June 4, 2002
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Attention: Jonathan G. Katz, Secretary
Re: File No. S7-08-02
Release Nos. 33-8089; 34-45741
Acceleration of Periodic Report Filing Dates and Disclosure Concerning Website Access to Reports
Ladies and Gentlemen:
This letter is submitted in response to the request of the Securities and Exchange Commission for comments on its April 12, 2002 release entitled Acceleration of Periodic Report Filing Dates and Disclosure Concerning Website Access to Reports (the "Release").
These comments have been prepared by the Subcommittee on Disclosure and Continuous Reporting (the "Subcommittee") of the Committee on Federal Regulation of Securities (the "Committee"), Section of Business Law (the "Section") of the American Bar Association. A draft of this letter was circulated for comment among other members of the Committee, including the Chairs and Vice-Chairs of Subcommittees and Task Forces of the Committee, the Officers of the Committee and the Advisory Committee of the Committee and the Officers of the Section. A substantial majority of those who have reviewed the letter in draft form have indicated their general agreement with the views expressed. However, this letter does not represent the official position of the American Bar Association, the Section, its officers, the Committee or the Subcommittee, nor does it necessarily reflect the views of all who reviewed it.
We commend the Commission for its efforts to reform financial reporting and disclosure practices in response to recently reported weaknesses in the disclosure practices of a number of public companies. We concur that reforms are needed to improve the quality of those practices. We also understand the pressure to act quickly to restore investor confidence. However, in general, we oppose the proposals set forth in the Release to accelerate the filing of Forms 10-K and 10-Q periodic reports by larger public companies, and instead suggest some alternatives designed to improve current reporting without the disadvantages of the Commission's proposal. In our view, the intended marginal incremental benefit to investors of the Commission's proposals will be far outweighed by the imposition of significant burdens on reporting companies, and the acceleration of filing deadlines will put in jeopardy the quality of disclosure in periodic reports and will undermine the governance and review mechanisms that have been put in place to insure that quality.
Moreover, we do not believe that the accelerated reporting proposals are responsive to the financial reporting failures our markets have recently witnessed. The Commission has considered and rejected similar proposals in the past, and recent events should not change that conclusion. The financial markets have experienced shocks because of incomplete, inadequate and misleading disclosures, in part resulting from the lack of thoughtful examination and analysis by management, directors, auditors and counsel, or in some cases because of an apparent intent to mislead. The problem is poor disclosure, not late disclosure. Requiring earlier filings will not address those problems but rather will exacerbate them as quality suffers from the shorter preparation and review times.
The proposal to accelerate the filing of periodic reports should not be adopted without evidence that issuers generally will be able to make filings that are thoughtful and accurate in the shortened time frames. Unfortunately, even though the Commission initially proposed to accelerate the filing of periodic reports in the Aircraft Carrier Release several years ago, there is still little data available on whether issuers can comply with the shortened time requirements. Also, much of the data generated in response to the Aircraft Carrier may be incomplete or obsolete. The comprehensive nature of that release may have discouraged many issuers from responding to the proposal, and disclosure, financial reporting and governance demands have grown significantly since then. The limited data available suggest that, while a number of issuers believe they normally can file within a shortened time frame, a majority anticipate they will have problems regularly doing so.1 If forced to meet the accelerated deadlines in the proposal, the risk of delinquencies and errors occurring in filings is substantially heightened.
Moreover, the collected data may not be totally meaningful because the responses to surveys2 and to the Commission's request for comment have been supplied without taking into account the additional accounting requirements and Commission's guidance on preparing Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") or the effect the Commission's recent rulemaking proposals on the content of MD&A will have on the process of preparing periodic reports. The task of preparing MD&A will become more, not less, challenging and, if done in the manner that the Commission wishes to encourage, will take more rather than less time. Similarly, additional filings of current reports on Form 8-K, which the Commission has indicated it will require, will increase the disclosure burdens on companies in ways that are not fully known at this time. In addition, this enhanced current reporting on Form 8-K may mitigate any need for accelerating the filing of periodic reports.
Simply put, proposals to shorten filing periods should be made and considered only after, not before, significant changes to the contents of the reports have been implemented by the Commission and public companies have had an opportunity to assimilate those new requirements into their reporting practices.3
Although we oppose the proposal to accelerate the times for filing periodic reports, we support the initiative to improve the currency of information provided to the public to the extent it can be done without adversely affecting the quality of disclosure. With this in mind, we propose as an alternative that the Commission amend Form 8-K to require the furnishing of earnings reports to the Commission on EDGAR when they are issued by companies. This alternative would have the following benefits:4
We also provide specific comments on the accelerated filer concept and website disclosure proposal.
2. THE BENEFITS OF THE PROPOSALS DO NOT JUSTIFY THE COSTS
A. The Need for Accelerated Filing Has Not Been Demonstrated.
We note below the significant risk, acknowledged by the Commission in the Release, that the proposal would adversely affect disclosure quality by rushing issuers and detracting from gatekeepers' ability to perform their roles. For this reason, this proposal should not be adopted without a showing of compelling policy need. We do not believe that the Release cites these needs or deficiencies in current practice.
