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Securities and Exchange Commission17 CFR PARTS 210, 229, 240 and 249[RELEASE NOS. 33-8128; 34-46464; FR-63; File No. S7-08-02]RIN 3235-AI33 Acceleration of Periodic Report Filing Dates and Disclosure Concerning Website Access to ReportsAgency: Securities and Exchange Commission Action: Final rules Summary: We are adopting amendments to our rules and forms to accelerate the filing of quarterly and annual reports under the Securities Exchange Act of 1934 by domestic reporting companies that have a public float of at least $75 million, that have been subject to the Exchange Act's reporting requirements for at least 12 calendar months and that previously have filed at least one annual report. The changes for these accelerated filers will be phased-in over three years. The annual report deadline will remain 90 days for year one and change from 90 days to 75 days for year two and from 75 days to 60 days for year three and thereafter. The quarterly report deadline will remain 45 days for year one and change from 45 days to 40 days for year two and from 40 days to 35 days for year three and thereafter. The phase-in period will begin for accelerated filers with fiscal years ending on or after December 15, 2002. We also are adopting amendments to require accelerated filers to disclose in their annual reports where investors can obtain access to their filings, including whether the company provides access to its Forms 10-K, 10-Q and 8-K reports on its Internet website, free of charge, as soon as reasonably practicable after those reports are electronically filed with or furnished to the Commission. Dates: Effective Date: November 15, 2002. For Further Information Contact: Jeffrey J. Minton, Special Counsel, or Elizabeth M. Murphy, Chief, Office of Rulemaking, at (202) 942-2910, Division of Corporation Finance, U.S. Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0312. Supplementary Information: We are adopting amendments to Rules 3-01,1 3-092 and 3-123 of Regulation S-X4 and Item 1015 of Regulation S-K6 under the Securities Act of 1933 ("Securities Act"),7 Forms 10-Q8 and 10-K9 under the Securities Exchange Act of 1934 ("Exchange Act")10 and Exchange Act Rules 12b-2,11 13a-1012 and 15d-10.13 Table of ContentsI. Background and Overview of Rule Amendments A. The Exchange Act Reporting System 1. Phase-In of Accelerated Deadlines 2. Definition of Accelerated Filer 3. Conforming Amendments for Other Commission Filings 4. Disclosure Concerning Website Access to Company Reports A. Reporting Deadlines for Annual and Quarterly Reports B. Definition of "Accelerated Filer" 1. Timeliness Requirements in Other Commission Filings 2. Time Allowed to Incorporate Form 10-K Information From Definitive Proxy or Information Statements 3. Form 10-K Schedules Required by Article 12 of Regulation S-X 4. Financial Statement Filing Requirements in Rule 3-05 of Regulation S-X and Item 7 of Form 8-K D. Website Access to Information VI. Final Regulatory Flexibility Analysis VII. Update to Codification of Financial Reporting Policies VIII. Statutory Authority and Text of Rule Amendments I. Background and Overview of Rule AmendmentsA. The Exchange Act Reporting SystemThe Exchange Act requires public companies to make information publicly available to investors on an ongoing basis to aid in their investment and voting decisions.14 Issuers that have been subject to the reporting requirements for a certain period of time also can incorporate information from their Exchange Act reports into their registration statements under the Securities Act. Investors purchasing securities in public offerings therefore also rely on Exchange Act disclosure. The Commission's rules under the Exchange Act now require disclosure at quarterly and annual intervals, with specified significant events reported on a more current basis.15 Specifically, a domestic issuer subject to the Exchange Act must, among other obligations, file the following reports:16
In addition, a company may be required to file transition reports on Form 10-K or 10-KSB or Form 10-Q or 10-QSB when it changes its fiscal year.21 B. Proposing ReleaseIn April 2002, we published for comment proposals to shorten the filing deadlines of quarterly and annual reports for many companies as a step in modernizing the periodic reporting system and improving the usefulness of periodic reports to investors.22 The annual and quarterly report deadlines were last changed 32 years ago.23 We proposed accelerating the deadline for annual reports from 90 days to 60 days after the end of the company's fiscal year and accelerating the deadline for quarterly reports from 45 days to 30 days after the end of the company's first three fiscal quarters. These proposals would have applied to companies that met the definition of an "accelerated filer" as of the end of their first fiscal year ending after October 31, 2002. We proposed the definition of an accelerated filer to include companies that had a public float24 of at least $75 million, that had been reporting for at least 12 months and that previously had filed at least one annual report. We also proposed to require a company subject to these accelerated filing deadlines to disclose in its annual report on Form 10-K where investors can obtain timely access to company filings, including whether the company provides access to its Forms 10-K, 10-Q and 8-K reports on its Internet website, free of charge, as soon as reasonably practicable after, and in any event on the same day as, these reports are electronically filed with or furnished to the Commission.25 Under the proposals, a company that did not provide website access in this manner would have been required to disclose why it did not do so and where else investors could access these filings electronically immediately upon filing. The company also would be required to disclose its website address, if it has one. We received responses to our proposals from 305 commenters.26 302 commented on the acceleration of periodic report deadlines. Generally, these commenters fell into two groups. The first group (20 commenters) represented primarily investors, institutional investors and other users of company reports who supported the proposals and our objective to provide investors with more timely access to company filings. The second group (282 commenters) represented primarily companies, business associations, law firms and accounting firms who opposed the extent of acceleration and length of transition period proposed because, in their view, preparing reports in the proposed timeframes would be too burdensome and could result in less accurate filings. However, many offered alternatives with longer transition periods or filing deadlines or alternative measures to limit the number of accelerated filers. Most of the 141 commenters expressing a view on the proposals concerning website access supported them, although some suggested refinements. C. Final Rule AmendmentsWe have considered the commenters' views and have modified the proposed amendments to reflect these comments. A summary of the final rules follows: 1. Phase-In of Accelerated DeadlinesCommenters representing investors, investor groups and other users of financial information favored receiving reports within a shortened timeframe. Most of the commenters who objected to the proposals believed that the proposals were too aggressive in terms of the extent of acceleration and the speed with which we expected companies to begin complying with accelerated deadlines. These commenters offered alternatives to reduce the potential costs and burden to registrants and a possible inadvertent negative impact on disclosure quality. Also, while comments were mixed, the majority of commenters addressing the issue believed it would be more difficult to accelerate filing of the quarterly report than the annual report. As we stated in our Proposing Release, in establishing the appropriate timeframes for filing periodic reports, we must balance the market's need for information with the time companies need to prepare that information without undue burden. Accordingly, in response to comments, we are phasing-in accelerated deadlines over a three year period, with no change in deadlines for the first year and a less extensive ultimate acceleration of the quarterly report deadline. For companies that meet our revised definition of accelerated filer as of the end of their first fiscal year ending on or after December 15, 2002, the annual report deadline will remain 90 days for year one and will then be reduced 15 days per year over two years to 60 days. The quarterly report deadline for these filers will remain 45 days for year one and will then be reduced five days per year over two years to 35 days. We also are making conforming amendments to transition reports filed by accelerated filers. These changes are summarized in the following table:
2. Definition of Accelerated FilerComments were mixed on the proposed definition of accelerated filer. Several commenters believed all public companies should be subject to the same filing deadlines, regardless of a company's size or experience in preparing filings. Other commenters agreed with the notion of excluding smaller companies that may not have the necessary resources and infrastructure to report on an accelerated basis. Comments also were somewhat mixed on the proposed use of public float as a method to differentiate between companies. Several commenters thought the $75 million public float threshold was too low. After evaluating the comments, we are adopting the proposals substantially as proposed with some minor clarifications. Under the final rules, accelerated deadlines will apply to a company after it first meets the following conditions as of the end of it fiscal year:
While we agree that there would be benefits from accelerating deadlines for all companies, we must balance the market's need for information with the ability of companies to prepare that information without undue burden. We are adopting the reporting history requirements and the $75 million public float threshold substantially as proposed, although we changed the determination date for the public float requirement to give companies more time to prepare for accelerated reporting. We believe that a public float test serves as a reasonable measure of size and market interest. A one-year reporting history requirement and a $75 million threshold excludes nearly half of all publicly traded companies from the category of accelerated filers. These requirements are based primarily on the current eligibility requirements for short-form registration and "shelf registration."27 Further, we believe the adoption of a three-year phase-in period for accelerating deadlines and a less extensive acceleration of the quarterly report deadline militates against the need to raise the threshold. 3. Conforming Amendments for Other Commission FilingsIn the Proposing Release, we requested comment on several possible conforming revisions to other Commission rules as a result of the proposals. Based on the responses we received, we are making several conforming amendments. We are adopting amendments to Regulation S-X to conform the timeliness requirements for the inclusion of financial information in other Commission filings, such as Securities Act and Exchange Act registration statements and proxy statements and information statements under Section 14 of the Exchange Act.28 Under the conforming amendments, financial information included in these documents still will be required to be at least as current as financial information filed under the Exchange Act. However, in response to the concerns of commenters, separate financial statements of subsidiaries not consolidated and 50% or less owned persons required by Rule 3-09 of Regulation S-X will not be accelerated for inclusion in a company's annual report on Form 10-K if the subsidiary or 50% or less owned person is not an accelerated filer. Companies will be able to file these financial statements by amendment within the existing time periods.29 We also are adopting as proposed conforming amendments to maintain an extra 30 days for companies to file schedules required by Article 12 of Regulation S-X30 as an amendment to their annual report on Form 10-K, if needed. As proposed, we are not shortening the period of time companies have to file their definitive proxy or information statements to allow the incorporation by reference of information required by Part III of Form 10-K. We also are not making conforming revisions to the financial statement filing requirements in Rule 3-05 of Regulation S-X31 and Item 7 of Form 8-K for financial statements of businesses acquired. 4. Disclosure Concerning Website Access to Company ReportsThe vast majority of commenters-representing investors, investor groups, companies and professional associations-supported the proposals that would require disclosure concerning website access to company reports. Accordingly, we are adopting the disclosure requirement substantially as proposed with minor modifications. Since the Proposing Release, we have arranged for real-time access to companies' electronically filed periodic reports through our Internet website.32 Elimination of the 24-hour delay in accessing EDGAR reports on our website substantially facilitates provision by companies of free, real-time website access to their reports by hyperlinking to our website. We also have eliminated two of the proposed disclosure elements to minimize the amount of disclosure required. As adopted, the amendments require accelerated filers to disclose the following in their annual reports on Form 10-K beginning with reports for fiscal years ending on or after December 15, 2002:
