Cleary, Gottlieb, Steen & Hamilton
one liberty plaza
new york, ny 10006-1470

May 23, 2002

Mr. Jonathan Katz
Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Re: Proposed Rules Regarding Acceleration of Periodic Report Filing Dates and Disclosure Concerning Website Access to Reports (File No. S7-08-02)

Dear Mr. Katz:

We are submitting this letter in response to the request of the Securities and Exchange Commission (the "Commission") for comments on the Commission's proposed rules regarding the acceleration of periodic report filing dates and disclosure concerning website access to reports set forth in Release Nos. 33-8089; 34-45741 (the "Proposing Release"). We appreciate the opportunity to comment on the matters discussed in the Proposing Release.

We commend the Commission for its efforts to improve the usefulness of annual and quarterly reports to investors. However, we are concerned that by sharply reducing the time available to draft and review these reports, the new deadlines will seriously undermine the Commission's parallel efforts to promote better quality disclosure, particularly MD&A. We believe the proposed deadlines will needlessly strain the capabilities of issuers, their boards of directors and audit committees at a time when the need for better quality MD&A disclosure is increasingly apparent.

We would elaborate on our views as follows:

I. The 30- and 60-day deadlines should not be adopted at this time.

We do not support alteration at this time of the deadlines for quarterly and annual reports. Our view is based on the following observations:

• The accelerated filing deadlines will undermine the Commission's efforts to promote quality MD&A disclosure. The Commission has recently noted that far too many companies produce MD&A disclosure that consists of little more than "rote calculations of percentages" and "boilerplate recitations" that fail to explain the drivers and dynamics behind the figures. Investors are too often faced with a lack of transparent disclosure and MD&A that is neither useful nor understandable. ¹
   
  Although we recognize and support the Commission's efforts to reverse this trend, we believe these efforts will fail if companies are not given adequate time to prepare more useful disclosure. Preparing useful MD&A disclosure is already a time consuming process under existing requirements. Responding to the Commission's calls for additional disclosure on critical accounting policies, liquidity and capital resources and related party transactions in MD&A, as well as the additional MD&A requirements the Commission promises for the future,² will add further time to the process, as will efforts to promote meaningful involvement by audit committees.
   
  We believe it is counterproductive to increase the demands on issuers while simultaneously reducing the available preparation time for reports by one-third. Faced with shorter deadlines, we believe companies will, as a matter of necessity, undertake less ambitious efforts to improve their MD&A disclosure.
   
  In sum, we believe the Commission's proposal puts the cart before the horse. The Commission is asking issuers to file annual and quarterly reports more quickly without any data regarding how much longer it will take to prepare those reports under the new MD&A requirements. In fact, the Commission has not yet even finally determined what those new requirements will be. Before embarking on a modification of the filing deadlines, the Commission should first determine what additional disclosure it wants issuers to provide in their annual and quarterly reports, and then allow issuers to gain experience in providing that disclosure. Only then should the Commission consider any modification of the filing deadlines, based on an analysis of issuer experience with the myriad new MD&A requirements under consideration.
   
• The accelerated deadlines would limit the time available for review by audit committees and boards of directors. Audit committees and boards of directors are increasingly being called upon to do more to help ensure the accuracy and completeness of financial statements and MD&A.³ Reducing the time available for review will hamper efforts to promote meaningful audit committee involvement. In the case of audit committee and board reviews of annual reports, the time crunch will be exacerbated by the fact that most issuers are on a calendar year schedule, and many directors serve on more than one public company board. Further compressing the available time frames will mean that the same people will be asked to focus significant efforts on several companies in a short time frame, posing real practical problems.
   
• The work is usually far from over when the earnings release is published. We believe that most companies do not release their earnings until all audit work that could have an impact on the information contained in the earnings release is complete. However, in our experience, most companies need substantial additional time after the earnings release to complete the other parts of the financial statements, including balance sheet information and the detailed notes to the financial statements. After the time necessary to draft and review meaningful MD&A disclosure is added, there is usually little, if any, time left before the filing deadline. In light of these considerations, we believe that many registrants will have considerable difficulty meeting the proposed deadlines without cutting corners that would undermine the quality of their disclosure. This will be of particular concern for quarterly reports. As noted in the Proposing Release, on average, registrants currently release their quarterly earnings 27 days after the end of a quarter. Allowing only three days more than the average date on which earnings are released to prepare and review the full quarterly report leaves far too little time to do the job properly. Accelerating filing deadlines may also increase the likelihood of amended filings to correct previously — and prematurely — reported information.
   