The Commission states its primary policy reason for this proposal as follows:
Many large seasoned reporting companies capture and evaluate information and announce their quarterly and annual financial results well before they file their formal reports with the Commission. These earnings announcements are generally less complete in their disclosure than quarterly or annual reports and can emphasize information that is less prominent in quarterly or annual reports. Investors also process, evaluate and react to information on a much shorter timeframe. The delayed filing of reports, however, means investors often make decisions without access to the more extensive disclosure in the Company's Exchange Act reports. (Release at 3.)
Even if one were to agree with the Commission that issuers ideally should file their full reports with their press releases and that all companies should file their reports as soon as possible, practical reality forces companies to release core earnings information when it is available, in response to market demands, and file reports later, after they take time to prepare financial statement footnotes and MD&A and complete gatekeeper reviews. Moreover, it is beneficial to the marketplace and investors to have earnings releases issued as soon as possible, without delaying them until more detailed comprehensive reports are prepared. The markets have worked well under this two-phased disclosure regime.
The Commission cites no empirical or other evidence supporting the proposition that current deadlines create meaningful market inefficiencies, such as a pattern of significantly higher trading volume and price volatility immediately following the filing of Exchange Act reports. There are no data indicating a problem created by current market practices that merits accelerating filing deadlines by one third.
We believe that any attempt to decrease the filing period will sacrifice the quality of disclosure. Accelerating the deadline for filing reports rushes the process and risks an adverse effect on disclosure quality. Companies are not delaying their reports to keep information from investors or dawdling in preparing and filing their reports, but rather are making information available to investors incrementally as it becomes available, a process that investors understand and accept. The "information gap" referred to in the Release is not a problem; rather, it is a market-generated solution to the inescapable problem created by the time demands necessary to comply fully with the Commission's disclosure requirements and accounting literature applicable to the periodic reports.5<
Moreover, we doubt that any "information gap" results in a meaningful delay in getting material information to the marketplace or shortchanging investors of the disclosures they need. Today, disclosure is more voluminous and continuous than ever before. Registrants increasingly issue pre-release disclosures that their quarterly or annual performance is expected to exceed, fall short of or meet market expectations or prior company guidance. Informal communications compliant with Regulation FD fill in the gaps between formal periodic filings, and press releases contain more extensive explanations and are increasingly accompanied by summary financial information and other data that can be useful to investors. Conference calls and webcasts that are generally available to wide audiences following earnings releases provide in-depth analysis of the earnings. While Form 10-K and 10-Q reports are important information vehicles, they are not the sole sources of disclosure they once were and now serve the purpose of providing more detailed information that complement other disclosures. Therefore, we do not believe that there is any practical "information gap" that denies significant benefits to investors.
B. New Technology Does Not Significantly Offset Greater Disclosure and Analysis Requirements.
The Commission acknowledges increased disclosure burdens on reporting companies, but states: "[During the past 30 years], advances in communications and information technology have made it easier for companies to process and disseminate information swiftly" (Release at 3). We believe that technological advances do not offset the greatly increased burdens imposed on issuers by new disclosure and financial reporting requirements and are not cause for shortening reporting deadlines by one-third.
The many advances in information and communications technology that have occurred in the 30 years since the current due dates were implemented are more than offset by developments in recent years that greatly expand the content of Exchange Act reports and extend the process for preparing those reports. Computers, electronic mail and financial software enhance the ability of enterprises to capture and compile raw data, but managers still need time to analyze the data and prepare reports, and gatekeepers need time to review them. The dramatic increase in available raw data may have actually increased the time needed to complete a comprehensive analysis of historical results and emerging trends.
Periodic reports today provide a far greater range and volume of information than 30 years ago. Thirty years ago, issuers simply compiled, reviewed and compared historical financial information. Financial accounting standards now require footnote disclosure regarding accounting policies, derivatives, stock options, taxes, commitments and contingencies and pension liabilities, as well as many other requirements applicable to specific industries or transactions. Financial statement preparation involves judgments regarding application of revenue recognition policies, materiality concepts and asset impairment standards, as well as understanding estimates, risks and uncertainties unique to each company. In addition, each year companies assimilate and apply new or changed accounting principles adopted by the Financial Accounting Standards Board, including most recently complex new rules governing accounting for derivatives and asset impairment.
The Commission itself has since adopted proposals that greatly expand disclosure requirements and increase the role of management, auditors, audit committees and counsel in the Exchange Act reporting requirements. For example:
To be thoughtful, these analyses require time that cannot be shortcut by advances in communications and information technology, and, increasingly, require input from outside advisers. Managers need sufficient time to assess and analyze the information in order to prepare Exchange Act reports in time for auditors and audit committee members to conduct a meaningful review of the reports prior to filing. Although technology can facilitate more rapid availability of data and basic financial statements, the critical review, thoughtful analysis, careful drafting and subsequent review that are necessary to prepare thorough, high-quality MD&A and notes to financial statements must be done sequentially over a period of weeks by people - registrants' employees, accountants, audit committee members and lawyers - not by computers.
