John H. Krueger, Jr.|
Senior Vice President
May 23, 2002
Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
|Re:||Acceleration of Periodic Report Filing Dates and Disclosure Concerning Website Access to Reports, Commission File No. S7-08-02|
Dear Mr. Katz:
I am writing to you on behalf of Valero Energy Corporation ("Valero") to provide our comments on the Commission's proposed rules concerning the acceleration of periodic report filing dates set forth in Release No. 33-8089;34-45741 (the "Proposed Rule"). We are pleased to have the opportunity to comment on the Proposed Rule.
Valero is a Fortune 100 company based in San Antonio, Texas with over 22,000 employees and total assets of almost $15 billion. One of the top three U.S. refining companies in terms of refining capacity, Valero owns and operates 11 refineries in the United States and one refinery in Canada with a combined throughput capacity of about 1.9 million barrels per day. Valero's common stock has been publicly traded since 1979, and its common stock trades on the New York Stock Exchange under the symbol "VLO." As a result, we would qualify as an "accelerated filer" under the Proposed Rule.
We wholeheartedly support the Commission's goal of improving disclosure to investors, and we have been in favor of many of the Commission's efforts to facilitate the timely disclosure of reliable, complete and accurate information to the investing public. Indeed, we have embraced Regulation FD as an effective tool with which to provide meaningful and timely disclosure to our shareholders. We do not believe, however, that the Proposed Rule will serve to advance these goals. Instead, we believe that the Proposed Rule would impose significant burdens on the "accelerated filers" who are subject to its requirements without providing a commensurate benefit to investors. Moreover, we believe that the accelerated filing schedules may in fact result in a diminution in the reliability, completeness and accuracy of periodic reports as issuers would lack sufficient time to properly prepare such reports. For these reasons and those expressed below, we respectfully oppose the adoption of the Proposed Rule.
B. Summary of Proposed Rule and Prior Comments
The Proposed Rule would shorten the filing deadline for periodic reports on Form 10-K from 90 days to 60 days and for periodic reports on Form 10-Q from 45 days to 30 days. Many issuers already struggle to comply with the current deadlines, and most, if not all, issuers must exert substantial effort to comply with the current deadlines. The Commission previously proposed the acceleration of the periodic reports filing dates as part of the so-called "Aircraft Carrier" release in 1998, and the Commission received a number of comments to that proposal. The majority of the comments, together with most of the comments that have been filed to date with respect to this Proposed Rule, have opposed the adoption of accelerated filing dates for periodic reports. These comments have been received from a wide range of market participants, ranging from issuers, counsel, investment banks, legal bars and business associations. In the aggregate, these participants have a vast degree of experience in the financial markets, and many have supported various means by which to facilitate greater disclosure to investors. We join them in their opposition because we believe that the objections made to the proposal in 1998 remain just as valid today.
C. Larger Issuers Will Not Be Better Able to Comply with the Proposed Rule
The Commission has indicated in the issuing release for the Proposed Rule that it has limited the accelerated filing dates for periodic reports to those issuers who meet certain public float and reporting history requirements, so-called "accelerated filers," based on the fact that larger, more experienced issuers are more capable of meeting the shorter filing deadlines. We strongly disagree that this is the case. Rather, we believe that the shortened filing deadlines would impose a substantial burden on both large and small issuers. Many larger issuers have far-flung operations extending across the United States and, in many cases, worldwide. In addition, their operations often include businesses in different industries which imposes upon them the additional burden of reporting by segment. The compilation of the financial information necessary for periodic reports for these diverse and complex business operations requires substantial time and effort. Indeed, many of the issuers who would be subject to the accelerated deadlines for filing their periodic reports currently need every moment of the current filing periods in order to compile the financial information and perform the processes and procedures necessary to file their periodic reports on a timely and accurate basis. We believe that accelerating the deadlines for periodic reports would place an undue burden on those issuers who would be subject to the accelerated filing dates for periodic reports.
The Commission points out in the issuing release for the Proposed Rule that the filing deadlines have remained the same since 1970, yet the technology available to issuers has increased dramatically, and concludes on that basis that larger, more experienced issuers should be in a position to prepare and file their periodic reports more quickly. This analysis, however, fails to take into account that disclosure requirements have increased dramatically since 1970. The requirements for substantive disclosure and procedural review have increased steadily and substantially, both of which serve to increase the time necessary to prepare and finalize periodic reports. In fact Valero's disclosures in Items 7 and 8 of its Form 10-K have effectively doubled to approximately 90 pages over the last 5 years. Moreover, based on the current rules proposals of the Commission, it appears that the Commission and accounting profession will continue to increase disclosure requirements.
