May 23, 2002
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street NW
Washington, DC 20549
Re: File No. S7-08-02
Dear Mr. Katz:
Reed Smith LLP is an international, multi-practice law firm representing a large number of publicly traded companies in the United States. Following the release of the proposed rule changes regarding acceleration of periodic report filing dates and the posting of information to company web sites (Release Nos. 33-8089; 34-45741), we have discussed these proposals with several of our clients. From these discussions it appears that there is a consensus among them that the filing date proposal, in its current form, will not improve the efficiency of delivery of important information to the investing public and could reduce the quality of the information provided. Our clients are also concerned with the proposal regarding posting of these reports to their web sites, especially with regard to inadvertent non-compliance and its consequences.
Acceleration of Periodic Reporting Filing Dates
Our clients believe that accelerating the due dates for annual and quarterly reports will have a significant adverse impact on the efficiency and quality of information delivered to the investing public. They believe that as a result of the compressed timeframes, there will not be enough time to fully and properly analyze the large amounts of data collected to prepare through and complete management's discussion and analysis of results of operations ("MD&A") and earnings releases could be delayed since resources used to track and complete this information will be diverted. In addition, the accelerated due dates will hinder the audit committee review process and possibly reduce the amount of oversight over management, contrary to currently stated Commission goals.
One of the stated purposes of the proposed rule changes is to bring important data to the markets faster so that the information is not "stale" by the time it reaches its audience. However, by reducing the amount of time management will have to review the data, it is likely that adequate and complete interpretations will not be found in time for the filing. As a result, revised estimates, trend data and other analytical information that would otherwise have been disclosed in a report filed under the current time frame will instead be disclosed in the next filing, a delay of ninety days instead of fifteen days in the case of quarterly reports.
As the staff correctly points out in the release, companies generally are able to release earnings announcements before they file their periodic reports with the Commission. Advances in technology have allowed companies to track earnings fairly reliably on an ongoing basis, which allows them to make these announcements relatively quickly after the data has been compiled. However, this is not necessarily the case with all of the other data required to be collected and compiled for purposes of preparing an annual or quarterly report.
While it is true the audit process is nearly complete by the time the earnings reports are released, the end of the audit marks the beginning of the process to complete the annual report. Data required by Item 1 of Form 10-K alone requires significant research, compilation and analysis, most of which cannot begin until after the audit process is complete. We know first-hand from some of our clients that it can take weeks to cull through the data from various business segments and condense it down for inclusion in the annual report. Obviously, the larger and more diversified a registrant's businesses are, the more difficult it is to pull this information together.
Additional problems can occur when a registrant has made a significant acquisition or disposition, especially for quarterly reports. It is likely that a significant transaction will have a substantial impact on the footnote disclosure in the financial statements, as well as with respect to the MD&A. It can take a fairly long period of time to integrate systems and compile data from new sources and thirty days might not be enough time after the end of the quarter to adequately gauge the full impact of the transaction. While under the current system, Form 12b-25 might be available, the proposal would shorten the time period allowed to take advantage of that form, leaving it with little use.
Even among our clients that have a fairly large group of in-house attorneys and accountants, the work required to prepare periodic reports diverts a significant amount of human resources from day-to-day tasks. We have been told by these clients that they envision substantial disruption of their work routines in order to meet the proposed deadlines. Our clients that rely on outside assistance to complete the periodic reports are even more concerned that they will not be able to prepare the necessary data to allow their lawyers and accountants time to have the reports prepared promptly. They envision, and we as providers also expect, significant competition for these outside resources. This will drive up costs for all registrants, since both types of clients will require the added services of their outside auditors and accountants.
The end result of this scarcity is the possibility that resources that are currently used by these companies to maintain a close watch on their earnings throughout the period will be diverted to preparing for the condensed report preparation period. Instead of earnings announcements being released early in the period, it can be expected that these announcements will be delayed, thus reducing the amount of available information and the speed in which it is released, rather than increasing it.
Without exception, every client we spoke to regarding the acceleration of the reporting deadlines feared that the quality of the disclosure will drop as a result. As stated above, even the largest of our clients devotes significant time and resources to preparing their periodic reports. They fear that stretching out these resources even more would result in mistakes and oversights.
Many of our clients have several business units that are located in different locations. It is already very difficult for them to collect data and pull it all together in one coordinated document under the current conditions. By shortening the time permitted to coordinate the data, many clients will be forced to have separate sections of their MD&A prepared by different people in different locations. This will lead to disjointed and inconsistent disclosure, as different people have different styles and opinions on how to disclose an event. Decentralization could also lead to certain trends being overlooked since they are not apparent to distant managers.