The Commission has suggested that large-cap, seasoned registrants are better equipped than other filers to meet an accelerated filing timetable. We question whether this assumption is accurate. While large companies may, as a general matter, have more resources than small companies, most companies do not possess excess resources, and cannot acquire or reassign additional resources, that could be allocated to accelerated filing. The same people needed to prepare or more importantly review the periodic reports typically are busy with other important tasks such as preparing for board meetings and analysts calls, or managing the company itself. And, it is not as simple as hiring more people, because the most knowledgeable and experienced personnel need to be involved. The judgment and review necessary from the CEO and CFO cannot be obtained by simply hiring more people. More significantly, large businesses tend to be more complex, often with international operations, multiple divisions and subsidiaries and investments in other entities from which they often must await reports. This delays not only the accumulation of financial data but also the analysis required to prepare detailed MD&A disclosures. As difficult as it will be to speed up the data collection and evaluation process in the United States, it will be even more so in many other countries and cultures where U.S. companies have extensive operations.
Moreover, companies do not always control the timing of production of information required to complete their financial statements. For example, companies may have investments in unconsolidated entities which they do not control and may not be in a position to require accelerated reporting by these entities, many of which are private or foreign entities not subject to SEC reporting requirements.
C. Accelerated Filing Deadlines Would Reduce the Quality of Disclosure and Undermine the Effectiveness of Other Initiatives.
We believe the public interest and the capital markets are best served by proposals that will lead to better disclosure, rather than faster but likely less well-prepared disclosure. We support in concept the Commission's efforts to enhance the quality and timeliness of disclosure. However, by focusing on the timing of periodic reports absent empirical evidence of market inefficiency, we believe the accelerated filing proposal undermines the effectiveness of the Commission's other recent guidance and pending proposals designed to enhance the quality of disclosure and improve the process generating the disclosure. Recent actions by the Commission and statements by the Chairman indicate that not enough attention is brought to bear on Exchange Act reports by management, audit committee members and other directors, and auditors. The accelerated filing proposal would significantly limit the ability of these parties to increase their roles in the disclosure process, and thereby limit the effectiveness of other, and in our view more important, public policy initiatives. Worse, it may signal that speed is more important than quality and that the processes to insure quality need not be taken seriously. In this regard, we note that surprises over recent financial frauds and bankruptcies are attributable to issues about the quality and accuracy of public disclosure, rather than the timing of filing of periodic reports. In these types of situations, accelerating the deadline for periodic reports would not improve the quality of the disclosure, but rather would significantly impede the ability of directors and auditors to serve their important gatekeeping function. Moreover, as efforts are made to reform the securities offering process and fully integrate the 1933 and 1934 Acts, even more focus will be placed on periodic reports.
At a time of widespread calls for more time and care in preparing disclosure, especially financial statements, this proposal would rush the disclosure process and undermine the quality of that disclosure to the disadvantage of investors. We can all recount occasions on which a few extra days or an extra layer of review made the difference between mistaken or incomplete disclosure and fully considered, complete and accurate disclosure. Accelerating the filing dates would eliminate those few days and limit the review opportunity, making errors, amendments and restatements more likely. Earlier filing dates will necessitate earlier auditor sign-off, which will require earlier accounting department deadlines, resulting in more estimates and softer numbers, and thus more adjustments and amendments later when the actual numbers can be verified.
D. The Proposal Would Detract from Auditor, Audit Committee and Legal Counsel Participation in the Reporting Process.
Virtually everyone agrees on the need for closer involvement in the disclosure process of auditors, audit committees, legal counsel and other gatekeepers following the recent disclosures of reporting failures and actual fraud. The Commission has repeatedly emphasized its perception that the overall quality of financial information being reported has declined. The Commission recently required more independent auditor and audit committee involvement in periodic reporting, mandating (and encouraging SRO requirements for) auditor review of interim financial statements, independent audit committees and increased audit committee oversight of the financial reporting process. Chief Accountant Robert Herdman has specifically admonished audit committee members to "take the time" in order to be effective.7 More recently, the Commission has called for audit committees to be involved in considering critical accounting policies and estimates and has proposed disclosure of whether they were involved.
