Dealer Accounting Committee of the Securities Industry Association
May 23, 2002
Jonathan G. Katz,
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: File No. S7-08-02
Dear Mr. Katz:
We are pleased to offer you the comments of the Dealer Accounting Committee (the "Committee") of the Securities Industry Association ("SIA")1 in response to Release No. 33-8089, 34-45741 (the "Release").2 Generally, the Release proposes to accelerate the filing of quarterly reports (10-Qs) and annual reports (10-Ks) under the Securities Exchange Act of 1934 by issuers that have a public float of $75 million or more. The proposal is to shorten the filing deadlines for these companies from 45 to 30 calendar days after quarter end for 10-Qs, and from 90 to 60 calendar days after fiscal year end for 10-Ks.
At the outset, the Committee wishes to applaud the Securities and Exchange Commission (the "SEC" or the "Commission") for publishing the Release, indicating as it does the Commission's continuing interest in ensuring that quality financial disclosure is made available to investors in a timely fashion. SIA firmly believes that disclosures that help provide a clear view of the risk profile of an issuer will be a step towards improving investor understanding, and renewing trust and confidence in our capital markets.
The Committee believes that the following key points should guide the Commission in its deliberations on the proposals contained in the Release:
As an alternative to merely shortening the filing deadlines under the existing regulatory paradigm for disclosures, the Committee proposes that the SEC consider building upon a nearly universal corporate practice with a view to creating a more continuous disclosure system.
Currently, most corporations release an earnings announcement within 3 or 4 weeks of the close of the quarter, which typically precedes the filing of a 10-Q or 10-K by several weeks. In our experience, these announcements attract considerably more attention from investors and analysts than do the subsequent regulatory filings. We propose that the Commission embrace the evolution of this market practice by standardizing earnings announcements, and making them the first entry in a stream of disclosure that would be supplied to investors. We envision three elements:
First Element We propose that any earnings announcement released by a firm be in a standardized format and take the form of a press release that would include at a minimum an income statement prepared in accordance with U.S. GAAP, (a pro forma calculation could be included, but a reconciliation to U.S. GAAP would be required)7 and total shareholders' equity, total capital, and segment data.
Second Element Within 30 days after the close of the quarter, the earnings announcement referenced above would be filed on an 8-K, as well as a full balance sheet and statement of cash flows. In the case of year-end disclosures, we would propose to file this document within 60 days.
Third Element We would propose that the third element be the current periodic requirements, namely the filing of a 10-Q within 45 days after the end of the quarter, or the 10-K within 90 days after the end of the issuer's fiscal year. With respect to these filings, we would observe that the delay that most firms experience is not generally due to a failure to have "the numbers" and an audit thereof but due to the time required to provide the complex footnote disclosures and qualitative descriptions required by the MD&A and footnotes to the financial statements. We urge the Commission to weigh the benefits of accelerating disclosure against the challenges of providing meaningful disclosure. If, however, acceleration is a fait accompli, we recommend that the Commission modify the filing deadlines to 75 and 40 days for 10-Ks and 10-Qs, respectively, and/or provide a longer phase-in period to permit issuers to acclimate procedures and systems to the accelerated filing regime.
The Committee shares the Commission's commitment to attempting to ensure more relevant and timelier disclosure to investors. With that goal in mind, we recommend that the SEC consider the advisability of implementing a continuous system of disclosure that would be built upon current market practices and regulatory requirements along the lines suggested above. Due to the relatively short period of time permitted for comments on the Release, we have necessarily had to provide a very broad outline of our views of how a system of continuous disclosure might be established. However, the Committee would be pleased to discuss this subject in greater detail at the Commission's convenience.
We appreciate the opportunity to comment upon the Release. If you have any questions about our letter or would like additional input from us, please feel free to contact me, or our SIA staff advisor, Jerry Quinn (212-618-0507).
Joanne Pace, Chair
Dealer Accounting Committee
1 The Securities Industry Association brings together the shared interests of nearly 700 securities firms to accomplish common goals. SIA member firms (including investment banks, broker-dealers, and mutual fund companies) are active in U.S. and foreign markets, and in all phases of corporate and public finance. The U.S. securities industry manages the accounts of nearly 80 million investors directly and indirectly through corporate, thrift, and pension plans. The industry generates $358 billion of revenue and employs approximately 760,000 individuals. (More information about SIA is available on our homepage: http://www.sia.com.)
2 67 FR 19896 (Apr. 23, 2002).
3 E.g., SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information"; SFAS No. 133, as amended, "Accounting for Derivative Instruments and Hedging Activities"; and "SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities".
4 E.g., Regulation S-K, Item 305, "Quantitative and Qualitative Disclosure about Market Risk" and new Regulation S-K Item 201(d) requiring detailed disclosure of equity compensation plan information.
5 Release Nos. 33-8098, 34-45907, International Series Release No. 1258, "Proposed Rule: Disclosure of Management's Discussion and Analysis about the Application of Critical Accounting Policies".
6 For example, a number of large financial institutions have voluntarily undertaken to provide additional disclosures pursuant to the recommendations of the Working Group on Public Disclosure (the "Shipley Report") and many are now collaborating with a newly formed Working Group of the Joint Forum on a follow-up to the Multidisciplinary Working Group on Enhanced Disclosure (the "Fisher Report") that is seeking a means of providing additional disclosures.
7 The Commission articulated its concerns about the use of pro forma information that may mislead investors by obscuring GAAP financial results. Release Nos. 33-8039; 34-45124FR-59. December 4, 2001.