Caremark Rx, Inc.
3000 Galleria Tower, Suite 1000
Birmingham, Alabama 35244
May 22, 2002
Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street NW
Washington, DC 20549
Re: Commission File No. S7-08-02, Acceleration of Periodic Report Filing Dates and Disclosure Concerning Website Access to Reports
VIA ELECTRONIC MAIL TO firstname.lastname@example.org
Dear Mr. Katz;
As officers of Caremark Rx, Inc. (“Caremark”), a registrant which would be subject to the accelerated filing requirements proposed in Release No. 33-8089; 34-45741 (the “Proposing Release”), we make the following comments on behalf of Caremark:
Comments Regarding Acceleration of Quarterly and Annual Report Due Dates
Timeliness Versus Accuracy. While not specifically mentioned in the Proposing Release, its timing and other factors make it appear to have been prompted by the high-profile bankruptcy of Enron Corp. and the associated scrutiny surrounding current accounting and auditing practices. If this is indeed the case, we believe that the Proposing Release misses the mark as a response to investor confidence issues precipitated by Enron’s collapse.
Much has been written in the press about Enron’s financial reporting practices, but we do not recall having read a single criticism of the timeliness of Enron’s financial statement filings. We have, however, read many thousands of words devoted to their accuracy.
Accounting information is available on a continuum with the quality of timeliness in one direction and that of accuracy in the other. On the first day after any period-end, we can produce timely, inaccurate financial statements consisting almost entirely of estimates. Years after the end of the same period, we can produce stale, perfectly accurate financial statements containing no estimates. Neither of these sets of financial statements are very beneficial to making sound investment decisions; therefore, financial reporting standards have been developed to support the creation of delayed, materially accurate financial statements.
A move toward timeliness on the financial reporting continuum is a move away from accuracy; therefore, the Proposing Release, if adopted, could only have the effect of diminishing the accuracy of registrants’ filed financial information. It appears that the adoption of the Proposing Release would be contrary to the public interest as expressed by the desire for more accurate financial information.
Workload Compression. Absent any consideration of Enron, we do not believe that the public interest is best served by increasing the time pressure on registrants and their accountants, legal counsel and other outside advisors. This is especially true in light of the proliferation of highly technical accounting and disclosure standards issued by various standards-setting bodies, including the SEC itself.
We believe the Proposing Release would have the effect of further compressing the workloads of both our staff and that of our outside advisors to the point that the quality of our financial reporting processes and outside services would suffer. This is especially relevant to 2002, as the remaining four largest public accounting firms establish their audit relationships with many former clients of Arthur Andersen, LLP, including Caremark.
As a result of this workload compression, an unintended effect of the adoption of the Proposing Release may be a reduction in the voluntary disclosure of information not specifically required by generally accepted accounting principles or the SEC’s rules but useful to a registrant’s investors. For example, our 2001 Form 10-K included disclosures which the SEC “suggested” in Financial Reporting Releases 60 and 61. While not specifically required, we concurred with the SEC that these disclosures may be useful to our investors and included them in our filing. Additionally, our Forms 10-Q contain disclosures, in both the footnotes and management’s discussion and analysis, which are more than that which is absolutely required for interim information but somewhat less than that required for audited financial statements.
Under a shorter filing timeframe, however, we could be forced to adopt a “bright-line” disclosure test whereby only required disclosures are included, and voluntary additional disclosures which may be useful are relegated to a second-tier status of items we will consider including if we have time.
Impact of Technology Offset by Standards Overload. In the Proposing Release, the SEC cites technological advances made since the establishment of the current filing deadlines in 1970 to justify its position that these filing timelines should be shortened. We would argue, as commenters to the 1998 “Aircraft Carrier” release did, that any benefits of advances in technology have been more than offset by increases in highly technical disclosure requirements. For example, the first FASB statement was issued in 1973; we now have 145 FASB statements with which to comply, not to mention the remaining alphabet soup of EITF’s, SOP’s, SAB’s, FRR’s, etc. The FASB acknowledges its constituents use of the term “standards overload” to describe this problem and currently has a project underway to address the issue.
The Proposing Release attempts to equate the fact that registrants have access to financial information of sufficient quality to issue an earnings release within a short time after a period-end to the presumed ability of the registrant to issue interim or complete financial statements in the same timeframe. The Proposing Release indicates that the SEC recognizes, and views as a problem, the fact that there are no “official” standards for the information issued in an earnings release. In lieu of such standards, registrants are left to determine for themselves what information about their company is most relevant to investors. In short, there is the exact opposite of a “standards overload” for earnings releases, which allows registrants the flexibility to speedily make information available.
Most of the information contained in earnings releases does benefit from the technological advances cited by the SEC. Preparing basic financial statements and computing earnings per share are processes which can be almost completely automated; authoring the non-financial sections of Form 10-K as well as management’s discussion and analysis and financial statement footnotes for both Forms 10-K and 10-Q, however, cannot.
We agree that technological advances have improved the financial reporting process, but we have not yet seen the computer system that will generate a Form 10-K or Form 10-Q at the “touch of a button.” If such a system were ever developed, we would certainly buy it. Until then, we will be forced to continue to rely on our internal and external auditors, financial reporting professionals, accountants, lawyers and other resources to prepare our Forms 10-K and 10-Q. In doing so, each of these groups will need to coordinate their efforts to produce a high-quality, accurate periodic report which must then be further reviewed by other officers and directors prior to filing.