These gatekeepers need time to perform their functions. Even under current time schedules, gatekeepers rarely have more than a few days in which to review disclosure and raise meaningful questions. The management staff that is responsible for preparing the Form 10-K and 10-Q reports and the MD&A is typically the same set of individuals who compile and prepare the financial statements. In the case of quarterly earnings, the effective preparation of the Form 10-Q and its MD&A does not begin until after the earnings release process is essentially complete. The Commission's proposal would generally leave most registrants one week or less to prepare these reports, vet them internally and then pass them through counsel, auditors and the audit committees. Any delay at all in this process would result in a late filing. Our experience is that the financial statement notes and the cash flow statement, which are critical to MD&A, are often not available until a week or more after earnings are released, leaving large gaps in the Form 10-Q / MD&A preparation process until near the end. The year-end Form 10-K/ MD&A process is subject to a more generous filing deadline, but that process is impeded because the financial personnel are heavily involved in the audit process and are often required to devote simultaneous attention to the annual report and proxy statement.
Accelerating the timetable would make the task of these personnel more difficult and, in many cases, eliminate altogether the opportunity for meaningful participation in the disclosure process by the gatekeepers. Our experience is that auditors and accounting firms are now stretched beyond their limits during their "busy seasons". Time constraints already limit the ability of audit partners and seasoned managers, who are knowledgeable and experienced in making the needed critical examinations, raising tough questions and exercising informed judgment on difficult issues, to be actively involved in the process. Reducing the time in which filings must be prepared will exacerbate this problem. The problem worsens as fewer and fewer national accounting firms divide responsibility for the vast majority of significant reporting companies.
Accelerating the reporting period would exacerbate these problems by concentrating into a few days or weeks in each reporting period the time for auditors and their firms to perform their functions for virtually all domestic public companies. It will also require many companies to rearrange their board and audit committee meeting schedules. The Commission should not expect companies to improve the quality of their financial information and MD&A while being forced to compile and analyze it in one-third less time. The proposal may also increase costs in ways not recognized or addressed in the Release as companies compete for scarce auditor resources and smaller and mid-size companies receive lower priority attention.
E. The Proposal Could Result in Other Unintended Harmful Consequences.
Companies that are unable to file their periodic reports within the reduced time periods may face significant consequences, not only under the federal securities laws, but also under existing contractual provisions. A majority of respondents to the recent NIRI survey cited by the Commission anticipated having difficulty meeting the proposed accelerated filing deadlines. Accordingly, the number of late filings can be expected to increase substantially if the filing deadlines are accelerated as proposed. As a result, substantially more companies would suffer the consequences of late filings.
i. Indentures and Other Contractual Obligations
Some indentures, loan agreements and registration rights agreements require the company to file all periodic reports within the required time period. For these companies, a late filing, even if only slightly late, may give rise to a breach of contract or default resulting in significant adverse consequences. For example, a company that is unable to file its Form 10-Q until 40 days after the end of the fiscal quarter, which is five days earlier than currently required but 10 days later than proposed, could be subject to damages or other penalties under contractual provisions requiring timely filings if the market price of the subject security declined during the 10-day period of non-compliance. We believe that these potential consequences are inappropriate for companies that file their periodic reports within the currently prescribed time periods. While registrants may be able to negotiate modifications to agreements with private lenders and other parties, the ability to modify covenants in indentures governing public debt may be more problematic.
ii. Securities Law Consequences
As the Commission notes, companies that are late in filing their periodic reports will lose their eligibility to use short-form registration statements for at least one year, and Securities Act Rule 144 and Form S-8 will be temporarily unavailable during the period of non-compliance. The loss of Form S-3 eligibility would significantly increase the costs and delays borne by issuers that have frequent financing requirements or have agreed to maintain a resale shelf registration statement. Similarly, holders of securities registered for resale would be subject to increased market risk with respect to sales that would be deferred while a supplement or amendment is being prepared. Even if loss of Form S-3 eligibility were eliminated, companies would be subject to a blackout period when a shelf registration statement could not be used if a report were delayed.
In summarizing why it elected not to accelerate the reporting deadlines when it last considered this proposal in 1998, the Commission stated:
A larger number of commenters, however, thought that a shortening of due dates would be overly burdensome, particularly for small companies. Several of the commenters that argued against shortening deadlines also were concerned that the benefits derived from technological advances over the past 30 years have been offset by additional and more complex reporting requirements. They were concerned that accelerated due dates would result in less accurate filings. (Release text at nn 31 and 32.)
These same concerns now apply to a much greater extent because of recent events and trends, heightened disclosure and review requirements and more complex business organizations. We urge the Commission again to conclude that it should leave unchanged the existing time-tested deadlines.
A. Earnings Report Form 8-K Alternative
As an alternative to accelerating the filing times and in order to provide more current disclosure under the formal reporting system, we recommend that the Commission add to its Form 8-K triggering events the announcements of quarterly and annual earnings results. Registrants could provide a Form 8-K with summary earnings data, together with high-level management commentary of the primary performance drivers of the period. We would not require the earnings press release itself to be included, inasmuch as it often includes extraneous comments of the chief executive or financial officer that companies should not be obligated to submit under EDGAR. We would not specify which earnings metrics would be subject to this disclosure mandate, instead preferring to leave it to the registrants to determine, based on market forces, the information they believed would best portray the operations for the reported period.8 We would require, however, that the financial data be at least as detailed as that contained in the press release.