While we would expect our clients to do the best jobs possible under the proposed rules, we fear that as a last resort many issuers will to resort to the use of boilerplate language or reusing the same disclosure (with updated numbers) in order to comply with the tighter deadlines. This will significantly reduce the overall quality of the disclosure and its usefulness to investors.
Audit Committee Oversight
In light of recent events, the Commission has made it clear that they expect audit committees and boards of directors in general to keep a closer watch on management's disclosure performance. Many of our clients have informed us that even under the current timelines, they find it difficult, but still feasible, to assemble the audit committee materials and disseminate them to the members so that they have enough time to properly analyze and prepare for their meetings. If the deadlines for filing are accelerated, audit committees and boards will have less time to evaluate the materials and the level of oversight by these committees will necessarily drop.
Further, qualified and dedicated audit committee members are a scarce commodity. The major exchanges and markets require audit committee members to be independent and somewhat knowledgeable in accounting areas (with the chairperson expected to have been involved in the industry). Therefore, by their very nature, audit committee members cannot devote their full time to the service on these committees. Many clients fear that the added pressures will only make it harder for them to attract and retain knowledgeable people to serve on these committees.
Without exception, our public company clients are devoted to the premise that investors deserve timely and accurate disclosures regarding the performance of the companies in which they invest. However, the proposed changes to the periodic report filing deadlines could serve to diminish the timeliness and accuracy of the information contained in those reports, which in the long run could run counter to the best interests of investors.
Posting of Periodic Reports on the Internet
The proposal would require companies to disclose their policies with respect to the posting of their periodic reports to the world wide web and to make arrangements to have these reports posted to their own web sites or make arrangements with third party providers to have them available immediately upon their filing with the Commission. While none of our clients has a particular problem with disclosing how and where their investors can find their periodic reports on the web, they are concerned that the immediacy requirement could pose problems and it is unclear what the consequences of an inadvertent delay would be. It would also appear that this new requirement is inconsistent with the treatment of the internet by the Commission in other disclosure areas, and this new requirement is causing increased confusion among registrants with respect to the internet.
It is unclear from the release what the repercussions would be if, for example, due to technical problems caused by a third-party host, a registrant's filing was unavailable immediately upon its filing with the Commission. Many companies rely on third party providers to host their web sites, and it is common in the industry for down periods to occur for reasons outside the control of the registrant. It is unclear under what circumstances a registrant would be considered out of compliance in that event. Would the registrant be considered in compliance if its web site were down for an hour? For one day? Would the materials be considered "immediately available" if the materials were posted to the web site and the site was functional, but due to heavy traffic, many investors would be unable to access it right away? The release makes it clear that the formats for files must be readily accessible, but what if a registrant uses the popular "Adobe Acrobat PDF" format and the Adobe web site making the viewing program available for download was unavailable at the time the report was filed? Each of these events are commonplace occurrences throughout the internet and highly foreseeable problems.
It is also unclear from the release what the consequences for failing to have the filing immediately available would be. Would an investor who could not obtain the filing due to one of the technical reasons described above have a cause of action against the registrant for failing to disclose material information? Would the registrant be in violation of Regulation FD if, due to heavy traffic, the material was available to some market participants, but not others? Would the registrant be considered an untimely filer for purposes of using Form S-3?
Some of our clients are very confused as to the role the internet may play in their disclosure regimes and we expect this new proposal will add to their confusion. This reliance on the internet by the Commission in the release appears to be at odds with the Commission's earlier positions that the internet is insufficient to meet the requirements of full disclosure as mandated by other regulations. For instance, a registrant cannot meet its dissemination requirements under Regulation FD by posting a press release on its web site, nor can a registrant meet its prospectus delivery requirements by posting a prospectus on its primary web site (in fact, it is prohibited from doing so if the contents of the entire web site have not been included as part of the prospectus contained in the relevant registration statement).
We believe that this inconsistency will only further cause additional confusion among registrants regarding the role of the internet and disclosure obligations. Perhaps the Commission will consider amending Regulation FD and Regulation C to clarify and harmonize the rules regarding the use of the internet by registrants in all of its securities issues.
Our clients have made it clear to us that they are dedicated to keeping the investing public informed and educated with respect to their operations. However they are concerned that the current proposals could have the opposite effect as those intended and would weaken, rather than strengthen our capital markets and the information flow that it vital to keeping it strong.
Very truly yours,
REED SMITH LLP
Contact: Steven C. Robbins, Esq. 215-851-8100.