II. Discussion of AmendmentsA. Reporting Deadlines for Annual and Quarterly Reports1. Proposed RulesThe proposed rules would have shortened the filing due date of annual reports from 90 days to 60 days after the end of a company's fiscal year and the filing due date of quarterly reports on Form 10-Q from 45 days to 30 days after the end of a company's first three fiscal quarters for companies that met our proposed definition of "accelerated filer."33 We proposed similar conforming amendments for transition reports filed on Forms 10-K and 10-Q by an accelerated filer when it changes its fiscal year. As discussed in the Proposing Release, we believe that periodic reports contain valuable information for investors. While quarterly and annual reports at present generally reflect historical information, a lengthy delay before that information becomes available makes the information less valuable to investors. While the specific disclosure required in periodic reports has evolved over the past 30 years, and the integrated disclosure system has placed added emphasis on Exchange Act reporting, the basic structure and timeframes that were established in 1970 remain in place today. The more extensive information in periodic reports is evaluated by investors and particularly analysts and institutional investors as a baseline for the incremental disclosures made by a company. These reports also contain more detailed information that is essential to conduct comparative analyses, as this information is often not contained in earnings releases or other incremental disclosures. Moreover, the information in Exchange Act reports, due to its required nature and the liability to which it is subject, provides a verification function against other statements made by the company in press releases and other public announcements. Investors and other users of the reports can judge previous informal statements by the company against the more extensive and mandated disclosure provided in the reports that have been reviewed by independent public accountants and other advisors.34 Accelerating the availability of this information will enable this verification to occur at an earlier point in time. Accelerating the availability of these reports also may increase the relevance of the reports, as the timeliness of information has considerable value to investors and the markets. In addition, many public companies issue press releases to announce quarterly and annual results well before they file their reports with us. These earnings announcements reflect the importance of financial information and investors' demand for it at the earliest possible time. Assuming that companies are collecting and evaluating information before they issue these announcements, the availability of this information also suggests that much of the process involved in preparing the financial information contained in periodic reports is substantially complete. However, these earnings announcements themselves are generally less complete in their disclosure than quarterly or annual reports, and they can emphasize information that is less prominent in quarterly or annual reports.35 Investors often must wait for the periodic reports to receive financial statements and the accompanying notes prepared in accordance with generally accepted accounting principles, management's discussion and analysis, or MD&A, and other vitally important financial disclosures. These additional disclosures increase transparency for investors. In establishing the appropriate timeframes for filing periodic reports, however, we must balance the market's need for information with the time companies need to prepare that information without undue burden. Significant technological advances over the last three decades have both increased the market's demand for more timely corporate disclosure and the ability of companies to capture, process and disseminate this information. However, we acknowledge that, while the deadlines for filing periodic reports have not changed in over 30 years, the disclosure requirements have changed and some companies, particularly those with widespread operations, face additional complexities in today's environment. Not all companies, particularly small and unseasoned companies, may have the resources and infrastructure in place to prepare their reports on a shorter timeframe without undue burden or expense. Our amendments must speed the flow of information to investors without sacrificing accuracy or completeness or imposing undue burden and expense on registrants. 2. Comments on the ProposalWe received responses from 302 commenters on the proposals to accelerate periodic report deadlines. Generally, these commenters fell into two groups. The first group (20 commenters) represented primarily investors, institutional investors and financial analysts who supported the proposals and our objective to provide investors with more timely access to company filings. The second group (282 commenters) represented primarily companies, business associations, law firms and accounting firms who opposed the extent of acceleration and transition period proposed because, in their view, preparing reports in the proposed timeframes would be too burdensome and could result in less accurate filings. Most of these commenters believed that any incremental benefit from the speed and extent of acceleration proposed was insufficient to warrant the added burdens on registrants and the risk of diminished disclosure quality, although these commenters generally did not analyze the benefits from the perspective of users of the reports. Many commenters representing investors, users of financial information and several companies believed that shortening deadlines will improve the delivery and flow of reliable information to investors and capital markets and assist in the efficient operation of the markets.36 These commenters emphasized the importance of the extensive information in periodic reports and investors' demand for it at the earliest possible time.37 Several other companies, accounting firms and professional associations agreed in concept that shortening due dates would improve the flow of information, but believed the due dates should reflect concerns about the quality of information to be filed.38 A few companies, law firms and business organizations, however, believed that existing deadlines and market practices are sufficient to satisfy investors' needs.39 These commenters did not think a significant benefit would result from shortening deadlines, but also generally did not attempt to address the question of possible benefits from the perspective of users of the reports. While some companies commented that they could or already comply with the proposal without undue burden,40 the group that objected to the proposal raised several common concerns over the extent of acceleration and transition period proposed. The most common concern was that the proposed deadlines would negatively affect the quality and accuracy of reports.41 According to one professional association, two-thirds of its survey respondents expected a reduction in the precision of reported information under the original proposals.42 Many commenters thought the proposals were contrary to other initiatives that the Commission has undertaken to increase the quantity and quality of company disclosure. Many believed that focusing on and improving accuracy and quality should be the objective, not speed. Another common concern was that the proposed deadlines would impair the ability of management, external auditors, boards of directors and especially audit committees to scrutinize and review filings properly and give appropriate consideration to the form, substance and priority of disclosures, especially MD&A disclosures and financial statement footnotes.43 These commenters feared that disclosures could be reduced or become more boilerplate if companies have less time to prepare and review them. These commenters believed that accelerating deadlines in the manner proposed would also undermine the governance and review mechanisms that have been put in place to ensure quality. We have separately proposed and the Sarbanes-Oxley Act of 2002 establishes new requirements to ensure that procedures are in place to ensure that a company is able to collect, process and disclose the information required in its periodic reports and for senior officers to certify the accuracy of those reports.44 A third concern was that advances in technology over the past 30 years have been largely offset by increases in accounting and disclosure requirements.45 Business operations have also become increasingly global and complex, further complicating report preparation. These commenters argued that technological advances that have allowed companies to generate earnings results quickly in an earnings release do not address the additional analysis necessary to prepare periodic reports. Processes and systems would need to be changed to report on an accelerated basis. Commenters objecting to the original proposals also were concerned that companies would face an increased burden in preparing reports, particularly with respect to increased costs and audit fees. While a few commenters believed that the original proposals would not have a significant adverse effect on the cost of preparing reports,46 most who addressed the subject mentioned that the original proposals would result in increased costs.47 Many commenters outlined their process of preparing reports to demonstrate the difficulties of accelerating the process.48 Several commenters provided detailed timelines. The particular steps and timing varied depending on the individual company, and not all companies appear to be at the same level of technological sophistication and staffing for preparing reports. Two professional associations noted that there are no current best practices for preparing reports.49 As a result, the few cost estimates received varied widely, and many commenters were unable to provide estimates. One company believed it was not possible to put a dollar value on such costs, as it depends on the quality and flexibility of each registrant's present systems, processes and staff.50 According to one professional association that surveyed its members, 52% of its survey respondents reported that they expected costs to increase in order to comply with the original proposals.51 Forty-five percent of respondents indicated they would have to hire additional staff, and 27% of respondents indicated they would have to buy or develop additional systems. Other commenters were concerned that the original proposals would result in increased audit fees, particularly for companies with a calendar fiscal year-end, given a compression in the amount of time available for auditors to complete their work for these companies. Objecting commenters mentioned additional concerns over the original proposals, such as an increased need to use estimates to prepare reports52 or an increased risk of amendments or restatements because of rushed preparation.53 Several commenters were especially concerned about accelerating deadlines now given recent events with Arthur Andersen LLP.54 While comments were mixed, many commenters said that while most audit and review work is substantially complete before the earnings release or the proposed deadlines, the process of preparing reports, including the financial statements and footnotes, is not.55 However, other commenters noted that the audit and review process is far from complete by the time a company issues an earnings release and little, if any, assurance can be ascribed to the publicly disclosed results.56 While some commenters prepare their reports concurrently with the earnings release, most described the process as a series of sequential steps where the company first closes its financial books, then prepares and releases its earnings release and then turns its attention to the periodic reports. Some companies would need to revise their internal processes to prepare their reports on a more concurrent basis with the earnings release. Several companies expressed concern that the proposals would be difficult for companies that operate on a decentralized basis with many subsidiaries and operations to consolidate, especially when the subsidiaries and operations are located worldwide or in emerging markets.57 Slightly less than half of those objecting to the proposals (129 commenters) did not think any acceleration of deadlines was warranted.58 However, slightly more than half of those objecting (153 commenters) objected because they believed the Commission was too aggressive in its proposal.59 Many of these commenters generally supported the Commission's objective to provide investors with more timely access to company information and offered alternatives to reduce the potential costs and burden to registrants and any negative impact on disclosure quality. These alternatives fell roughly into three categories:
In addition to the comments received on the Proposing Release, earlier this year we hosted an investor summit in Washington, DC.64 The summit offered individual investors nationwide an opportunity to ask questions and offer comments about our regulatory agenda. Most participants at the investor summit mentioned their support for our proposals to accelerate the delivery of periodic reports to investors.65 As mentioned in the Proposing Release, we also hosted roundtable discussions in New York, Washington, DC, and Chicago earlier this year at which investor relations professionals, corporate executives, academics and experienced legal counsel discussed financial disclosure and auditor oversight.66 Several participants at these roundtables indicated that reporting within the proposed shortened deadlines was feasible.67 Some participants, however, referred to the comment letters on our 1998 request for comment on accelerating deadlines,68 and were concerned about the ability of companies, and smaller companies in particular, to report in a shorter timeframe.69 They thought that accelerating deadlines could cause the quality of reports to diminish.70 One participant was concerned that shortened deadlines may present more problems for quarterly reports than for annual reports.71 After careful consideration of the comments received, we are adopting a phased-in approach of accelerated deadlines, with no change in deadlines for the first year and a less extensive ultimate acceleration of the deadline for quarterly reports. Specifically, we are phasing-in accelerated deadlines for accelerated filers according to the following schedule:
We also are accelerating the due dates for transition reports by accelerated filers on Form 10-K and 10-Q on the same schedule. These conforming changes will ensure that the deadlines for transition reports remain similar to the deadlines for periodic reports.72 We also are making technical corrections to the codification of financial reporting policies to reflect our amendments. According to the amendments, if a company with a calendar year fiscal year-end determines it is an accelerated filer as of December 31, 2002 (its first fiscal year ending on or after December 15, 2002), its annual report on Form 10-K for that fiscal year will continue to have a 90 day filing deadline and will be due by March 31, 2003.73 Each of the Form 10-Q reports for the first three quarters of its 2003 fiscal year will continue to have a 45-day deadline. For example, the Form 10-Q for the company's first fiscal quarter ending March 31, 2003 will continue to be due by May 15, 2003. The Form 10-K for the fiscal year ending December 31, 2003 will have a 75-day deadline and will be due by March 15, 2004. Each of the Form 10-Q reports for the first three quarters in the 2004 fiscal year will have a 40-day deadline. For example, the Form 10-Q for the company's first fiscal quarter ending March 31, 2004 will be due by May 10, 2004. The Form 10-K for the fiscal year ending December 31, 2004 will have a 60-day deadline and will be due by March 1, 2005. Each of the Form 10-Q reports for the first three quarters in the 2005 fiscal year will have a 35-day deadline. For example, the Form 10-Q for the company's first fiscal quarter ending March 31, 2005 will be due by May 5, 2005. All subsequent reports on Form 10-K and 10-Q by the accelerated filer will be subject to a 60 and 35-day deadline, respectively. In establishing this schedule for accelerated deadlines, we agree with the suggestions of many commenters that appropriate focus should be directed toward report quality.74 We also agree with investors and other users of financial information that timeliness of information is important. Increased quality and timeliness, with an appropriate balance between the two, assures that investors receive the full and reliable data they deserve at the speed in which they desire it. A phased-in approach of accelerated deadlines allows a greater transition period for companies to adjust their procedures and to develop efficiencies to ensure that the quality and accuracy of reported information will not be sacrificed. Under a phased-in approach, companies will have additional time to plan for and adjust their reporting schedules and processes to ensure that the necessary reviews will not be compromised. Given the recent enactment of the Sarbanes-Oxley Act of 2002, a phased-in approach also allows companies to adjust to significant new changes and requirements in the reporting system. At the same time, a phased-in approach allows investors to begin to experience the benefits of an accelerated flow of information. A phased-in approach also will provide the Commission with an opportunity to understand how each incremental change affects the disclosure process. A phased-in approach helps to alleviate the immediate impact of any costs and burdens that may be imposed on certain registrants. While several commenters indicated that they could report on an accelerated timeframe today, several major business associations that surveyed their members reported that adjustment to accelerated deadlines would be easier with a longer phase-in period.75 A longer transition may even help reduce costs as companies will have additional time to develop best practices, long-term processes and efficiencies to prepare reports, as opposed to having to take rushed and possibly inefficient measures to meet a more sudden acceleration.76 Also, a longer transition period helps to smooth out any possible impact on the availability of third party advisors used by companies to prepare their reports. A less extensive acceleration of the quarterly report deadline also will alleviate some of the burdens mentioned by commenters. There will be more time than proposed to gather the necessary data and complete the necessary reviews by company officials, the board of directors and outside advisors. One professional association commented that 80% of its survey respondents reported they could more easily meet a 35-day deadline than a 30-day deadline.77 Further, we believe that by imposing a 40-day deadline before finally reducing it to 35 days, we are striking an adequate compromise between the benefits of reducing deadlines with the potential inconvenience, difficulty and cost that may be incurred by some companies. We considered, but rejected, the alternative of tying the due date of reports to a company's announcement of earnings. Not all companies issue earnings releases or issue them on an accelerated basis. As a result, linking deadlines to earnings releases may not result in more accelerated reporting of information. We also were concerned that linking report deadlines to earnings announcements could delay earnings announcements, as companies would know that the announcement would trigger the deadline to file reports. While market demand for earnings information could negate this risk, an approach linking deadlines to earnings announcements could have the effect of penalizing companies for early releases of information while rewarding companies that delay their earnings with extended time to file their reports. Even with a phase-in period, accelerating filing deadlines may create the risk that more companies will file their reports late or need a filing extension. Moreover, if a company is late filing its reports, it will lose availability for short-form registration for at least one year from the date of the late filing. Being late also could render Securities Act Rule 144 temporarily unavailable for security holders' resales of restricted and control securities, and make new filings on Form S-8 temporarily unavailable for resales of employee benefit plan securities.78 We considered the suggestions of some commenters to extend the filing extension periods in Exchange Act Rule 12b-25 as an additional method to alleviate any transition difficulties to shortened deadlines.79 However, we think a lengthy phase-in period adequately addresses these concerns. A less dramatic acceleration of deadlines over a set schedule each year will provide companies with advance notice of the changes they will be expected to make and will smooth out some of the possible difficulties raised by commenters. Rule 12b-25 in its existing form still will provide companies that face extenuating circumstances the ability to gain a filing extension of five calendar days for quarterly reports and fifteen calendar days for annual reports. While our proposals did not directly address the contents of earnings releases, many commenters supported additional efforts by the Commission in this area. Several recommended that earnings or other standardized earnings information be filed with the Commission, such as on Form 8-K.80 Others thought the Commission should consider issuing or promoting minimum requirements or guidelines for the contents of earnings releases, such as a GAAP reconciliation.81 While we will continue to explore ways to improve earnings releases, and the Sarbanes-Oxley Act of 2002 requires us to take steps in this area, we believe these are separate initiatives from the need to accelerate periodic report deadlines.82 We recognize that the information in periodic reports is more extensive than that contained in earnings releases, and that it would be difficult to eliminate any gap between the earnings release and the filing of the report. As mentioned above, however, we believe periodic reports contain valuable information for investors, and comments received from the users of this information uniformly indicated their desire to receive the reports at the earliest time that is consistent with receiving quality information.83 B. Definition of "Accelerated Filer"1. Proposed RulesWe proposed to accelerate the due dates for annual and quarterly reports only for companies with a common equity public float of $75 million or more, that have been reporting for at least 12 calendar months and that have filed at least one annual report. The public float and reporting history requirements are designed to include the companies that are least likely to find such a change overly burdensome and where investor interest in accelerated filing is likely to be highest. Other companies would continue to file under existing deadlines, including small business issuers that file on Forms 10-KSB and 10-QSB, foreign governments, foreign private issuers that elect to use Form 20-F and companies that do not have a common equity public float. Under the proposed rules, a company would determine its public float for purposes of determining whether it would become an accelerated filer as of a date no more than 60 and no less than 30 days before the end of its fiscal year. In addition, as proposed, a company would become an accelerated filer at any time during the year if it met the public float test on a previous determination date and subsequently met the reporting requirements during the year. 2. Comments on the ProposalComments were mixed on the proposed definition of accelerated filer. Several commenters believed that all public companies should be required to adhere to the same filing deadlines, regardless of a company's size or experience in preparing filings.84 These commenters thought it would be confusing to investors and companies to have differing filing deadlines. They also believed that investors in companies with a public float of less than $75 million should expect the same timely access to prompt disclosure as investors in larger companies. They argued that such prompt disclosure may be even more important for smaller companies. Several commenters also thought that while large firms may have more resources, they tend to have more complex and geographically widespread operations, numerous consolidated entities and segments and complicated financial transactions.85 Other commenters agreed with the notion of excluding smaller companies.86 Smaller companies may have operations that are just as complicated as large companies. More importantly, accelerated reporting may be particularly burdensome for smaller companies because they may not have the necessary resources or infrastructure to report on an accelerated basis. Many of these issuers have small staffs and limited technological resources, so the imposition of accelerated deadlines may have a disproportionate impact on these companies. In addition, auditors may be more likely to postpone their reviews of smaller companies' financial statements until they have completed their work for larger clients. There also may not be sufficient market interest in these companies to justify the costs and burdens needed to accelerate a smaller company's reporting processes.87 Comments also were somewhat mixed on the use of public float as a method to differentiate between companies.88 Several commenters questioned the use of public float as a measure indicative of a company's ability to file sooner. According to these commenters, smaller companies with limited operations and personnel could easily develop a significant public float. These commenters offered several alternative measures, including revenues, assets or some measure of trading volume. Other commenters thought the proposed $75 million public float threshold was too low.89 These commenters recommended a number of alternative thresholds, ranging from $150 million to $10 billion. Several other commenters thought the proposed public float measurement date occurred too late in the fiscal year to give companies sufficient time to modify their systems and prepare for accelerated reporting.90 In the Proposing Release, we also requested comment on whether the deadline for annual reports of foreign private issuers on Form 20-F should be shortened. Comments were mixed on this request. Some commenters did not think there was a reason to not also shorten deadlines for foreign filers.91 Others thought that the issues involving foreign issuers are sufficiently different as to warrant a separate study and rule proposal.92 A few others thought the deadlines for foreign issuers should not be accelerated at all.93 3. Final RulesAfter evaluating the comments on this aspect of the proposal, we are adopting the amendments substantially as proposed with some minor clarifications. Under the final rules, accelerated deadlines will apply to a company after it first meets the following conditions as of the end of its fiscal year:
The public float and reporting history aspects of this definition are being adopted substantially as proposed. These requirements are based primarily on the current eligibility requirements for registration of primary offerings for cash on Form S-3.94 These companies can take advantage of short-form registration, including the resultant benefits of incorporation by reference and quick access to the capital markets through "shelf registration." Shortening the periodic reporting deadline for these companies, coupled with our conforming revisions to the financial statement timeliness requirements discussed below, promises that investors will receive information about these companies sooner. This enhances the timeliness of information received for primary purchasers in these offerings in addition to secondary market purchasers. These changes also ensure that investors receive consistent financial information regardless of the particular registration form a company uses. In identifying companies that will be subject to this new requirement, we also thought it would be appropriate to use a pre-existing threshold to reduce regulatory complexity. While we agree that investors in smaller companies value the timeliness of corporate disclosures, we must balance the market's need for information with the ability of companies to prepare that information without undue burden. The possible detrimental effects of accelerating the reporting process for companies least able to bear the burden of these changes may outweigh the potential advantages of acceleration if the quality of information suffers. We do not think that having two sets of reporting deadlines will be confusing. Some registrants, such as foreign private issuers, are already subject to different deadlines. We believe it is more important that companies of the same relative size, including the most actively followed companies, are subject to shortened deadlines. We agree that larger companies may have more complex operations, but they also are more likely than smaller companies to have the infrastructure and resources to report on an accelerated timeframe. We believe that a public float test serves as a reasonable measure of company size and market interest. While several commenters urged raising the proposed threshold, we believe a longer phase-in period for accelerating deadlines and a less extensive acceleration of the quarterly report deadline militates against the need to raise the threshold. The definition of accelerated filer we are adopting today with a $75 million public float threshold excludes nearly half of all publicly traded companies, as well as all companies eligible for our small business issuer reporting system, all foreign private issuers that file on Form 20-F and all companies that do not have a common equity public float.95 A company that does not fall within the "accelerated filer" definition as of its first fiscal year ending on or after December 15, 2002 will have to re-evaluate its status at the end of each fiscal year. To address concerns raised by commenters, a company will determine its public float by looking back at the last business day of its most recently completed second fiscal quarter. This allows companies to know further in advance whether they will become an accelerated filer at the end of their fiscal year and allow them to begin making the appropriate preparations. As explained in the new definition of "accelerated filer," the determination of whether a non-accelerated filer becomes an accelerated filer as of the end of its fiscal year governs the annual report to be filed for that fiscal year, the quarterly reports to be filed for the subsequent fiscal year and annual and quarterly reports to be filed thereafter. Under the final rules, a company would not need to determine whether it would become an accelerated filer other than at the end of its fiscal year. We believe this provides increased notice to a company for planning purposes. It also lessens any potential confusion to investors by a sudden change in deadlines. For example, if a calendar year-end company meets the public float requirement, but has not filed its first annual report as of December 31, 2002, it does not become an accelerated filer and remains subject to existing deadlines for its 2002 annual report and its 2003 quarterly reports. However, if on December 31, 2003, the company meets the public float test as of the last business day of its second fiscal quarter ending June 30, 2003 and meets the other requirements of the accelerated filer definition, the company becomes an accelerated filer subject to the accelerated deadlines for its 2003 annual report, 2004 quarterly reports and all periodic reports thereafter. As proposed, once a company becomes an accelerated filer, it remains an accelerated filer subject to shortened deadlines unless and until it subsequently becomes eligible to use Forms 10-KSB and 10-QSB for its annual and quarterly reports.96 In that case, the issuer ceases to be an accelerated filer unless and until it again meets the accelerated filer criteria. A few commenters thought that the use of different standards for entering and exiting accelerated filer status would be confusing and potentially unfair compared to companies that never had their public float exceed $75 million, especially for companies that cross the threshold for a certain period of time and then fall back below the threshold but do not otherwise meet the criteria to become a small business issuer.97 However, it is our view that, once a company meets the accelerated filer threshold, it is reasonable to minimize a company's fluctuation in and out of accelerated filer status while still allowing the company to exit if it becomes so small for so long that it becomes eligible to file its reports as a small business issuer. Accordingly, we are adopting the provisions to exit accelerated filer status as proposed. Currently, companies are required to disclose on the cover page of their annual report on Form 10-K their public float as of a specified date within 60 days before filing. To assist investors and the Commission in evaluating whether a company is subject to accelerated deadlines, we are revising this requirement. We are requiring every company, regardless of whether it is an accelerated filer, to disclose its public float as computed on the last business day of the company's most recently completed second fiscal quarter. We recognize that this will reduce the currency of this disclosure, but we believe such a change will simplify the burdens companies face by requiring them to calculate only one public float amount. Also, to clarify further a company's filing status, we are requiring each company to check a box on the cover of its quarterly and annual reports to indicate whether it is an accelerated filer. We are not adopting changes today to the deadline for annual reports by foreign private issuers on Form 20-F. As we mentioned in the Proposing Release, we are continuing to consider this issue and Exchange Act filing requirements generally for foreign issuers. We recognize that with the adoption of today's amendments, the discrepancy between the filing deadlines for larger seasoned U.S. issuers and those for foreign private issuers will increase. We will consider the comments received in our continuing review of the issue. C. Conforming AmendmentsIn the Proposing Release, we requested comment on several possible conforming revisions to other Commission rules as a result of the proposals. Our decisions on these requests are discussed in this section. 1. Timeliness Requirements in Other Commission FilingsWe mentioned in the Proposing Release that we were considering making conforming revisions to accelerate the timeliness requirements in Regulation S-X for the inclusion of financial statements by accelerated filers in other Commission filings, such as Securities Act and Exchange Act registration statements and proxy and information statements under Section 14 of the Exchange Act. We requested comment on whether these changes should be made. Most of the commenters that responded to this request suggested we should make conforming changes if we change the periodic report deadlines.98 We agree. When the Commission made extensive revisions to its rules, forms and regulations in 1980 to further the integrated disclosure system, it adopted amendments regarding the inclusion of financial information in registration statements and proxy statements that parallel the requirements for financial data in Exchange Act periodic reports.99 Parallel requirements facilitate the integrated reporting system by simplifying existing rules. They also improve overall disclosure as investors are assured consistent requirements as to the timeliness of information regardless of the document received. If conforming amendments are not made to keep these requirements parallel, a filing could conceivably be filed under the Securities Act with financial information less current than that filed under the Exchange Act. Accordingly, to facilitate uniform requirements, we are adopting amendments to Regulation S-X to conform the timeliness requirements. Under the conforming amendments we are adopting today, financial statements included in a registration statement or proxy statement still will be required to be at least as current as any financial statements filed under the Exchange Act. We recognize that in making these conforming changes, for some short period of time, accelerated filers may be prevented from going to market.100 However, it is our view that, when a company is an accelerated filer and is attempting to raise capital in the marketplace after audited financial information would be required to be filed under the Exchange Act, it is reasonable to delay registration until such financial statements become available. We believe this change is in the best interest of the investing public and will not create any additional burden on the large majority of accelerated filers because the required financial information already will be required to have been filed. Also, as in the past, we will consider waivers to the rules where unusual circumstances dictate the need for them.101 a. Filings Within 90 Days of Year-EndCurrently, a reporting issuer is not required to include audited financial statements for its most recent fiscal year until the 90th day after the end of the fiscal year if it satisfies three conditions:
Unless all three conditions are met, registration statements filed or declared effective or proxy statements mailed after the 45th day following the fiscal year end must include audited financial statements for the most recent fiscal year end.102 We are shortening the 90-day deadline to conform to the phase-in periods for accelerated filers to keep this requirement parallel to the requirement to file an annual report under the Exchange Act. In year one of the phase-in period, the deadline will remain at 90 days. In year two of the phase-in period, the deadline will be reduced to 75 days. For year three and subsequent years, the deadline will be reduced to 60 days. One commenter suggested we eliminate the distinctions among registrants that meet the conditions in Rule 3-01(c) of Regulation S-X.103 We are not changing the 45-day deadline for companies that do not meet the three required conditions. This deadline was not previously linked to an Exchange Act reporting requirement, and we continue to think that this shorter deadline is sufficient. This deadline will continue to require audited financial information more current than that required by the Exchange Act reporting requirements for companies that have not reported, and do not expect to report, income. b. Filings After 134 Days of Year-EndThe existing rules require interim financial information in registration statements filed by registrants after 134 days subsequent to the end of the registrant's fiscal year-the period after audited financial statements for the most recently completed fiscal year are already required to be filed by most registrants on Form 10-K or 10-KSB and on or after the date most registrants are required to have filed interim financial statements for the first quarter on Form 10-Q or 10-QSB. Under the conforming amendments, in year one of the phase-in period, the period will remain at 134 days for accelerated filers. In year two of the phase-in period, the period will be reduced from 134 to 129 days for accelerated filers. When a registration statement is filed or is to be declared effective during this period, updated financial statements will now be required as of an interim date within 130 days of the date of filing. For year three and subsequent years, the period will be reduced to 124 days for accelerated filers. Registration statements filed or to be declared effective during this period will be required to include updated financial statements as of an interim date within 125 days of the date of filing. Here again, the amended rules parallel the requirements for filing interim information under the Exchange Act. c. Age at Effective Date of FilingUnder the existing rules, where financial statements in a filing are as of a date 135 days or more before the date the filing is expected to become effective, or proposed mailing date in the case of a proxy statement, the financial statements must be updated with a balance sheet as of an interim date within 135 days and with statements of income and cash flows on a comparative basis for the interim period between the end of the most recent fiscal year and the date of the interim balance sheet provided.104 Two exceptions exist under the current rule. First, where the registrant meets the conditions in Rule 3-01 of Regulation S-X and the anticipated effective date or proposed mailing date in the case of a proxy statement falls after 45 days but within 90 days of the end of the fiscal year, the filing need not be updated with financial statements more current than as of the end of the third fiscal quarter of the most recently completed fiscal year provided audited financial statements for such fiscal year are not available. Second, where the registrant does not meet the prescribed conditions referred to above and the anticipated effective date or proposed mailing date falls after 45 days but within 90 day of the end of the fiscal year, the filing must include audited financial statements for the most recent fiscal year. Both exceptions are consistent with the rules governing financial statements as of the date of filing. The conforming amendments revise the updating rule to parallel the requirements for filing financial information under the Exchange Act. In year one of the phase-in period, the general updating period will remain at 135 days for accelerated filers. In year two of the phase-in period, the general updating period will be reduced from 135 days to 130 days for accelerated filers. For year three and subsequent years, the period will be reduced to 125 days. For each of the exceptions, the 90 day period will remain at 90 days for year one and then be reduced to 75 days in year two and 60 days in year three and subsequent years for accelerated filers. We will maintain the two existing exceptions in the rule.105 d. Unconsolidated Subsidiaries and 50% or Less Owned PersonsSeveral commenters did not think that the due date in Rule 3-09 of Regulation S-X regarding the inclusion of financial statements of significant equity investees, joint ventures and subsidiaries not consolidated should be accelerated to conform to that of the investor registrant.106 Accelerating the filing of these financial statements could require a company that does not meet the definition of an accelerated filer to file its financial statements before it would otherwise be required to do so solely because of a minority ownership stake by the investor registrant. In addition, the investor registrant may have difficulty in obtaining these financial statements from these non-wholly owned entities in the appropriate timeframe. This may lead a registrant to either sell its investment, not for business reasons, but in order to remain timely and current in its filing requirements, or cause the investor registrant to be not timely, which could have a number of adverse effects, including the loss of short-form registration. As part of our conforming amendments, we are amending Rule 3-09 of Regulation S-X to address these concerns. Separate financial statements of subsidiaries not consolidated and 50% or less owned persons required by Rule 3-09 of Regulation S-X will not be accelerated for inclusion in a company's annual report on Form 10-K if the subsidiary or 50% or less owned person is not an accelerated filer. In that instance, the financial statements of the subsidiary or 50% or less owned person can be filed by amendment within the existing time periods. In addition, we are making conforming amendments to still provide companies with additional time to file the required financial statements if the fiscal years of the investor registrant and the subsidiary or 50% or less owned person differ. 2. Time Allowed to Incorporate Form 10-K Information From Definitive Proxy or Information StatementsIn the Proposing Release, we did not propose to make a conforming change to the 120-day period companies have to file their definitive proxy or information statements involving the election of directors to allow the incorporation by reference of the information required by Part III of Form 10-K.107 We requested comment on whether this period should be shortened. While two commenters supported accelerating the filing of definitive proxy or information statements to ensure that investors have timely information,108 the majority of commenters that responded to our request objected to a conforming change.109 The objecting commenters thought that a shortened deadline would be overly burdensome. We see no significant reason to shorten the deadline at this time. Some commenters were concerned that a reduction of the filing deadline for Form 10-K without a corresponding change in the deadline for incorporating the Part III information by reference from the proxy statement would interfere with the ability of some companies to file new short-form registration statements for securities offerings during the period between the Form 10-K filing date and the filing of the proxy statement.110 This is because these issuers would be required to include the Part III information in the registration statement, either directly or through incorporation by reference from another document, before the proxy statement is filed. As the ability to incorporate the Part III information from the proxy statement is voluntary and is designed for the benefit of registrants, we do not believe this concern warrants either a change to the deadline to incorporate Part III information from the proxy statement or the Form 10-K deadline. Companies will retain the flexibility to choose the alternative that best suits their individual circumstances. 3. Form 10-K Schedules Required by Article 12 of Regulation S-XWe did propose to make a conforming change to the date by which all schedules required by Article 12 of Regulation S-X may be filed as an amendment to the annual report. We proposed to change this date from 120 calendar days to 90 calendar days for accelerated filers to maintain a 30-day period after the due date of the report to file the amendment. We requested comment on this change. The majority of commenters responding to this request supported this change.111 Several commenters supported eliminating any delay and requiring these schedules to be filed with the Form 10-K.112 However, we understand that in some instances additional time may be necessary to prepare these schedules. As a result, we are adopting conforming amendments to maintain a 30-day period after the due date of the report to file the schedules. 4. Financial Statement Filing Requirements in Rule 3-05 of Regulation S-X and Item 7 of Form 8-KIn the Proposing Release, we requested comment on whether we should make conforming revisions to the financial statement filing requirements in Item 7 of Form 8-K and Rule 3-05113 of Regulation S-X for financial statements of businesses acquired. The commenters who responded to this request uniformly objected to such a change.114 Many of these commenters believed that the ability to obtain audited financial statements of a significant acquired business generally is unrelated to any circumstances of the acquirer that cause it to be an accelerated filer for purposes of its own financial statements. We see no significant reason to shorten the deadline at this time, and therefore we are not adopting conforming amendments to these provisions. D. Website Access to Information1. Proposed RulesWe proposed to require accelerated filers to provide additional disclosure in their annual reports of where investors can obtain access to company filings. This would have included disclosure regarding the availability of information from the Commission, the company's website address and whether the company makes available free of charge on its website, if it has one, its annual, quarterly and current reports, and all amendments to those reports, as soon as reasonably practicable after, and in any event on the same day as, such material is electronically filed with or furnished to the Commission. If a company chose not to make its filings available on its website in this manner, the proposals would have required it to disclose why it does not do so and where else the public can access these filings immediately upon filing and whether there is a fee for such access. Companies also would have to disclose whether they voluntarily will provide electronic or paper copies of its filings upon request. Widespread access to timely corporate information promotes the efficient functioning of the secondary markets by enabling investors to make informed investment and voting decisions. Further, ready access to Exchange Act information is critical to short-form registration of securities offerings by seasoned issuers under the Securities Act.115 This form of registration allows certain information about the company conducting the offering to be incorporated by reference from the company's Exchange Act reports without, in many instances, separate delivery of those reports. One rationale for this method of registration is that the information in the company's Exchange Act reports already has been adequately disseminated and evaluated by the marketplace. The development of the Internet has revolutionized information production, availability, and dissemination.116 The increased availability of information has helped to promote transparency, liquidity and efficiency in our capital markets. One of the key benefits of the Internet is that companies can make information available to many investors and the financial markets quickly and in a cost-effective manner. Online access to Internet information also helps to democratize the capital markets by enabling many small investors to access corporate information.117 We have taken a number of steps to encourage the dissemination of information electronically via the Internet. For 18 years, we have been continually improving and modernizing electronic access to companies' Exchange Act reports through our EDGAR system, including by providing Internet access to these reports.118 We now provide electronic access to the public on a real-time basis through our Internet website.119 Without regard to EDGAR, an efficient and economical method for companies to make information available about themselves to many investors is through their Internet websites. In addition to other existing sources of company information, such as our website, a company's website is often an obvious place for investors to find information about a company. A company also may use different formats and other approaches to making information available in ways it believes are useful to investors. Most companies, realizing the benefits of this technology for information dissemination, already provide access to their Commission filings through their websites. A study by our Office of Economic Analysis revealed that approximately 83% of companies with a public float of at least $75 million provide some form of access to their Commission filings through their websites, either via a hyperlink with a third-party service providing real-time access to the filings (45%), by posting the filings directly on their websites (29%) or via a hyperlink to our EDGAR database (15%). Modernizing the disclosure system under the federal securities laws involves recognizing the importance of the Internet in fostering prompt and more widespread dissemination of information.120 We believe company disclosure should be more readily available to investors on a timely basis in a variety of locations to facilitate investor access to that information. We believe it is important for companies to make investors aware of the different sources