As earnings data that would be included in the Form 8-K under our alternative would of necessity be subjected to less scrutiny and analysis than the information included in the Form 10-Q, the earnings data, like the financial information and MD&A in Part I of the Form 10-Q, should not be deemed to be "filed" for purposes of Section 18 of the Exchange Act. We suggest that such information be allowed to be filed or furnished under Item 9 of Form 8-K and that the information be deemed to be automatically superseded upon the filing of the Form 10-K or the Form 10-Q.
The advantage of this approach over the accelerated filing deadline is that it requires formal disclosure of the information the registrant is in a position to make at the time. It does not force disclosure prematurely. By allowing the full 45 and 90 days for filing the Forms 10-Q and 10-K, it allows for a thorough and careful process involving all relevant gatekeepers, permitting disclosure having a higher degree of accuracy and transparency. This alternative would also get the released earnings into the Exchange Act disclosure system sooner and it would enhance the quality of this information because registrants would know that the information will become part of the formal reporting system. In addition, because earnings releases typically contain an explanation of the reported results, the alternative we suggest would get summary information into the reporting system, which SEC officials have indicated would be advantageous to investors. Furthermore, it would obviate the need to develop a two-tiered accelerated filer/small issuer filer regime with its detailed and cumbersome definitions, because the Form 8-K filing requirement would be self-defining and could be met by all classes of filers.
A variant of this alternative would be to accelerate the filing periods as proposed, but allow a registrant to file within the existing periods if the registrant submits its earnings results on a Form 8-K by the accelerated deadline. Thus, a registrant would get the full 45 and 90 days for the Form 10-Q and Form 10-K report if it submits its earnings results on Form 8-K within 30 and 60 days, respectively. This approach has the advantage of requiring earlier filing of at least the core information and minimizing the need for an accelerated filer concept.
B. Alternative Accelerated Filing Period
If the Commission disagrees with our position and decides to proceed with accelerated filing of periodic reports as proposed, a less burdensome alternative to some issuers would be the alternative we suggested in our comments regarding the Aircraft Carrier Release that the due date for a periodic report be a specified number of days following the release of earnings by the registrant. This period could be the time deemed sufficient to permit the necessary analysis of the financial statements, input from the audit committee and consultation with outside accountants and lawyers to take place once the financial results are available. Specifically, with respect to a quarterly report on Form 10-Q, we propose that the report be due 15 days after the registrant first publicly discloses its financial results for the preceding quarter, but in no event would it be due earlier than 30 days or later than 45 days after the quarter-end. Similarly, we proposed that the due date for Annual Reports on Form 10-K be 45 days after the first public disclosure of financial results for the fiscal year, but in no event would it be due earlier than 60 days or later than 90 days after fiscal year end. These deadlines would have the practical effect of accelerating the deadline for filing the periodic reports for many registrants, but would do so in a way that accommodates their particular circumstances.
While not ideal, this approach has a number of advantages as an alternative to the Commission's accelerated filing proposal. Most importantly, it addresses head on the gap issue that seems to concern the Commission, while providing registrants a reasonable time for analysis after the financial statement numbers are available. In addition, it implicitly acknowledges that one size does not fit all when it comes to periodic reporting. The registrants that are capable of finalizing and releasing their financial results earlier than 30 days after quarter-end (45 days after fiscal year-end) would be required to file their periodic reports earlier under this alternative than under the current system. However, the registrants who are unable to accelerate the process, whether due to lack of sufficient resources, inability to obtain information from foreign subsidiaries or investees or other reasons, would not be forced to file a hastily conceived periodic report only a few days after they finalize their numbers.9
Another advantage of this alternative is that it could alleviate some of the competition for the time and attention of professionals (outside auditors and lawyers) during the period following each quarter when periodic reports are being prepared by spreading the due dates out a bit. This could result in a more efficient use of resources and a higher likelihood that the smaller companies are able to get the necessary attention from their outside advisors. Requiring a 30- and 60-day deadline would compress all this activity into a very condensed time period when competition for scarce resources could undermine the reporting process.
A potential objection to this alternative could be the incentive that registrants might have to delay their earnings releases in order to maximize their deadline for filing periodic reports. We believe that this concern is unfounded. Registrants feel tremendous pressure from their analysts and investors to release their earnings as quickly as possible. Registrants are not likely to view a few more days in which to prepare a periodic report as a benefit sufficient to justify incurring the penalties of the marketplace by postponing the release of earnings.
Another potential objection is that the alternative might result in the market not knowing when the periodic report for a particular registrant is due. Under the current system, however, investors never know exactly when a Form 10-Q or Form 10-K will actually be filed; all they know is, if it is timely, it will be filed within 45 days after quarter-end or 90 days after fiscal year-end. A registrant may always file reports early (or late, pursuant to Rule 12b-25), and many do so by varying degrees. Moreover, investors who are following a particular company will certainly be watching for the company's earnings press release and can easily calculate the due date for the periodic report, if that is important to them. With respect to the registrant, clearly there is no issue as to whether the registrant knows when its earnings release went out, so it will always be able to calculate the exact due date for its own periodic reports.
