September 29, 2006
September 29, 2006
Securities and Exchange Commission
Via Electronic Submission
I am responding to the new regulations proposed for the performance graph which will now appear in the annual report. There are three items upon which I would like to comment.
The first issue is your decision to exempt the SB filers from the requirements of the performance chart.
This exception hurts investors. For years, SB filers have dodged requirements often trying to "hide" under the SB exemptions so as to limit the data that is made publicly available about their companies. Yet the investor money that is given to them has the same value as that given to a Fortune 500 company. It makes little sense that investors in small businesses should be treated like second class citizens. There is a price companies pay for the public's money and part of that is the requirement for full disclosure. They know this going in.
This is information investors want and need and the arguments offered by SB filers to providing this information are specious at best. It is not a burdensome regulation as there are services that can readily provide this information efficiently. The cost of requiring SB filers to include the performance chart in their annual report is negligible. Compared to the cost of an audited financial statement, the cost of graphics, photography and printing of an annual report, not to mention its packaging and mailing, the added cost of a producing a performance chart is inconsequential.
The second issue I am concerned about is the continued mandating of the use of the SP 500 as the major market index for all companies included in that index. This requirement needs to be reconsidered.
The forcing of companies to use the SP 500 index versus a broader market indexes such as the Russell, the NASDAQ, the NYSE or one of the Dow-Wilshire indexes is unfair and gives shareholders a false picture of relative performance. While the 500 companies in the SP index at one time may have been an accurate indicator of the broad market, today it does not give as accurate a picture as some of the other indexes. Even SP has, in effect, acknowledged this with the introduction of broader market indexes including the use of the Global Industry Classification System. This requirement needs to be updated for the times and not carried over.
The third item is the proposal to allow companies to use as an additional performance measure, return on equity.
While conceptually attractive as a measure of performance, a hard methodology for the calculation of this item must be mandated. Without a mandated methodology for calculating this and its comparison to a peer group, the SEC will have opened the proverbial Pandora's box.
I would submit that you must define the calculation so as to have consistency in its presentation to shareholders. Specifically I would ask you set standards for the calculation concerning the following:
1. You MUST define what is "shareholder equity" in the denominator of the calculation. Is the shareholders' equity used in the calculation, the equity shown on an audited balance sheet as of the prior year end or an average, or weighted average equity figure derived over the course of the year? Should it be tangible equity as some suggest throwing out all intangibles on the balance sheet?
2. Is the equity used in the calculation to include equity in preferred shares or just common equity?
3. What happens if there is a convertible issue which may potentially be converted during the year?
4. How do you define the income number in the numerator, into which your defined "shareholders' equity" is to be divided into? Is its net income available to common shareholders net income prior to extra ordinary items or net income prior to deduction of preferred dividends?
5. What is the policy to be where income is not subject to taxes as in the cases of REITs or Partnerships?
6. Is the return on equity calculation to be made over a corresponding period of time to the performance graph or is it for one year only?
7. Is there to be a requirement that the return on equity of the subject company be compared to that of its performance graph peer group? If this is not the case how is a shareholder to know what this calculation should be compared to?
8. If the there is a relative comparison to a peer group, how is the peer average to be calculated? Must it employ the same methodology for each company in the peer group as is employed for the subject company and should peer companies with negative returns on equity be included in the calculation of the peer average?
9. If you do not choose to mandate a methodology for the calculation, will you require a footnote of the methodology to be included?
While conceptually attractive this calculation can be deceptively used unless there are specified guidelines as noted above.
Thank you for the opportunity to respond.
Thomas A. Elliott, Jr.
Research Data Group, Inc.
PO Box 883213
3450 Third Street Ste 3F
San Francisco, CA 94188