New York State Bar Association
One Elk Street
Albany, NY 12207
Business Law Section
Committee on Securities Regulation
May 23, 2002
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, DC 20549
E-mail addresss: email@example.com
Attention Jonathan G. Katz, Secretary
Re: File No. S7-08-02
Acceleration of Periodic Report Filing Dates and Disclosure Concerning Website Access to Reports, Release Nos. 33-8089; 34-45741
Ladies and Gentlemen:
The Committee on Securities Regulation (the "Committee") of the Business Law Section of the New York State Bar Association appreciates the invitation in Release No. 33-8089 (the "Release") to comment on the proposal for accelerated filing of mandated annual and interim reports under the Securities Exchange Act of 1934.
The Committee is composed of members of the New York Bar, a principal part of whose practice is in securities regulation. The Committee includes lawyers in private practice and in corporation law departments. A draft of this letter was circulated for comment among members of the Committee, and the views expressed in this letter are generally consistent with those of the majority of members who reviewed and commented on the letter in draft form. The views set forth in this letter, however, are those of the Committee and do no necessarily reflect the views of the organizations with which its members are associated, the New York State Bar Association, or its Business Law Section.
A. Existing Filing Dates for Forms 10-K and 10-Q Should Be Retained
The Committee supports the Commission's objective to insure a transparent and understandable disclosure regime for the benefit of investors. However, in the case of the proposal for accelerated filing dates for Forms 10-K and 10-Q, for the reasons discussed below we believe that the Commission should retain the current filing dates.
If the Commission nonetheless believes that it must take action at this time, we urge that new filing dates be established on an experimental basis at 40 days for filing Form 10-Q and 80 days for Form 10-K. At such time as registrants and the Commission gain experience with the new requirements expected to flow from other disclosure initiatives, further reductions in filing periods can be considered. We recommend that any further reductions be on a phased-in basis over two years with a 10-day reduction for filing Form 10-K and a 5-day reduction for filing Form 10-Q in each of the two years. But, these additional reductions in filing times should not be instituted unless and until it can be shown that the new dates would not result in a reduction in accuracy and reliability of financial reports and disclosures.
1. Comments Filed in 1999 on the Aircraft Carrier Release Did Not Support Shortening Filing Periods
As noted in the Release, the Commission has, in connection with its 1998 release entitled "The Regulation of Securities Offerings", known as the "Aircraft Carrier Release", previously solicited the views of corporations, market participants and members of the legal, accounting and investment professions on the advisability of shortening the time periods for filing Forms 10-K and 10-Q. The comments filed in 1999 by many registrants and professional firms and associations pointed out a number of concerns and problems with accelerated filing dates. The following is a summary listing of some of those concerns.
We respectfully request that the Commission review and consider those comments filed on the Aircraft Carrier Release. Although some commenters favored shortened filing periods, we believe that the serious and substantial nature of the problems raised in the comments demonstrated at the time that the existing filing dates should be retained. We know of nothing that has occurred since then that would change this conclusion today. If anything, additional requirements and demands, including Audit Committee review, would raise questions about whether some of the commenters that did not oppose accelerated filing dates would have the same views today.
2. Changes Since the Aircraft Carrier Release Make Accelerated Filing Dates Even More Problematic
New, express requirements, as well as heightened sensitivity by registrants and their Audit Committees since the Aircraft Carrier Release, have placed additional time and other pressures on registrants in preparing annual and interim reports. These include Audit Committee reviews of interim financial statements with the independent auditors, Audit Committee reports in the proxy statements in connection with reviews of the audited financial statements included in Form 10-Ks, and independent auditor review of interim financial statements. In addition, Commission actions have added to the detail and complexity of disclosures, most recently the Statement about MD&A concerning liquidity and capital resources, off-balance sheet arrangements, certain trading activities, and transactions with related parties, and the Cautionary Advice Regarding Disclosure About Critical Accounting Policies.
The most significant (and as of yet untested additional demands) will probably be the rules mandating new MD&A disclosures about the application of critical accounting policies, proposed by the Commission in Release No. 33-8089 ("MD&A Release"). The proposal would require additional disclosures about the critical accounting estimates made by the company in applying its accounting policies, and disclosures concerning the initial adoption of an accounting policy by the company.
Among other things, the MD&A Release would require additional data collection, sensitivity studies, and earlier and more extensive involvement of the independent auditors and the Audit Committee. In addition, many commentators are looking to the Audit Committee as the gatekeeper for reviewing financial reporting and financial disclosures. We expect that Audit Committees will need and demand more time -- receiving copies of financial statements and reports earlier in order to be able to read and digest the increasingly more complex reports and disclosures, and thereafter to review them with management and the independent auditors and request further information if necessary.
This additional lead time needed by Audit Committees, as well as for independent auditor reviews, taken together with the additional time for registrants to assemble information and write the reports, all argue for longer, not shorter, periods to assemble, prepare and review reports. Consequently, we believe that it would not serve the public interest to shorten the filing periods at this time.
3. Many Companies Would Have Difficulty Meeting the Proposed Filing Dates and Believe that the Quality of their Disclosures Would Suffer
The financial markets and the Commission seek greater quality in financial reporting and disclosure, and favor greater quality over greater speed. There is an inherent tension between improving quality of disclosure, and at the same time, seeking speedier disclosure. We believe that accelerated filing dates would be difficult to meet for a large number of companies and would result in a reduction in the quality and accuracy of financial reporting and disclosure.
