April 17, 2001
Mr. Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
Mail Stop 6-9
450 Fifth Street, N.W.
Washington, DC 20549
File No. S7-04-01 SEC Release Nos. 33-7944, 34-43892
Disclosure of Equity Compensation Plan Information
Dear Mr. Katz:
The SEC Regulations Committee of the American Institute of Certified Public Accountants (AICPA) is pleased to respond to the Commission's request for comments on its proposed amendments to the disclosure requirements applicable to proxy statements and periodic reports under the Securities Exchange Act of 1934, as presented in Release Nos. 32-7944 and 34-43892, Disclosure of Equity Compensation Plan Information.
While we are supportive of the Commission's efforts to provide meaningful disclosure of the implications of a registrant's equity compensation plans, we believe that the proposed disclosures fail to achieve the Commission's objectives and largely overlap disclosures already required by GAAP. In our view, the proposed rules will only increase the amount and costs of disclosures by public companies without providing meaningful information to investors.
Proposed Information Redundant with GAAP
The proposed amendments require reporting of much information that is already required by GAAP under FASB Statement No. 123, Accounting for Stock-Based Compensation (FAS 123). FAS 123 provides the necessary information on the potential dilution from outstanding earned and unearned equity awards, as well as the number of shares authorized for grants. Further, FAS 123 requires the disaggregation of data on various types of awards when required to understand the implications of those awards on the company's financial statements. FAS 123 also requires information for both employee and non-employee stock-based compensation arrangements, thereby addressing the Commission's concern about equity-based compensation plans for goods and services.
In addition to the requirements of FAS 123, FASB Statement No. 128, Earnings per Share (FAS 128), provides information on the potential earnings dilution from stock options and other potential issuances of common stock. FAS 128 provides this information in the disclosed amount of diluted earnings per share, as well as in the required numerical reconciliation of the denominator for that computation that was intended to highlight "the dilutive effect of certain securities included in the EPS computations" (paragraph 137 of FAS 128).
From a broader perspective, the accounting profession is concerned about redundancies in reporting between SEC and GAAP requirements. As suggested in the recently issued report of the GAAP-SEC Disclosure Requirements Working Group (as part of the Business Reporting Research Project, sponsored by the Financial Accounting Standards Board), the redundant requirements between GAAP and SEC disclosures should be removed. Further, as recommended in that report, a proactive effort is needed to prevent future redundancies between GAAP accounting standards and SEC disclosure rules. In our view, the proposed disclosure of more detailed data about equity compensation plans beyond that already required by GAAP would be a step in the wrong direction, as we see no need for additional, duplicative numerical or tabular information on a plan-by-plan basis.
To the extent that the Commission believes that additional disclosures are needed about a registrant's equity compensation programs to address the stated concerns and objectives, we suggest that the Commission consider proposing additional narrative disclosures. Such narrative disclosures could be incorporated into Regulation S-K Item 303, Management Discussion & Analysis, or Regulation S-K Item 402(k), Compensation Committee Report.
The New York Stock Exchange is currently working on a project to change its criteria for shareholder approval of equity compensation plans to be based on a dilution test. It is expected that the recommendations of the project would be studied and discussed amongst all the major listing markets in the United States. The adoption of a materiality based dilution criteria for shareholder approval would address one of the principal concerns cited by the Commission in proposing the additional equity compensation plan disclosures. In the event that the Commission moves forward with the disclosures as proposed in the release, we recommend that a five year sunset provision be added to the amendments to preclude potential future redundancy.
Location of Disclosures
If the Commission chooses to finalize the rules as proposed, we believe that the additional disclosures are best suited for inclusion in the proxy statement only, and not in the Form 10-K or annual report. Disclosure in the proxy statement maintains all compensation information in a central location. Moreover, we disagree with the proposed requirement to include the information in the proxy only in years when the registrant is seeking security holder action regarding a compensation plan and in the annual report on Form 10-K in years when the registrant is not seeking security holder action. This approach is inconsistent and would be difficult for registrants and investors to follow. Accordingly, we recommend that the disclosures in the proxy statement be provided under Item 8 instead of Item 10, as Item 8 disclosures are required whenever directors are being elected. Providing this information under Item 8 will ensure that it is usually provided in the proxy statement each year, rather than only in years when a plan is being approved.
Finally, we would like to comment on the cost summary contained in the cost benefit analysis. The analysis estimates that the preparation of the required tabular disclosure will add two burden hours to each proxy or information statement or annual report on Form 10-K or 10-KSB, and preparation of the required description of the material terms of the equity compensation plans, where required, will require another two burden hours. Based on our prior experience observing companies' compliance with SEC disclosure requirements, we believe that the estimates of the additional time required to comply with the proposed new disclosures are significantly understated.
The Commission cited the need to provide investors with information to promote investors' understanding of a registrant's equity compensation policies and practices so that investors can make informed voting and investment decisions. We believe that the current disclosure requirements of FAS 123 and FAS 128 provide investors with the material information necessary to assess the potentially dilutive effects of a registrant's equity compensation plans. Further, we do not believe that the proposed disclosures provide incremental value in this regard, nor do they achieve the Commission's stated objective for its rule-making proposal. Therefore, we urge the Commission to reconsider the need for the detailed, plan-by-plan tabular disclosures, as proposed.
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The AICPA SEC Regulations Committee appreciates the opportunity to comment on the release. We would be pleased to discuss these comments with you at your convenience.
Amelia A. Ripepi
AICPA SEC Regulations Committee