community Bank, and Bayside Savings Bank – failed in July because of risky loans in commercial real estate. Turnberry’s collapse cost the federal bank insurance fund $34.4 million, Olde Cypress $31.5 million, and Bayside $16.2 million (OIG).

HEALTH

• Novartis Pharmaceuticals Corp. agrees to comply with FDA, Medicare, and Medicaid programs in a “corporate integrity agreement” and pays $420 million settlement to resolve allegations that it promoted a drug for off-label uses and paid kickbacks (OIG).

NATIONAL SECURITY

• Homeland Security Dept. should ensure that the Coast Guard maintains effective information technology security program for its intelligence and sensitive information (OIG).
• Homeland Security Dept. should test and evaluate the security technology it has developed to safeguard the nearly 10 million cargo containers that arrive at U.S. ports annually (GAO).

ENVIRONMENT

• Propane Education and Research Council and National Oilheat Research Alliance collected $458 million in assessments through 2008 and spent more than half on consumer education, raising issues about whether this is how Congress intended the money to be spent (GAO).
• For 32 years, the Mining, Safety and Health Administration has failed to take tougher enforcement actions with mines that have recurring safety violations (OIG).

MISC.

• FEMA should improve how it manages the deployment of employees for disaster assistance and eliminate duplicative time-reporting systems (OIG).
• Army Corps of Engineers’ efforts to close some district offices faces congressional opposition, and its project-based funding and cost-sharing requirements are other hurdles to a reorganization (GAO).