These conclusions are supported by the comments filed on the Aircraft Carrier Release. In addition, two professional associations have conducted extensive surveys of their corporate members in which a majority of the responding companies support the foregoing conclusions. The survey by the National Investor Relations Institute ("NIRI") is referred to in footnote 49 of the Release. The Commission cited the results of the NIRI survey that 40 percent of respondents did not anticipate significant problems filing 10-Ks within 60 days, and 46 percent anticipated no significant problems filing 10-Qs within 30 days. However, we believe that the more pertinent results of that survey are that 60 percent of respondents anticipate significant problems filing 10-Ks within 60 days, and 54 percent anticipate significant problems filing 10-Qs within 30 days.
The other survey was conducted by the American Society of Corporate Secretaries, which has filed comments on the Release reporting the results of its survey. In that survey, 23 percent of respondents said they cannot file 10-Ks in 60 days and 30 percent were not sure if they can file within 60 days. With respect to 10-Qs, 29 percent of respondents reported they cannot file in 30 days, and 25 percent are not sure if they can file within 30 days.
4. Additional Questions if Accelerated Filing Dates are Adopted
In response to some of the additional questions and issues raised for comment in the Release, assuming accelerated filing dates are adopted, the Committee believes that
In the absence of criteria that would distinguish companies that could meet accelerated dates from those that could not, the Committee suggests that the Commission adopt criteria that would serve the overall public interest. The criteria should be set to exclude companies whose failure would not be expected to impact the financial markets. One possibility is a specified level of total assets; others are a specified level of average daily trading volume or a specified level of market capitalization.
B. Same Day Postings on Company Websites No Longer Necessary with Real Time Access to Filings on EDGAR; the Commission Should Expressly Provide That References to Websites Do Not Incorporate Website Information By Reference
We commend the Commission for taking prompt action to eliminate the 24-hour delay on EDGAR. The real time access to filings on EDGAR now eliminates the need for same day posting of filings on company websites. EDGAR provides the most convenient website access to filed documents for investors generally. Investors can access the filings of any electronic filer on one website without the need to know individual company website addresses.
We see no problem in requiring companies to refer to the Commission's website and Public Reference Room for access to its filings. This is already a requirement of electronically filed registration statements. We also have no objection to requiring companies to give their website addresses and stating whether they make their Forms 10-K, 10-Q and 8-K available free of charge on their websites, provided two conditions are met. One is that the Commission clarify that website content will not be deemed incorporated by reference.
The Commission should expressly provide by rule, unconditionally, that including a website address (even with hot links to the site) in any filing under the Securities Act or the Exchange Act does not constitute incorporation by reference of any website information unless, and only to the extent of, information expressly incorporated by reference. Some companies, out of an abundance of caution, may still include disclaimers, but registrants should not be at risk as to whether they have taken the necessary steps to avoid being deemed to have incorporated their websites. We understand that some browsers may activate website addresses outside the control of the company. Footnote 75 of the Release states that inclusion of a website address "would not, by itself, include or incorporate by reference" the website information, and suggests steps for the company to take to avoid incorporation. This footnote is intended to keep open the possibility that a company may be deemed in some cases to have incorporated website material.
Avenues of enforcement or redress applicable to information other than website content are also available to the Commission and to private investors for addressing website content, without the need to subject website content to statutory liability as a filed document. These include dealing with materially misleading information being used in connection with securities transactions, and information that constitutes improper gun-jumping. Such relief from incorporation is critical if the Commission requires including company website addresses, and in any event should be adopted by the Commission even if it does not mandate giving website addresses. Failure to give relief would be unfair to registrants, and would most likely trip up the unwary. Furthermore, keeping open the possibility of incorporation and the attendant potential for liability would be counter to the Commission's objective of encouraging making more information more readily available through the Internet.
The other condition is to eliminate the required reference to same day posting of filed reports on company websites. The need for same day posting is now academic with real time EDGAR access. Posting on a company website as soon as reasonably practical should be sufficient. Furthermore, where companies post documents on their websites, as opposed to linking to EDGAR, the documents generally are not in EDGAR format. The time to do the formatting and the process of checking to ensure that the posted document exactly matches the EDGAR filing (e.g., no dropped lines) can take more than a day and delay posting beyond the day of filing.
Finally, we see no valid purpose for requiring the affected companies to disclose why they do not post their reports on their websites, or to require companies to provide names and fees of third party service providers. Again, the latter requirement is academic now that there is real time access to EDGAR filings.
We hope the Commission finds these comments helpful. We would be happy to meet with the Staff to discuss these comments further.
COMMITTEE ON SECURITIES REGULATION
By Gerald S. Backman__________________
GERALD S. BACKMAN
CHAIRMAN OF THE COMMITTEE
Joseph D. Hansen, Chair
Michael J. Holliday
Margaret A. Bancroft
Henry Q. Conley
Richard E. Gutman
Richard R. Howe
The Honorable Harvey L. Pitt, Chairman
The Honorable Isaac C. Hunt, Jr., Commissioner
The Honorable Cynthia A. Glassman, Commissioner
Alan L. Beller, Esq., Director of Division of Corporation Finance
House Committee on Financial Services
The Honorable Michael G. Oxley, Chairman
The Honorable John J. LaFalce, Ranking Member
Members of the Committee
Senate Committee on Banking, Housing, and Urban Affairs
The Honorable Paul S. Sarbanes, Chairman
The Honorable Phil Gramm, Ranking Member
Members of the Committee