• Technological advances do not justify accelerating the filing deadlines. Although technology has made it easier for many companies to collect data more quickly on the front end, the process of analyzing that data, determining the drivers behind trends and drafting useful MD&A to discuss the figures continues to be a labor intensive process that involves multiple participants and many layers of review.
   
• Many registrants that qualify as Accelerated Filers will have significant difficulty meeting the new deadlines. Contrary to the assumption set forth in the Proposing Release, we believe that many companies that would qualify as Accelerated Filers will find the new rules very burdensome. We agree that larger companies often have greater accounting and information technology resources than smaller companies. However, larger companies also often have far more complex operations than do small companies. Far-flung foreign operations and multiple business segments frequently hamper the speed with which many of the companies covered by the Accelerated Filer definition can prepare their reports.

II. Any acceleration of the filing deadlines should be phased in gradually.

If the Commission determines to accelerate the filing deadlines at this time, we believe it should do so more gradually than set out in the Proposing Release. For example, the Commission could accelerate the deadline only for Form 10-K, and to 75 days, rather than 60 days, after the end of an issuer's fiscal year. This approach would allow the Commission to evaluate the ability of issuers to meet the new MD&A disclosure and audit committee review requirements on a somewhat accelerated basis, without greatly increasing the likelihood that a large number of issuers would fail to meet the requirements or would provide reduced quality disclosure. This approach would also have the benefit of avoiding the problems that would likely accompany an acceleration in the Form 10-Q deadline, since, for the reasons described above, we believe any meaningful acceleration of the current deadline would not allow issuers time to prepare useful MD&A, even under existing disclosure requirements. After an evaluation of the success of this initial phase, in conjunction with an analysis of the burden added by the new MD&A requirements, the Commission could consider whether to accelerate the Form 10-Q filing deadlines or to further accelerate the Form 10-K filing deadlines.⁴

III. Filing Deadlines for Foreign Issuers should not be accelerated.

The Proposing Release asks for comment on whether the due date for annual reports of foreign private issuers on Form 20-F should be reduced from six months after the end of their fiscal year to four or five months after the end of their fiscal year.

We would not support an acceleration of the Form 20-F filing deadline. Accelerating the due date for filing Form 20-F would be unduly costly and burdensome to foreign private issuers. Although some foreign private issuers may be able to produce the requisite financial information, including U.S. GAAP reconciliation, and the other detailed disclosure required within the proposed accelerated time frames, a significant number will not be able to do so. Many foreign private issuers also face the considerable burden of preparing English translations or English summaries of foreign language documents and financial information.⁵ We do not believe the possible marginal benefit that may be achieved in receiving earlier disclosure by foreign private issuers justifies the considerable burdens it will place on them. Furthermore, this proposal would only serve to undermine the Commission's efforts to encourage foreign issuers to access the U.S. public markets in connection with their capital raising efforts.⁶

IV. Website Access to Periodic Reports.

We generally support the proposal to require subject companies to disclose in their annual reports their website addresses, if they have one, and to post on their websites their annual, quarterly and current reports. We note, however, that requiring subject companies to post these reports on the same day as they are filed electronically with the SEC may prove difficult. In our experience, many of these filings are made late in the day, either just before or after the close of business. This timing may for practical and technological reasons prevent companies from being able to post their reports on their websites on the same day they are electronically filed. In response to this technological hurdle, we suggest simply requiring that this information be made available within 24 hours of the time of filing.

V. Suggestions in the event the 30- and 60-day deadlines are adopted.

If, despite our concerns outlined above, the Commission decides to adopt the 30- and 60-day accelerated filing deadlines set forth in the Proposing Release, we would urge the Commission to implement the suggestions set out below in order to reduce the negative consequences of the new deadlines and make them more workable.