In order to avoid unduly complicating the determination under this alternative of whether a registrant has filed all required reports for purposes of the current information requirement of Rule 144, and to keep from unfairly disadvantaging the selling secuityholder based on a registrant's inability to meet an accelerated deadline for filing periodic reports, we suggest changing Rule 144 so that the current public information requirement of subsection (c)(1) is deemed satisfied so long as the required periodic reports are filed by the outside deadlines (45 days after quarter-end for Form 10-Q and 90 days after year-end for Form 10-K), regardless of when the earnings release is issued. This would have the effect of keeping the existing deadlines for purposes of Rule 144, and would avoid potential traps for unwary selling securityholders who may not know the earnings release date. The same relief could be provided for resales of securities under Form S-3 shelf resale registration statements and sales of securities to employees under Form S-8 to avoid undue hardship to selling securityholders and employees seeking to exercise options.10
4. COMMENTS ON SPECIFIC PROPOSALS
A. The Commission should not adopt the "accelerated filer" concept.
The Commission's goal of enhancing disclosure to investors is not well served by the accelerated filer concept. Investors in smaller companies that would not meet the public float requirement of the accelerated filer definition have the same need for timely information as investors in larger companies that would meet the public float requirement. In addition, we have previously discussed why we believe large issuers may not necessarily be better able to cope with accelerated filing requirements. The Commission should pursue an approach that does not necessitate these distinctions among registrants, but rather allows for self-selection based on the circumstances and constraints of each registrant, such as the alternatives that we have proposed.
For a number of reasons, the method for determining the measurement date for the public float test will not be clear enough for companies or their investors, and will create practical problems for issuers. First, the measurement date occurs too late in the fiscal year. A company that determines its status as an accelerated filer in the eleventh month of its fiscal year will not have sufficient time to prepare its accelerated filings properly. Such a company would have already set its calendar for audit events assuming a filing date of 90 days after the end of the fiscal year and would have to rely on more expensive outside help for the preparation of accelerated filings. It certainly would not have enough time to make any changes in its reporting systems and processes.
Second, utilizing different public float standards for entering and exiting accelerated filer status is confusing. The public float threshold should be the same for both entering and exiting accelerated filing status. If a company with a public float of $75 million is obligated to enter into accelerated filing status, then that company should be no longer obligated and exit accelerated filing status if its public float drops below the same threshold on a subsequent determination date.
In addition, we believe that the public float test, although used widely in the Commission's rules for other purposes, is not the right test for this purpose. Recent experience has demonstrated that smaller issuers with limited operations and personnel may develop a significant public float based on what the market perceives to be a promising business plan. Conversely, the public float test would exclude larger registrants that do not avail themselves of the public equity markets and rely instead on other sources of financing, such as debt. A test based on revenues would be a better indicator of whether the registrant has adequate resources and personnel to meet the shorter deadlines. We suggest a $500 million annual revenue threshold, determined as of the end of the third quarter, based on revenues during the prior four quarters (i.e., the fourth quarter of the prior fiscal year and the first three quarters of the current fiscal year).
Third, the determination date for accelerated filer status should be more easily ascertainable by filing companies and their investors. Under the proposed definition of accelerated filer, a company would become an accelerated filer in the middle of a fiscal year if it met the public float test in the eleventh month of one fiscal year, but was not a reporting company for 12 full months until the middle of the next fiscal year.
Fourth, a company should be subject to the filing requirements of Section 13(a) or 15(d) of the Exchange Act for a period longer than 12 calendar months before it becomes an accelerated filer. Twelve calendar months is not likely to be enough time for a company to gain sufficient experience as a filing company to handle the additional burdens of being an accelerated filer.
We do not recommend the adoption of any approach that necessitates a distinction between accelerated filers and other filers. If the Commission is determined to adopt this concept, we propose that the definition of accelerated filer proposed by the Commission be modified as follows:
B. Website Posting Requirements.
i. Use of websites to disseminate information should be encouraged by the Commission.
We support the Commission's goal of increasing investor access to information by promoting the use of company websites and applaud the Commission's recognition of the important function that company websites can serve. As the data cited by the Commission in the Release demonstrates, companies are, both on their own initiative and in response to market forces, taking advantage of the Internet to improve the direct flow of information to investors. We hope that the Commission's current proposal is a prelude to greater recognition by the Commission of the value and appropriateness of using company websites for broad dissemination of information, including in the offering of securities, solicitation of proxies and compliance with Regulation FD.
To support greater use of websites, we believe that it is important to promote their efficient use and to provide companies with assurances that use of websites will not expand their liability for the information provided. The specific comments offered below are intended to further those objectives.
