SEC chairman blames lack of transparency for market turmoil

The head of the Securities and Exchange Commission said Wednesday that the need for a modern financial reporting system is more pressing than ever, given the current market crisis.

Speaking at a roundtable discussion at SEC headquarters in Washington about his agency's efforts to modernize the financial disclosure system, Chairman Chris Cox said insufficient transparency "is at the heart of today's market problems."

"Never in this agency's history has this fundamental mission been more relevant, and more urgent. The current credit crisis has shown the importance of transparency to a healthy marketplace -- and how costly hidden risk can be," said Cox during his opening remarks. He also listed several actions taken in recent months by SEC to combat fraud and insider trading.

Wednesday's panel was part of SEC's 21st Century Disclosure Initiative, which Cox announced in June. The aim is to modernize the disclosure system so companies report their financial information in a more useful and transparent way to investors and regulators, while also expanding the role of technology.

SEC currently uses the Electronic Data Analysis and Retention system to allow companies to file their financial disclosures online. Panel members, however, said EDGAR is out-of-date and difficult to use, forcing investors and analysts to turn to other places for information about a business' finances.

"It's important that whatever we come up with, it's something that people want to use," said Douglas Chia, senior counsel and assistant corporate secretary for Johnson & Johnson, the pharmaceutical and consumer health care products firm. "Right now you have the EDGAR system and people ignore it, because it's not user-friendly and people don't want to use it."

Matt Reed, assistant director of SEC's 21st Century Disclosure Initiative said EDGAR has been around for almost 30 years as a searchable place to upload government-prescribed forms. In 1992 SEC made it mandatory to submit disclosure materials to EDGAR. Reed agreed the system was obsolete.

"It's cumbersome and hard to get at certain data in the forms," said Reed. Instead, companies such as Bloomberg, Thomson Google and Yahoo! Finance pay for access to the data and reformat it to make it more useful and readable to investors.

SEC announced in August that EDGAR eventually will be replaced by the Interactive Data Electronic Application, which the agency said will cost $48 million and take three years to develop and implement. Reed said the goal of the initiative is to improve on the existing system by eliminating the need for data mining and allowing users to access more easily the information available.

The agency is soliciting public comment on roundtable topics until Oct. 15. Reed said he expected to have a high-level plan by the end of the year outlining the best approach to the modernization effort and its major challenges. He hoped the commission would appoint an advisory committee by January; that committee would then take all of 2009 to examine the planned approach and optimize it.

"We're probably a year and a half from now for specific recommendations, and about three years away from rulemaking," said Reed.