• Rule 12b-25
  In the event the Commission adopts the 30- and 60-day filing periods, we recommend extending the grace periods for quarterly and annual reports under Exchange Act Rule 12b-25 to mitigate the potential harm to filers who are unable to meet the new guidelines. Under this rule, companies that comply with the requirements of Rule 12b-25 currently can file their quarterly reports five calendar days after the prescribed filing deadline, and their annual reports 15 calendar days after the prescribed filing deadline. We believe this should be extended to 15 calendar days for quarterly reports and to 30 calendar days for annual reports so that the grace periods would incorporate the previous filing deadline. Extending the grace periods in this manner would provide companies additional leeway in those instances where the necessary information cannot be gathered and analyzed in time to meet the accelerated filing deadline.
   
• Alternative Thresholds for Accelerated Filer Status
  We believe that the alternative thresholds for determining Accelerated Filer status that the Proposing Release indicates are under consideration, such as a $5 million revenue or asset threshold, would cast too wide a net, capturing companies that do not have the resources to comply with the shortened filing dates. In addition, using a different test than that used for Form S-3 eligibility would further confuse issuers and be even more disruptive than the original proposal.
   
• Conforming Changes to Item 7 of Form 8-K
  The Proposing Release indicates that the Commission is considering reducing the filing deadlines for financial statements in respect of acquired businesses and pro forma financial statements that are contained in Item 7 of Form 8-K (i.e., reducing the filing deadline from 60 to 40 days). We do not believe this change logically flows from the proposal inasmuch as the financial information required by Item 7 is not prepared in the ordinary course of business. This requirement could prove particularly difficult for companies to meet in the context of an acquisition of a company that is not a reporting company. For these reasons, we do not believe the Commission should implement this change.

  *       *       *

  We thank you for the opportunity to submit this comment letter. We would be happy to discuss with you any of the comments described above or any other matters you feel would be helpful in your review of the proposal. Please do not hesitate to contact Leslie N. Silverman or Janet L. Fisher in New York (212-225-2000) or Edward F. Greene in London (44-171-614-2200) if you would like to discuss these matters further.

  Very truly yours,

  CLEARY, GOTTLIEB, STEEN & HAMILTON

  cc: The Honorable Harvey Pitt, Chairman
  Alan L. Beller, Director, Division of Corporation Finance

  Endnotes

  ¹ See generally, SEC Release Nos. 33-8098; 34-45907; International Series Release No. 1258 (May 10, 2002) (the "Critical Accounting Policies Release"). See also SEC Release Nos 33-8056; 34-45321; FR-61 (Jan. 22, 2002) (the "MD&A Release").

  ² See, e.g., the Commission's statements in the Critical Accounting Policies Release indicating that it currently is considering additional proposals to require a MD&A summary, further disclosure regarding off-balance sheet structures and improved trend information. It can be expected, in the wake of Enron, that accounting pronouncements will also require increased disclosures as part of financial statement presentation. These proposals are, of course, in addition to increased disclosure requirements under accounting standards promulgated in recent years, including SFAS 144, SFAS 140 and SFAS 133.

  ³ See, e.g., the Commission's suggestion in the Critical Accounting Policies Release that management should discuss critical accounting estimates with the audit committee. The additional burden on audit committees should not be understated: the sample audit committee charters in the Report and Recommendations of the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees (1999) suggest some 20 responsibilities often assigned to audit committees.

  ⁴ We would not recommend that the Commission adopt new rules requiring companies to file their reports by the earlier of the existing deadlines or an earlier time after their first release of earnings. Such a rule would effectively penalize companies that publish earnings releases, and reward those that do not. Adopting it would both discourage and delay the prompt release of earnings information to investors.

  ⁵ These burdens will likely increase under the new rules regarding translation and English summaries of foreign language exhibits. See Release Nos. 33-8099, 34-45922, International Series Release No. 1259 (May 14, 2002).

  ⁶ We raised similar timing and related concerns in our comments on the proposals by the Commission in the Aircraft Carrier Release and on the Commission's earlier proposals with respect to changes in the permitted age of financial statements of non-U.S. issuers. See SEC Release No. 33-7606A; 34-40632A; IC23519A (Nov. 13, 1998) (the "Aircraft Carrier Release") and our comment letter with respect thereto dated June 30, 1999. See also SEC Release No. 33-7637; 34-41014; IC 1182A (Feb. 2, 1999) and our comment letter with respect thereto dated May 18, 1999.