We also note that when the Commission's proposals were issued the Commission's website did not provide live dissemination of EDGAR filings. Therefore, aspects of the proposal were focused on addressing a temporary problem. Now that the Commission has achieved its goal of making its website a live dissemination site through EDGAR, the underlying need to encourage website posting should be revisited. The benefits of website posting in the face of the burdens involved in maintaining two forms of reports become less important with the availability of real-time access through EDGAR. Even if the Commission decides to proceed with encouraging website posting, we believe the proposed rule can be greatly simplified and its burdens substantially reduced, as discussed below.
ii. Proposed Item 101(e)(2) - Requirement to provide an issuer's Internet address, if one exists, in Form 10-K
Addressing Concerns of Incorporation by Reference and Duty to Update. As the Commission recognized when proposing that companies who have a website be required to furnish their website address in their annual reports on Form 10-K, companies will be legitimately concerned that by doing so they will be deemed to have included or incorporated by reference all of the information on the website itself into their filings. Footnote 75 of the Release attempts to alleviate those concerns by providing that, subject to certain conditions, unless the company otherwise acts to incorporate the information by reference, it will not be incorporated. We believe that companies' legitimate concerns about deemed incorporation by reference of website contents would be more effectively addressed if:
On a technical point, we note that the requirement in Footnote 75 for companies to provide a website address as an "inactive textual reference only" could lead to inadvertent mistakes since most off-the-shelf word processing software automatically converts website addresses into Internet links. Instead of the technical requirements now set out in Footnote 75, we favor a simple requirement that companies include a plain English statement to the effect that "Our website address is www.companyname.com. While our website contains information about us, unless we expressly say otherwise, information on our website is not part of this filing."
In addition to the concerns addressed above, companies are also concerned about whether or how they can effectively disclaim a duty to update information made available on their websites. We believe that the Commission should clarify that the mere fact that a statement is contained on a website does not result in a duty to update that statement so long as the date as of which the statement was originally made is clearly indicated, the statement was accurate on the date it was originally made and the company has not indicated to investors that they can rely on the statement as of any date after the date it was originally made.
Companies Should be Permitted to Use Alternatives to their Primary Website Address. Some companies may prefer to use their principal website address for business and operational purposes, and would prefer not to have their principal website viewed as a primary source of information by investors. Accordingly, we believe that companies should have the flexibility to direct investors to a website or specific page on the company's website maintained for investors rather than to the company's home page or to a link to another site on which the company's filings can be accessed, such as the SEC's EDGAR filing site now that it provides real-time access to filings or a third party service.
iii. Proposed Item 101(e)(3)(i) - Requirement to disclose if Exchange Act reports are made available on the company's website "as soon as reasonably practicable after, and in any event on the same day as" such reports are filed with the Commission.
If the Commission retains the website posting requirement, the ability to hyperlink to another site should be made clear. The discussion in the Release appears to indicate that hyperlinking from a company's website to another site at which its periodic reports can be timely accessed will satisfy the availability requirement of Item 101(e)(3)(i). Many companies now follow that approach. However, the proposed language of the rule is not as clear in its reference to "make available... on your Internet website." We suggest that the Commission modify that language to say "on or through your Internet website" to make clear that hyperlinking is contemplated. In addition, because EDGAR now provides real-time and user-friendly access to Exchange Act reports, we recommend that the Commission make clear in the rule or adopting release that a link to EDGAR will satisfy the availability requirement.11 The ability to hyperlink to EDGAR would also obviate the need to differentiate "accelerated filers" should that concept no longer be necessary under the accelerated filing proposal as we suggest because we believe all registrants with a website could comply with the requirement by hyperlinking to EDGAR.
The "As Soon As Reasonably Practicable" Standard. If the website posting requirement is retained, we believe that the proposed standard of posting a document as soon as reasonably practicable after it is filed with the Commission should be replaced with a standard tied to the issuer's receipt of notification of acceptance of a filing. Before the recent EDGAR enhancement, a time delay existed between when a registrant transmitted a filing and when it received an electronic confirmation that the filing had been accepted. As a result, filers were, and we assume they still are, generally unaware of the exact moment when a filing first becomes available to the public. While this period of time is typically only a few minutes, some issuers have experienced significantly longer delays. Tying the posting standard to when the issuer receives notification of acceptance would be a more rational approach and would also reduce the chance of a registrant's accidentally posting a version of a filing that has become suspended.