that provide access to company information. We applaud those that already provide access to their Commission filings through their websites, and encourage every reporting company to do so. 2. Comments on the ProposalWe received responses from 141 commenters on the proposals for disclosure concerning access to company filings. The vast majority of commenters representing investors, investor groups, companies and professional associations were supportive of the proposals. Sixty commenters supported the requirement as proposed and concurred with our objective to provide investors with information on where they can access company reports.121 These commenters believed the proposal would aid in encouraging companies to make information available in a variety of locations and hence make corporate information more widely accessible and disseminated. One professional association mentioned that almost 90% of companies in its survey expected to accomplish the objectives of the proposal with ease.122 The commenter also referred to other studies demonstrating that corporate websites are a significant source of information to investors and the media. Forty commenters concurred with our objective but offered modifications to the proposal, such as recommending that we allow additional time for companies to post the reports on their websites and suggesting that a permanent statement regarding availability of the company's filings on a web page referring to EDGAR or a standing hyperlink to EDGAR should suffice.123 Twenty other commenters offered similar suggestions to modify the proposal.124 Some of the commenters requested interpretive clarifications for complying with the proposals.125 Twenty-one commenters questioned the utility of the proposal, especially considering the existence of the Commission's EDGAR website and the Commission's recent announcement that its website now provides real-time access to filings.126 Some of these commenters thought the proposal unnecessarily duplicated the Commission's EDGAR system.127 One commenter did not agree that a variety of electronic sources provides any more widespread access to information than a single source.128 Ten companies suggested that the desired improvement the Commission seeks in instant accessibility of information could be best accomplished by modernizing the EDGAR system, including by making filings immediately available to the public on its website, which we have now done.129 3. Final RulesAfter evaluating the comments received, we are adopting the proposals with minor revisions. These amendments require accelerated filers to disclose in their annual reports on Form 10-K the following:130
Accelerated filers must begin complying with the new disclosure requirement starting with their annual reports on Form 10-K to be filed for fiscal years ending on or after December 15, 2002. In response to comment, we have eliminated the proposed requirement that registrants disclose that filings are available on our website and in our public reference room as unnecessary. We have also eliminated the proposed disclosure relating to where else the public can access company filings immediately upon filing if the company does not provide real-time website access as real-time access to filings is now available through our website. We understand that companies provide website access to their Exchange Act reports in a variety of ways, including by establishing a hyperlink to its Exchange Act reports via a third-party service in lieu of maintaining the reports themselves.132 For purposes of the disclosure element for website access to reports, hyperlinking to a third-party service is acceptable so long as the reports are made available in the appropriate time frame and access to the reports is free of charge to the user. To clarify that hyperlinking to a third party website is acceptable, we have slightly modified the proposed language to specify that a company can provide access on or through its website. A company should hyperlink directly to its reports (or to a list of its reports) instead of just to the home page or general search page of the third-party service.133 We note that many companies already provide this level of specificity in their hyperlinks as a matter of best practice. As we now provide real-time access to Exchange Act reports through our website, hyperlinking directly to a company's reports (or to a list of its reports) on our EDGAR website will allow a company to state that it provides website access to its reports as soon as reasonably practicable after those reports are filed. This will help to decrease further any incremental burdens or costs caused by the new requirement. Despite the availability of these reports through our website, we concluded that disclosure regarding company website access is still desirable as one of our objectives is to encourage the availability of information in a variety of locations and foster best practices for making that information broadly accessible. Hyperlinking through EDGAR will now allow a company to state in all cases that it provides website access as soon as reasonably practicable.134 In reference to comments concerned about technical and other obstacles that might lead to violating the "same day" requirement, we have eliminated that requirement. However, we interpret the "as soon as reasonably practicable" standard to mean that the report would be available, barring unforeseen circumstances, on the same day as filing. We could revisit this requirement if posting on the same day does not generally occur. Whether a company provides access to its Exchange Act reports either directly or through a third-party service, we recognize that some companies display the reports in electronic formats (for example, PDF) other than the official electronic format used to transmit the filing to our EDGAR system. In fact, we encourage companies to do so if alternative formats enhance readability and accessibility of the reports, so long as all of the information in the reports remains retrievable. However, the use of a particular medium to access the reports should not be so burdensome that the intended recipients cannot effectively access the information provided.135 The website access contemplated by the amendments includes access to all exhibits and supplemental schedules electronically filed with the reports or amendments. Information incorporated by reference is not required to be separately posted, although we encourage companies to do so if it will aid investor access to the information. While the amendments do not cover how long a company's report must be made available on or through its website, we encourage companies to provide ongoing website access to their reports. At a minimum, we suggest companies provide website access to their previous reports for at least a 12 month period. It would be desirable for companies to provide access to their previous reports on an appropriately archived portion of their website over an even longer timeframe. Finally, we encourage companies to provide website access to all of their filings with the Commission, including their filings under the proxy rules and their Securities Act filings. Regarding the requirement that a company disclose its website address in its annual report on Form 10-K, some commenters were concerned as to whether including the website address in the filing constitutes incorporation by reference of any website information into the filing.136 If a company is complying with this disclosure item in its annual report on Form 10-K, the inclusion of the company's website address will not, by itself, include or incorporate by reference the information on the site into the company's Commission filing, unless the company otherwise acts to incorporate the information by reference.137 We understand that a company may have multiple websites that it uses for various purposes, such as investor relations, product information and business-to-business activities. We interpret the requirement to disclose the company's website address to mean the website the company normally uses for its investor relations functions. The revisions we adopt today create new disclosure obligations that are designed to create duties only under Sections 13(a) and 15(d) of the Exchange Act. The new disclosure is not an antifraud rule, and it is not designed to create new duties under the antifraud provisions of the federal securities laws or in private rights of action or to alter any existing liability provisions. The new disclosure also does not separately create or otherwise affect a company's duty to update its prior statements. As proposed, we are initially limiting the amendments to accelerated filers. Commenters were nearly unanimous in thinking that we should extend the amendments to all filers, including smaller issuers and foreign issuers.138 According to these commenters, the utility of information about report access is likely to be just as great or even greater for these issuers compared to the minimal incremental cost that may be associated with the proposals. We will continue to study this issue and consider extending the requirement to all reporting companies after evaluating our initial experience with the requirement by accelerated filers. III. Paperwork Reduction ActThe amendments contain "collection of information" requirements within the meaning of the Paperwork Reduction Act of 1995 ("PRA").139 We published a notice requesting comment on the collection of information requirements in the Proposing Release, and we submitted these requirements to the Office of Management and Budget ("OMB") for review.140 Subsequently, OMB approved the proposed information collection requirements. The titles for the collection of information are "Form 10-K" and "Form 10-Q." An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number. Form 10-K (OMB Control No. 3235-0063) prescribes information that a registrant must disclose annually to the market about its business. Preparing and filing an annual report on Form 10-K is a collection of information. Form 10-Q (OMB Control No. 3235-0070) prescribes information that a registrant must disclose quarterly to the market about its business. Preparing and filing a quarterly report on Form 10-Q is a collection of information. We currently estimate that Form 10-K results in a total annual compliance burden of 12,105,360 hours and an annual cost of $1,210,536,000. The burden was calculated by multiplying the estimated number of respondents filing Form 10-K annually (9,384) by the estimated average number of hours each entity spends completing the form (1,720 hours). We estimate that 75% of the burden is carried by the respondent internally (9,384 x 1,720 x 0.75 = 12,105,360), and we estimate that 25% of the burden is carried by outside advisors retained by the respondent at an average cost of $300 per hour (9,384 x 1,720 x 0.25 x $300 = $1,210,536,000).141 The portion of the burden carried by outside advisors is reflected as a cost. We currently estimate that Form 10-Q results in a total annual compliance burden of 2,728,092 hours and an annual cost of $272,809,200. The burden was calculated by multiplying the estimated number of reports on Form 10-Q filed annually (26,746) by the estimated average number of hours each entity spends completing the form (136 hours). We estimate that 75% of the burden is prepared by the respondent (26,746 x 136 x 0.75 = 2,728,092). We estimate that 25% of the burden is prepared by outside advisors retained by the respondent at an average cost of $300 per hour (26,746 x 136 x 0.25 x $300 = $272,809,200). This portion of the burden is reflected as a cost. A. Summary of AmendmentsThe amendments will accelerate the filing deadlines of quarterly reports on Form 10-Q and annual reports on Form 10-K by companies subject to specified public float and reporting history requirements. The amendments also require those companies to disclose in their annual reports on Form 10-K where investors can obtain access to company filings, including whether the company provides access to its Exchange Act reports free of charge on its Internet website as soon as reasonably practicable after those reports are electronically filed with or furnished to the Commission. If a company does not provide website access in this manner, it must also disclose the reasons it does not do so. We also require companies to disclose their website address if they have one. We believe that the revisions will promote direct, uniform and more widespread dissemination of timely information to investors and the markets and further the purposes of short-form registration under the Securities Act. B. Summary of Comment Letters and Revisions to ProposalsWe requested comment on the PRA analysis contained in the Proposing Release. We received responses from two companies addressing the Commission's overall estimates for preparing reports.142 Both commenters questioned our original estimate of the allocation of the burden between the company (25% of the burden) and outside professionals retained by the company (75% of the burden). Both believed the estimate for the amount of work prepared in-house should be much higher.143 Subsequent to the Proposing Release, we