Avon Hoax Embarrassing but Not Easy for SEC to Prevent

NEW YORK (TheStreet) -- One of the biggest strengths of the Securities and Exchange Commission's electronic filing system is how quickly it can share documents containing potentially lucrative information on American businesses with investors looking for the next big trade.

That's also one of its biggest weaknesses, as illustrated Thursday when a phony takeover bid submitted to the agency electronically prompted a brief spike in the stock of Avon (AVP), a cosmetics merchant whose neighborhood sales force made it a cultural icon. The filing outlined an offer of $18.75 a share, or about $8.2 billion, roughly three times Avon's current market value.

For investors who considered SEC filings a reliable source of market-moving information, the incident was a wake-up call. The agency has no system in place to vet the accuracy of each of the 4,000 filings it receives every day. Adding one would not only be costly but would work against e-filing's goal of sharing information rapidly with investors of all kinds -- a goal designed to make stock markets more fair for investors both large and small.

The SEC "operates a disclosure regime based upon the assumption that they want filers to be accurate, but they can't check the accuracy," said James Fanto, a professor of business law and regulation at Brooklyn Law School. "Maybe the system is too accessible."

The system, known as EDGAR, an acronym for Electronic Data Gathering, Analysis and Retrieval, was set up in 1993, and all public companies were required to start using it by May 1996, almost 20 years ago. Today, it consists of a network of computers that allow 300,000 individuals and 28,000 companies and mutual funds to file documents via the Internet.

To gain access, users -- either individuals or companies -- must submit an electronic application with contact and identification information that's been signed and notarized. Once it's accepted, they are given a login, known as a Central Identification Key, that allows them to access the EDGAR platform and generate three more passcodes required to upload filings.

Afterward, the information filers submit is subject to review at the agency's discretion. That doesn't happen with all, or even with most, of the documents.

"EDGAR is an open system by design," said Tom Sporkin, a former SEC enforcement official now at Buckley Sandler LLP in Washington. "EDGAR balances the interests of third parties by allowing them quick access to file ownership positions. Employing a gatekeeper may be a lot of effort to take for a minimal increase in security."

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