In order for Valero to perform all of the necessary steps of gathering financial information, reviewing that information, obtaining the outside review or audit of that information, carefully drafting the necessary disclosure language, and engaging in the comment and review process with management and the audit committee, we are stretched to our capacity to meet the current filing deadlines. This is particularly true when acquisitions or other transactions have occurred during the reporting period, requiring the integration of new reportable information and the preparation of pro forma information and other disclosures. If the filing dates were to be accelerated as proposed in the Proposed Rule, we would necessarily be forced to increase our internal financial reporting capacity and devote substantially more resources and attention to the preparation of periodic reports during the filing periods. In addition, we are certain that our outside auditors would likewise be compelled to increase their employees devoted to our audit in order to meet the shortened deadlines, thereby increasing the cost of Valero's external audit. We therefore believe that the Proposed Rule would impose a substantial burden on Valero both in terms of labor and expense. We believe that many other issuers that would be subject to the provisions of the Proposed Rule are similarly situated.
D. Accelerated Filing Dates Could Decrease the Quality of Disclosure
We are particularly concerned that the acceleration of the filing deadlines for periodic reports will decrease the accuracy, completeness and reliability of periodic reports because issuers will not have sufficient time to properly prepare their reports. As discussed above, the compilation and review of the financial information required by periodic reports is a significant undertaking. Moreover, the preparation of careful and accurate disclosure language, in accordance with the recommendations of the Commission, requires a great deal of time and effort. The performance of the various levels of review, including that of management, the audit committee and the board of directors, requires additional time. Each of the various steps of the review process would have to be compressed if the filing dates for periodic reports were accelerated, and it would be substantially more difficult to perform a satisfactory level of review prior to the filing date. As a result, at a time when we should be requiring more involvement by management and the audit committee in the reporting process and more accountability on the part of management, the Proposed Rule would, by its very nature, be allowing less time for management to ensure the propriety of reported information. We believe the prospect of less reliable periodic reports would be to the material detriment of investors and substantially outweighs any benefits that may be provided to investors by making periodic reports available earlier.
E. Issuance of Earnings Release Does Not Mean an Issuer's Audit Is Substantially Complete
The Commission has also assumed as a basis for the Proposed Rule that issuers who issue their earnings releases have substantially completed their annual audit, including the notes and MD&A disclosure. Earnings releases are typically issued some time before the filing dates for periodic reports, so the Commission has concluded that issuers must therefore be in a position to file their periodic reports earlier because the annual audit is complete. We strongly disagree with this conclusion. At the time Valero issues its earnings releases, it typically has not substantially completed the annual audit or the quarterly review nor had time to complete all necessary disclosures. Rather, in response to substantial market pressure to issuer earnings releases as soon as possible, we endeavor to release earnings as soon as we have completed an appropriate portion of the audit or SAS 71 review to substantiate the earnings release information. It is our understanding that many other issuers follow a similar procedure with respect to their earnings release. As a result, we believe its is incorrect to conclude that issuers must have completed their audit and therefore are in a position to make their periodic report filings based on the fact that they have issued their earnings release.
In conclusion, we do not believe that the Commission should accelerate the filing dates for periodic reports as set forth in the Proposed Rule. We certainly support more timely disclosure to the extent it benefits investors, but we believe the additional burdens placed on issuers to meet the accelerated filing dates will diminish the reliability, completeness and accuracy of periodic reports without providing any significant benefits to investors. We believe the Proposed Rule is based on several questionable assumptions. First, the assumption that full audited financial statements, including notes and with supporting MD&A, are substantially complete at the time of an issuer issues its earnings release is often not the case. Second, the assumption that the "accelerated filers" have the systems and personnel to easily adjust to the decrease in the amount of time that would be available to prepare periodic reports is not well founded. Again, this assumption disregards the considerable increase in the disclosure requirements that are now applicable to issuers and the ever increasing complexity of many issuers' businesses.
For all these reasons, we would respectfully request that the Commission withdraw the Proposed Rule.
/s/ JOHN H. KREUGER, JR.
John H. Krueger, Jr.
|cc:||William E. Greehey, Chief Executive Officer and President|
John D. Gibbons, Executive Vice President and Chief Financial Officer
Gregory C. King, Executive Vice President and General Counsel
Jay D. Browning, Vice President, Secretary and Managing Attorney, Corporate Law