May 23, 2002
Foley Hoag
Boston Office
617.832.1000
Via E-mail
Mr. Jonathan G. Katz
Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Commissioners:
We submit this letter in response to the request of the Securities and Exchange Commission (the "Commission") for comments regarding the Commission's proposal (the "Proposal") contained in Release No. 33-8089; 34-45741 (the "Release") to accelerate the filing deadlines for periodic reports filed under the Securities Exchange Act of 1934 (the "Exchange Act"). We appreciate the opportunity to participate in this important undertaking and intend our comments to be helpful to the Commission in its efforts to protect investors by ensuring the timely disclosure of material information.
We represent registrants of various sizes, in various industries, on a regular basis. This comment letter is responsive to issues our clients have raised in the course of our representation. Inquiries regarding this comment letter should be addressed to Messrs. Paul Bork (617-832-1113), John Hancock (617-832-1201) or Lee Feldman (617-832-3027).
The Proposal and the Commission's Objectives
The Proposal, if adopted, would require companies with a public float of at least $75 million that have been subject to the reporting requirements of the Exchange Act for a period of at least 12 calendar months, and certain foreign private issuers, to file annual reports on Form 10-K within 60 days after the company's fiscal year-end and file quarterly reports on Form 10-Q within 30 days after the end of each of the first three quarters of the company's fiscal year. Existing rules require all public companies to file Forms 10-K within 90 days after the end of the fiscal year and Forms 10-Q within 45 days after the end of each of the first three fiscal quarters.
In the Release, the Commission expressed a belief that accelerating the delivery of information to the capital markets would enhance the efficient functioning of those markets. While many public companies routinely issue press releases with quarterly and annual financial information before the filing of a Form 10-K or Form 10-Q, the Commission noted that these earnings releases vary dramatically in presentation and do not contain much of the detailed information found in the full reports. The Commission believes that shortening the deadlines would "shorten this information gap, thereby increasing the relevancy of those reports." Further, the Commission pointed out that filing deadlines for periodic reports have not been changed in over 30 years and that it is the Commission's view that advances in technology and productivity should enable companies to assemble and file these reports faster than they could have 30 years ago.
While we wholeheartedly support the Commission's desire to protect investors by ensuring the timely disclosure of material information, we are concerned that the new reporting framework might result in lower quality disclosure, substantial administrative burdens and a number of other new problems.
Issues and Problems with Accelerated Filing Deadlines
The accelerated filing deadlines under the Proposal simply do not afford many companies the time they need to close their books, have their auditors review (in the case of Form 10-Q) or audit (in the case of Form 10-K) the financial statements, make final adjustments and prepare the detailed analysis of information that is required by these reports. If the new filing deadlines are adopted, we believe that the result will be a lower level of accuracy and completeness in the reports filed and a substantial increase in the level of late filings pursuant to Rule 12b-25. We also believe that accelerating the date for filing Forms 10-K and 10-Q is inconsistent with the expansion of the role of the Audit Committee of the Board of Directors in the financial reporting process. One cannot expect the members of the Audit Committee to meaningfully perform their review functions where the period available to prepare and file the reports has been reduced by one-third.
The Proposal carries with it the prospect of greater inefficiency in the capital markets as companies of comparable business parameters within the same industrial sector may be publishing their full results as much as thirty days apart based on a small difference in market capitalization held by non-affiliates. The stocks of companies in the same sector often trade in patterns based upon the results of all companies in the sector. We think there exists significant risk of inefficiency in the capital markets if a system is adopted that requires disclosure on different time frames for companies in the same sector based on their market capitalization. If there is going to be an exception to the accelerated filing deadlines for "smaller issuers," a better distinction may be based on revenues, tangible assets, number of employees or other factors, which are better indicators of whether a company has sufficient scale and resources to meet the filing deadlines.
Our Recommendations for Improving Investor Access to Material Information
We believe there may be more practical, less onerous ways to provide investors with faster access to material information. Consistent with the goal of protecting investors through timely disclosure of material information, we suggest that the Commission require that all public companies make, via press release, periodic financial disclosures that contains at least certain identified "line items" of both income statement and balance sheet types within thirty (30) days after the end of a quarter and sixty (60) days of a fiscal year end.
To ensure consistent disclosure between companies and across industries, every such financial press release should include at a minimum the items required by Item 301 of Regulation S-K - "Selected Financial Data." See Instruction No. 2 which calls for "appropriate variation to conform to the nature of the registrant's business." The company at its option could include additional line items from the income statement and balance sheet. We recommend that if additional line items are included, such format remain unchanged for a full year.
This mandated scope of disclosure in financial press releases would afford investors a common base of information with which to analyze and judge performance on the faster basis that the Commission believes is required. To further ensure access to the disclosure, we suggest that such press release be "furnished" to the Commission as part of an Item 9 report on Form 8-K, consistent with the intentions of Regulation FD. Under this reporting scheme, additional narrative items which take more time to prepare, including the complex "Management's Discussion and Analysis", would not be required until the company files its Form 10-K and Forms 10-Q within the current filing deadlines.
Conclusion
While we support the Commission's desire to protect investors by ensuring the timely disclosure of material information, we strongly believe that accelerating the filing deadlines for periodic reports is fundamentally inconsistent with many of the Commission's stated objectives. For this reason we strongly urge that the Proposal be reformulated. We believe our recommendations as to a reformulated proposal would enable investors to have more timely access to material information, without creating substantial administrative burdens and increasing the risk of lower quality disclosure.
Respectfully yours,
Foley Hoag & Eliot LLP