have changed our estimates of the allocation of the burden between the company and outside advisors to 75% for in-house work and 25% for outside advisors.144 We recognize that not all companies may utilize in-house resources to the extent mentioned by the commenters, but we believe the new allocation more accurately reflects current practice for annual and quarterly reports. One of the commenters believed the Commission's estimate of the average number of hours each entity spends completing Form 10-Q (136 hours) is too low.145 The commenter also believed that the Commission's estimate of the average number of hours each entity spends completing the Form 10-K (1,720 hours) was more accurate. We have not concluded that our estimates should be changed as a result of this comment, although we will continue to monitor registrant response to our burden hour estimates. In addition to the concerns raised by commenters, we have made several modifications to the proposals, although the modifications do not affect our estimate of the incremental burden of the amendments. The amendments will change the calculation date for determining the disclosure of a company's common equity public float that appears on the cover page of its Form 10-K. In addition, companies will be required to check a box on their Form 10-K and 10-Q indicating whether they are an accelerated filer. We believe these changes are minimal and do not affect the total amount of burden hours for preparing the forms. In addition, we have made several changes to the proposal for disclosure concerning access to company reports in response to comments on the substance of the proposal and to avoid unnecessarily lengthening reports. These changes include revising or eliminating some of the proposed disclosure elements. We do not believe these changes will significantly change our previous estimates of the burden on registrants from this new disclosure item. C. Revisions to Reporting and Cost Burden EstimatesWe estimate that approximately 59% of Form 10-K and Form 10-Q respondents, or 5,494 respondents, will satisfy our proposed definition of accelerated filer, and thus will be subject to accelerated deadlines and the requirement to make the enhanced disclosure in their Form 10-K regarding website access to their Exchange Act reports.146 For our amendments regarding filing deadlines, the amount of information required to be included in Exchange Act reports will remain the same. Accordingly, solely for purposes of the Paperwork Reduction Act, our estimate is that the amount of time necessary to prepare the reports, and hence, the total amount of burden hours, will not change. As proposed, we estimate that the preparation of the required disclosure regarding information access in a respondent's Form 10-K will add 0.50 burden hours to each annual report on Form 10-K. Thus, we estimate this aspect of the amendments will add an additional 2,747 burden hours to the current Form 10-K (0.50 hours x 5,494 respondents). We estimate that 75% of the burden is carried by the respondent (0.50 x 5,494 x 0.75 = 2,060).147 We estimate that 25% of the burden is prepared by outside advisors retained by the respondent at an average cost of $300 per hour (0.50 x 5,494 x 0.25 x $300 = $206,025). This portion of the burden is reflected as a cost. As a result, we estimate the total annual compliance burden for Form 10-K after our revisions to be 12,107,420 hours and an annual cost of $1,210,742,025, an increase of 2,060 hours and $206,025 in cost. Compliance with the disclosure requirement will be mandatory. There will be no mandatory retention period for the information disclosed, and responses to the disclosure requirements will not be kept confidential. We do not believe that the imposition of this disclosure requirement will alter significantly the number of respondents that file on Form 10-K. IV. Cost-Benefit AnalysisThe amendments are part of our initiative to modernize and improve the regulatory system for periodic disclosure under the Exchange Act. We are sensitive to the costs and benefits that result from our rules. In this section, we examine the benefits and costs of our amendments. The rule and form changes will enhance the timeliness and availability of disclosure to investors in two ways:
A. Acceleration of Quarterly and Annual Report Due Dates1. BenefitsThe due dates for quarterly and annual reports by domestic issuers have not changed in over 30 years, despite enormous advances in information technology and productivity. We believe that periodic reports contain valuable information for investors. Shortening the due dates for quarterly, annual and transition reports will provide many benefits. Most importantly, it will accelerate the delivery of information to investors and the capital markets, enabling them to make more informed investment and valuation decisions more quickly.149 This helps the capital markets function more efficiently, which implies more efficient valuation and pricing. While quarterly and annual reports at present generally reflect historical information, a lengthy delay before that information becomes available makes the information less valuable to investors. The more extensive information in periodic reports is evaluated by investors and particularly analysts and institutional investors as a baseline for the incremental disclosures made by a company. These reports also contain more detailed information that is essential to conduct comparative analyses, as this information is often not contained in earnings releases or other incremental disclosures. Moreover, the information in Exchange Act reports, due to its required nature and the liability to which it is subject, provides a verification function against other statements made by the company in press releases and other public announcements. Investors and other users of the reports can judge previous informal statements by the company against the more extensive and mandated disclosure provided in the reports that have been reviewed by independent public accountants and other advisors. Accelerating the availability of this information will enable this verification to occur at an earlier point in time. Accelerating the availability of these reports also may increase the relevance of these reports, as the timeliness of information has considerable value to investors and the markets. Moreover, seasoned issuers incorporate information from their Exchange Act reports in their Securities Act registration statements. Hence, investors buying in these public offerings, particularly in on-going shelf offerings, also may benefit from more timely disclosure. Many companies now routinely release quarterly and annual results well before they file their formal reports with us. These earnings announcements reflect the importance of financial information and investors' demand for it at the earliest possible time. Assuming that companies are collecting and evaluating information before they issue these announcements, the availability of this information also suggests that much of the process involved in preparing the financial information contained in periodic reports is substantially complete. However, these earnings announcements are generally less complete in their disclosure than quarterly or annual reports, and they can emphasize information that is less prominent in quarterly or annual reports. Investors often must wait for the periodic reports to receive financial statements and the accompanying notes prepared in accordance with generally accepted accounting principles, MD&A and other vitally important financial disclosures. These additional disclosures increase transparency for investors. We also are making conforming amendments to accelerate the timeliness requirements in Regulation S-X for the inclusion of financial statements by accelerated filers in other Commission filings, such as Securities Act and Exchange Act registration statements and proxy and information statements under Section 14 of the Exchange Act. When the Commission made extensive revisions to its rules, forms and regulations in 1980 to further the integrated disclosure system, it adopted amendments regarding the inclusion of financial information in registration statements and proxy statements that parallel the requirements for financial data in Exchange Act periodic reports. Parallel requirements facilitate the integrated reporting system by simplifying existing rules. They also improve overall disclosure as investors are assured consistent requirements as to the timeliness of information regardless of the document received. If conforming amendments are not made to keep these requirements parallel, a filing could conceivably be made under the Securities Act with financial information less current than that filed under the Exchange Act. Accordingly, to facilitate uniform requirements, we are adopting amendments to Regulation S-X to conform the timeliness requirements. Under the conforming amendments we are adopting today, financial statements included in a registration statement or proxy statement still will be required to be at least as current as any financial statements filed under the Exchange Act. Many commenters representing investors, users of financial information and several companies concurred with our assessment of the benefits of the proposals. These commenters believed that shortening deadlines will improve the delivery and flow of reliable information to investors and capital markets and assist in the efficient operation of the markets. These commenters emphasized the importance of the extensive information in periodic reports and investors' demand for it at the earliest possible time. Several other companies, accounting firms and professional associations agreed in concept that shortening due dates would improve the flow of information, but believed the due dates should reflect concerns about the quality of information to be filed. A small minority of companies, law firms and business organizations, however, believed that existing deadlines and market practices are sufficient to satisfy investors' needs and believed we over-emphasized the importance of periodic reports. These commenters did not think a significant benefit would result from shortening deadlines, but also generally did not attempt to address the question of possible benefits from the perspective of users of the reports. While we recognize that investors and the markets rely on information from a variety of sources in formulating their investment decisions, we agree with the near unanimous view of commenters representing the users of reports that the financial and other information in periodic reports is important to them, and that accelerating the delivery of the reports will provide benefits to investors and the markets. 2. CostsThe amendments will increase costs to some affected reporting companies, although companies may, and some already do, report within the new deadlines voluntarily. Specifically, the amendments may increase the costs of preparing reports because although companies already must prepare the reports, some may have to delay other projects or use additional resources, including in-house personnel, outside legal counsel and outside auditors to prepare the information in a shorter timeframe. Some companies may need to make additional capital investments, such as in additional information systems, to prepare their reports in a shorter timeframe. While a few commenters believed that the original proposals would not have a significant adverse effect on the cost of preparing reports, most who addressed the subject mentioned that the original proposals would result in some increased costs. Many outlined their process of preparing reports to demonstrate the difficulties of accelerating the process. The particular steps and timing varied depending on the individual company, and not all companies appear to be at the same level of technological sophistication and staffing for preparing reports. Two professional associations noted that there are no current best practices for preparing reports.150 As a result, the few cost estimates received varied widely, and many commenters were unable to provide estimates. One company believed it was not possible to put a dollar value on such costs, as it depends on the quality and flexibility of each registrant's present systems, processes and staff.151 According to one professional association that surveyed its members, 52% of its survey respondents reported that they expected costs to increase in order to comply with the original proposals.152 Forty-five percent of respondents indicated they would have to hire additional staff, and 27% of respondents indicated they would have to buy or develop additional systems. Other commenters were concerned that accelerating deadlines would result in increased audit fees, particularly for companies with a calendar fiscal year-end, given a compression in the amount of time available for auditors to complete their work for these companies. The amendments may have indirect effects as well. While some companies commented that they could or already comply with the proposal without undue burden, the group that objected to the proposal raised several