Information Gap. The Proposing Release states that “although our proposed changes would not eliminate entirely the information gap between a company's announcement of earnings and the filing of more extensive information in its periodic reports, they would lessen the gap.” We disagree with the SEC’s assertion that the gap would, in all cases, be lessened because: (i) the Proposing Release does not directly link registrants’ earnings release dates to their periodic report filing deadlines and (ii) the processes which must be accelerated for registrants to file their periodic reports by the deadlines contained in the Proposing Release will, almost certainly, produce an acceleration of the earnings release date (at least for quarterly periods) as a by-product.
If the SEC is truly concerned about this “information gap,” a better solution would be requiring companies to file their periodic reports within a certain specified time after their earnings release, although this could have the effect of slowing the release of information to the capital markets. There are many offsetting benefits of this “soft” deadline, however, in that information would flow in a more smoothed fashion rather than being dumped into the markets on the filing due date. Companies wishing to get their earnings release out to the public would mobilize their resources to have their Exchange Act filings completed in an acceptable timeframe, while those with more complex Exchange Act filings would be (probably beneficially) prevented from issuing an early earnings release. Additionally, the “soft” due date surrounding an earnings release-based filing deadline would alleviate the problem of workload compression on our outside advisors.
Alternatively, the SEC could require the filing of the earnings release and a transcript of any conference call held to discuss earnings (i.e. management’s discussion and analysis) in a Form 8-K. Additionally, the idea of requiring a fourth-quarter Form 10-Q has been debated in the past and may warrant reconsideration in this context.
Consideration of Acceleration of Deadlines for Financial Statements of Acquirees. The Proposing Release indicates that the SEC is also considering acceleration of the timeliness requirements for information filed in response to Item 7 of Form 8-K. We strongly oppose consideration of this change as well, since even the current deadlines are often difficult to meet. This is especially true in circumstances where multiple years of audited financial statements of a non-public acquiree are required to be filed.
Accelerated Filer Definition. The Proposing Release purports to ease the burden on small companies by establishing an “accelerated filer” class of registrant. It is not at all clear to us how having different filing deadlines for different companies benefits the capital markets or why the magnitude of a registrant’s market capitalization is viewed as indicative of its ability to comply with the accelerated filing deadlines. We suspect that many small registrants could easily file by the accelerated deadlines and that many large registrants would have trouble meeting the accelerated deadlines based on business complexities alone; therefore, we oppose the separation of registrants into “accelerated” and “non-accelerated” classes based on the arbitrary criteria set forth in the Proposing Release.
Comments Regarding Website Access to Information
With regards to the provision of the Proposing Release that would require us to post our periodic filings on our website on the same day as these filings are made with the SEC, we have the following comments:
Limitations of Liability for Information on Website. While we agree with the SEC that the Internet has “revolutionized information production, availability and dissemination,” we are not prepared to accept liability under the federal securities laws for the entire contents of our website through its incorporation by reference in an Exchange Act filing. To our knowledge, this issue has not been addressed in case law; therefore, registrants who currently include their website address in SEC filings, even with verbose disclaimers of liability for its contents, do so at their own peril.
We believe that, prior to requiring registrants to refer readers of Exchange Act filings to their websites, the SEC should establish safe-harbor provisions to expressly exempt information contained on registrants’ websites from being deemed to be incorporated by reference into an Exchange Act filing by virtue of its containing the registrant’s website address.
With this safe harbor provision in place, the required disclosure of the registrant’s website address would best be accomplished on the cover page of Form 10-K along with the existing contact information for the registrant.
Disclosure of Availability of Information. We are uncertain of the need for the Proposing Release’s request that registrants “disclose in their annual reports where investors can obtain access to company filings, including whether the company provides access to its reports on Forms 10-K, 10-Q and 8-K on its Internet website...” By definition, the reader of this disclosure has access to the registrant’s Form 10-K; therefore, he presumably knows how to access the registrant’s filings.
EDGAR Modernization. As noted in the Proposing Release, our electronically submitted Exchange Act filings are available directly from the SEC’s EDGAR database on a delayed basis. We transmit our Exchange Act filings to EDGAR in HTML format for the express purpose of making them more easily readable by EDGAR users and believe that having the EDGAR database represent the sole, official source of our electronic format SEC filings is an important safeguard for the investing public. We support the SEC’s stated goal of making EDGAR filings immediately available to the public and believe that this change would be the best way for the SEC to provide the benefits sought in the Proposing Release, since it would allow us to simply include a hyperlink from our website to our HTML-formatted filings in the EDGAR database. Conclusion
In conclusion, we believe the Proposing Release should be withdrawn in its entirety. The provisions concerning accelerated filing dates for Forms 10-K and 10-Q should be readdressed after the conclusion of the FASB’s “Standards Overload” project at the earliest, and the provisions concerning making Exchange Act reports available over the Internet are within the SEC’s exclusive control today, without the need for additional rulemaking, through implementing changes to EDGAR so that filings are immediately available.
/s/ HOWARD A. MCLURE
Howard A. McLure
Executive Vice President and Chief Financial Officer
/s/ MARK S. WEEKS
Mark S. Weeks
Senior Vice President and Controller