September 30, 2002
Mr. Jonathan G. Katz, Secretary
RE: File Number S7-31-02
Dear Mr. Katz:
We at PricewaterhouseCoopers LLP appreciate the opportunity to comment on the Commission's Final Rule: Ownership Reports and Trading by Officers, Directors and Principal Security Holders (the "Final Rule").
We fully support the Commission's efforts to make information concerning insiders' transactions in issuer equity securities publicly available to investors on a more timely basis and to accomplish the objectives of Section 403 of the Sarbanes-Oxley Act (the "Act"). Transparent reporting and timely dissemination of accurate information by public companies to investors is very important to U.S. capital markets.
In general, the Final Rule appears to be effective for purposes of implementing Section 403 of the Act. However, there are certain areas of the Final Rule that we believe could create implementation issues for reporting persons. We have provided our views and suggestions regarding these areas below.
Amendments to Rules 16a-3(f) and 16a-6(a)
The two-business-day accelerated reporting deadline represents a substantial reduction in the time previously required for filing insider transactions in issuer equity transactions. At least initially, the revised deadline may prove quite difficult for a reporting person to comply with to the extent that the information required to be reported is outside the control of the reporting person and the issuer, as is often the case with dividend reinvestment plans and various employee stock purchase and benefit plans. We suggest that the Commission consider a transition period for the accelerated reporting of insider transactions for which the required information is outside the control of the reporting person and the issuer. This would provide time for companies to modify their systems and arrangements with outside plan administrators to ensure that the information needed by reporting persons is available to them within a timeframe that permits them to comply with the accelerated reporting deadline. In this regard, we note the existing provision in the Final Rule that permits an exception to the two-business-day deadline for 10b5-1(c) arrangements and "Discretionary Transactions".
We also recommend that the Commission consider relaxing the accelerated reporting deadline for transactions that a reporting person does not directly initiate or control, as is the case with various company-sponsored employee benefit plans in which transactions are effected for large numbers of employees on a regular basis and based on regular periodic payroll deductions made pursuant to elections previously made by the reporting person. We do not believe that the reporting of these types of transactions within a period somewhat greater than two business days (e.g., monthly or quarterly), or perhaps on a summarized basis (e.g., quarterly), would be inconsistent with the objective of ensuring the timely dissemination of important information to the public.
Regarding the type of transactions described in the foregoing recommendation, we believe there is likely to be a substantial increase in the volume of reports to be filed and that many of those reports are likely to be for transactions of lower dollar/share value than would be the case for transactions directly controlled by a reporting person. We question whether the availability of a substantially greater number of reports regarding relatively low dollar transactions will significantly improve investor protection. Accordingly, we recommend that the Commission consider amending the Final Rule to permit reporting persons to report these types of transactions on a less frequent, and summarized, basis. Dollar and/or percentage thresholds could be incorporated into any amended rule to ensure that only relatively smaller dollar transactions are exempted from the two-business-day accelerated reporting deadline.
Revisions to S-K 405 and S-B 405
Pursuant to the Final Rule, an insider's failure to timely file a Section 16(a) report will remain subject to disclosure in the annual report and proxy statement pursuant to the requirements of Regulations S-K 405 and S-B 405. Given the likely increase in the number of transactions to be reported and the shorter timeframe for reporting, there may be, at least initially, a substantial increase in the frequency of untimely and erroneous reporting, despite good faith efforts to comply. We question whether the reporting of these incidences of failure to timely report and of errors in reporting in annual reports and proxy statements would provide meaningful or useful information for investors. Accordingly, we suggest that the Commission consider other alternatives for the reporting of untimely or erroneous filings, such as a transition period during which companies would not be subject to item 405 disclosures of late filings or filing errors if those errors were corrected promptly, or a modification to item 405 to introduce a de minimis threshold under which companies would not have a requirement to report. We also suggest that the disclosure requirements should be more stringent for transactions directly initiated and controlled by the insider than for those transactions that the insider does not directly initiate or control.
We appreciate the opportunity to express our views, and we commend the Commission and its Staff for its efforts to restore investor confidence in the U.S. capital markets.
We will be pleased to discuss our comments or answer any questions that you may have. Please do not hesitate to contact Jay P. Hartig at (973) 236-7248 regarding our submission.