common concerns over the extent of acceleration and transition period proposed. The most common concern was that the proposed deadlines would negatively affect the quality and accuracy of reports. According to one professional association, two-thirds of its survey respondents expected a reduction in the precision of reported information under the original proposals.153 We are not changing the liability standards for reports, nor are we decreasing the amount of information required. Investors and the capital markets may suffer if quality or accuracy diminished, causing the markets to function less efficiently and investment decisions to be impaired. Another common concern was that the proposed deadlines would impair the ability of management, external auditors, boards of directors and especially audit committees to scrutinize and review filings properly and give appropriate consideration to the form, substance and priority of disclosures, especially MD&A disclosures and financial statement footnotes. These commenters feared that disclosures could be reduced or become more boilerplate if companies have less time to prepare and review them. The commenters believed that accelerating deadlines in the manner proposed would also undermine the governance and review mechanisms that have been put in place to ensure quality. Several other commenters mentioned additional concerns over the proposals, such as an increased need to use estimates or an increased risk of amendments or restatements because of rushed preparation. Several commenters were especially concerned about accelerating deadlines now given recent events with Arthur Andersen LLP. We have limited direct data on which to base cost estimates of the amendments. However, we reviewed cost estimates provided by respondents to a survey conducted by the American Society of Corporate Secretaries. These estimates were based on the original proposal. We attempted to determine if the survey results were related to issuer characteristics. The cost estimates did not appear to be related to market capitalization, revenues, industry or number of reporting segments of the underlying company. Based on 46 companies with over $75 million in public float that provided estimates, 17% reported that they did not expect any additional costs from the proposals. 43.4% expected initial costs to prepare for the proposals. These estimates ranged from $12,500 to $5,000,000, with a median value of $125,000. 50% expected on-going annual costs to comply with the proposals. These estimates ranged from $27,500 to $250,000, with a median value of $90,000. 11% of respondents expected both initial and on-going costs to comply with the proposals. Assuming these estimates are representative of all affected companies, we estimate that initial costs of the original proposal for all affected companies would range from $29,862,500 to $11,945,000,000, with a median value of $298,625,000.154 Aggregate on-going, annual costs of the original proposal for all affected companies would range from $75,524,500 to $686,750,000, with a median value of $247,230,000. These estimates may overstate the actual costs from the amendments we are adopting today, however, as we are making several accommodations to address commenters' concerns and to ease compliance, including:
A phased-in approach helps to alleviate the immediate impact of any costs and burdens that may be imposed on certain registrants. While several commenters indicated that they could report on an accelerated timeframe today, several major business associations that surveyed their members reported that adjustment to accelerated deadlines would be easier with a phase-in period.155 A longer transition may even help reduce costs as companies will have additional time to develop best practices, long-term processes and efficiencies to prepare reports, as opposed to having to take rushed and possibly inefficient measures to meet a more sudden acceleration. Also, a longer transition period helps to smooth out any possible impact on the availability of third party advisors used by companies to prepare their reports. A less extensive acceleration of the quarterly report deadline also will alleviate some of the burdens mentioned by commenters. There will be more time than proposed to gather the necessary data and complete the necessary reviews by company officials, the board of directors and outside advisors. One professional association commented that 80% of its survey respondents reported they could more easily meet a 35-day deadline than a 30-day deadline.156 Further, we believe that by imposing a 40-day deadline before finally reducing it to 35 days, we are striking an adequate compromise between the benefits of reducing deadlines with the potential inconvenience, difficulty and cost that may be incurred by some companies. Regarding our conforming changes to the timeliness requirements in other Commission filings, we recognize that for some short period of time, accelerated filers may be prevented from going to market. However, it is our view that, when a company is an accelerated filer and is attempting to raise capital in the marketplace after audited financial information would be required to be filed under the Exchange Act, it is reasonable to delay registration until such financial statements become available. We believe this change is in the best interest of the investing public and will not create any additional burden on the large majority of accelerated filers because the required financial information already will be required to have been filed. Also, as in the past, we will consider waivers to the rules where unusual circumstances dictate the need for them. We considered several regulatory alternatives in formulating the final amendments. We considered, but rejected, the alternative of tying the due date of reports to a company's announcement of earnings. Not all companies issue earnings releases or issue them on an accelerated basis. As a result, linking deadlines to earnings releases may not result in more accelerated reporting of information. We also were concerned that linking report deadlines to earnings announcements could delay earnings announcements, as companies would know that the announcement would trigger the deadline to file reports. While market demand for earnings information could negate this risk, an approach linking deadlines to earnings announcements could have the effect of penalizing companies for early releases of information while rewarding companies that delay their earnings with extended time to file their reports. Even with a phase-in period, accelerating filing deadlines may create the risk that more companies will file their reports late or need a filing extension. Moreover, if a company is late filing its reports, it will lose availability for short-form registration for at least one year from the date of the late filing. Being late also could render Securities Act Rule 144 temporarily unavailable for security holders' resales of restricted and control securities, and make new filings on Form S-8 temporarily unavailable for resales of employee benefit plan securities. We considered the suggestions of some commenters to extend the filing extension periods in Exchange Act Rule 12b-25 as an additional method to alleviate any transition difficulties to shortened deadlines. However, we think a lengthy phase-in period adequately addresses these concerns. A less dramatic acceleration of deadlines over a set schedule each year will provide companies with advance notice of the changes they will be expected to make and will smooth out some of the possible difficulties raised by commenters. Rule 12b-25 in its existing form still will provide companies that face extenuating circumstances the ability to gain a filing extension. While our proposals did not directly address the contents of earnings releases, many commenters supported additional efforts by the Commission in this area. Several recommended that earnings or other standardized earnings information be filed with the Commission, such as on Form 8-K. Others thought the Commission should consider issuing or promoting minimum requirements or guidelines for the contents of earnings releases, such as a GAAP reconciliation. While we will continue to explore ways to improve earnings releases, and the Sarbanes-Oxley Act of 2002 requires us to take steps in this area, we believe these are separate initiatives from the need to accelerate periodic report deadlines. As mentioned above, we believe periodic reports contain valuable information for investors, and comments received from the users of this information uniformly indicated their desire to receive the reports at the earliest time that is consistent with receiving quality information. We also considered shorter and longer phase-in periods and deadlines. While several commenters indicated they could report on an accelerated timeframe today, several major business associations that surveyed their members reported that adjustment to accelerated deadlines would be easier with a phase-in period. Also, while comments were mixed, the majority of commenters addressing the issue believed it would be more difficult to accelerate the quarterly report than the annual report. Accordingly, the quarterly deadline will only be reduced to a 35-day deadline at the end of the phase-in period, which is five days longer than originally proposed. We think any concerns over possible confusion over changing deadlines during the phase-in period will be temporary and justified by the benefits of giving companies additional time to adjust their reporting schedules. We considered shortening filing deadlines for all companies. Comments were mixed over excluding smaller issuers. Although we believe investors in less large or unseasoned companies may want and benefit from more timely disclosures just as much as investors in larger, listed companies, we are concerned that this may impose undue burden and expense on these companies. Smaller companies are likely to be more sensitive to any increased costs in preparing their reports. These entities may not have the infrastructure and resources available or necessary to prepare their reports on a shorter timeframe. Accordingly, we are only shortening the filing deadlines for companies with a minimum public float or reporting history as proposed. Of course, smaller companies may file their reports earlier voluntarily. Comments also were mixed on the proposed $75 million public float threshold. We considered several different thresholds for shortening deadlines, including thresholds based on revenue, measures of trading volume and listing status. However, based on our past experience, we believe the public float test currently used in Form S-3 is consistent with our purposes. We believe that a public float test serves as a reasonable measure of company size and market interest. While several commenters urged raising the threshold, we believe a longer phase-in period and a less extensive acceleration of the quarterly report deadline militates against the need to raise the threshold. The definition of accelerated filer we are adopting today excludes nearly half of all publicly traded companies, as well as all companies eligible for our small business issuer reporting system, all foreign private issuers that file on Form 20-F and all companies that do not have a common equity public float. Selecting a $75 million public float threshold also is consistent with our conforming amendments to the timeliness requirements for other Commission filings. By using the same threshold as in Form S-3, investors are assured of receiving the most up-to-date information regardless of the particular registration form a company chooses. B. Website Access to Information1. BenefitsWidespread access to timely company information promotes the efficient functioning of the capital markets. Also, ready access to Exchange Act information is critical to short-form registration of securities offerings. Many aspects of our disclosure system were adopted well before the revolutions in information technology brought about by the Internet. In modernizing and improving our disclosure system, we recognize the benefits of the Internet in promoting more widespread dissemination of information. An efficient and cost effective method for companies to make information available about themselves is through their Internet website. In addition to other existing sources of company information, such as our website, a company's website is one obvious place for many investors to find information about a company. A company also may use different formats and other approaches to making information available in ways it believes are useful to investors. We believe company disclosure should be more readily available to investors on a timely basis in a variety of locations to facilitate investor access to that information. We believe it is important for investors to know of additional sources where they can access company information. Providing this disclosure and encouraging companies to post their Exchange Act reports on their websites will provide many benefits, and the vast majority of commenters concurred and were supportive of the |