The "Same Day" Standard. To the extent this standard remains relevant (i.e., the website posting requirement remains and a registrant chooses a method of access other than hyperlinking to EDGAR), we do not believe that the "same day" standard is reasonably practicable in many circumstances. For one, the same day standard would not, without modification, accommodate filings that are made after 5:30 p.m. and are deemed to be made and accepted on the following business day. Furthermore, some registrants rely on outside filing agents to make their EDGAR filings or on a small group or a single person to EDGARize documents in-house and to maintain their website. In either case, achieving same-day posting of documents may be difficult. Companies that use outside EDGAR filing agents are not effectively able to control how quickly the filing agents send copies of the filing to the company. Delays in receiving copies from filing agents will be particularly acute during the peak filing periods for calendar year-end filers. For companies with a small in-house staff, the necessary personnel may not be available for late-day posting. While companies that use outside servicers could try to maintain parallel copies of documents (that is, one version at the filing agent and another at the company), this would be a highly inefficient and error-prone approach. Some companies might delay their filings to meet the posting deadline, but this would be counterproductive to the disclosure process. For these reasons, we suggest that a more realistic posting deadline would be either (a) by the same time on the following business day as the registrant received confirmation of acceptance of the filing or (b) for filings confirmed after 12:00 noon, by 12:00 noon on the following business day and for filings confirmed before 12:00 noon, by 12:00 midnight that day. The availability of filings on a real-time basis on EDGAR, which the registrant is required to disclose pursuant to Item 101(e)(2), makes the "same day" standard less important.
Whatever the standard, a company should be deemed to be in compliance if it submits the report within the applicable time period to a service that the company reasonably believes to be reliable and capable of promptly posting the materials on the appropriate website.
iv. Proposed Item 101(e)(3)(ii) - Required disclosure by companies that do not provide same-day posting.
We do not believe that the Commission should require registrants to explain their rationale for not making same-day postings, particularly when the reason may be for legitimate technical, staffing or budgetary reasons. Besides serving as an inducement to do so (to avoid having to make the awkward disclosure as to why it does not do so), any such explanation would be of absolutely no informational value to investors and would merely add further boilerplate. The proliferation of non-substantive statements does little to improve disclosure documents and should be avoided unless there are compelling reasons to the contrary. We see none in this case and urge the Commission to drop this requirement for an explanation. Moreover, the importance of this requirement as a carrot/stick to encourage same-day posting by companies has been reduced as a result of the availability of live filings from the Commission's own website.
The adoption of such a disclosure mandate would raise other troubling issues that would need to be addressed. It would be helpful for the Commission to provide guidance as to what type of disclosure a company should provide when the company's policy is to post its filings on its own website on a same-day basis, but, for example, during one quarter in the last fiscal year it was unable for technical reasons to post the document on its website until the next business day. It is unclear from the current proposal whether, and for how long, missing the same-day posting standard on a single occasion would require a registrant to modify its statement of website posting policy or to disclose the tardy posting.
v. Proposed Item 101(e)(3)(iii) - Requirement to identify locations where the public can access SEC filings immediately upon filing.
We believe that the availability of live EDGAR filings from www.sec.gov has eliminated the need for this proposed requirement. Item 101 of Regulation S-K, which currently requires companies to identify the address of the Commission's website, should simply be amended to require companies that maintain websites but do not provide timely access to their Exchange Act filings through their websites to inform investors that real-time copies of filings can be accessed for no charge at www.sec.gov or, if the company chooses to identify them, at other websites.
We appreciate the opportunity to submit comments. We are available to meet with the Commission or the Staff and to respond to any questions.
Stanley Keller, Chair
Committee on Federal Regulation of Securities
/s/Clarence B. Manning
Clarence B. Manning, Chair
Subcommittee on Disclosure and Continuous Reporting
/s/ David A. Sirignano
David A. Sirignano, Vice Chair
Subcommittee on Disclosure and Continuous Reporting
Sue Ann Dillport
David S. Felman
Clarence B. Manning
Ann Yvonne Walker
c: Hon. Harvey L. Pitt
Chairman of the Securities and Exchange Commission
Hon. Isaac C. Hunt, Jr.
Hon. Cynthia A. Glassman
Alan L. Beller, Esq.
Director of Division of Corporation Finance
|1||Approximately 60% of the 406 companies responding to the March 2002 survey by the National Investor Relations Institute ("NIRI")(cited in footnote 49 of the Release) indicated that they could not meet the earlier deadline for annual reports and 54% indicated that they could not meet the earlier deadline for quarterly reports. Surveys by the American Corporate Counsel Association and The Business Roundtable likewise indicated that a substantial number of companies, though not a majority, would not be able to comfortably meet the new deadlines, particularly with respect to the Form 10-Q.|
|2||Many surveys of organizations regarding the Release are ongoing.|
|3||We note that the Commission has not proposed to accelerate the filing periods for foreign private issuers, but is considering those issues as part of a comprehensive examination of the foreign issuer reporting system. We defer comments on whether foreign issuer filing periods should be accelerated until the Commission formulates its proposals with respect to that reporting system.|
|4||In the event the Commission should decide, notwithstanding our comments, to accelerate the filing times, we also suggest as an alternative, as we did in response to the Aircraft Carrier Release, tying the deadlines to a company's release of its earnings. See Section 3.B. below.|
|5||To the extent the Commission's concern about an "information gap" stems from the recent practice of some companies to highlight "pro forma" financial information, rather than results reported in accordance with GAAP, in their earnings releases, we recommend that the Commission continue to address that practice, which the Commission has recognized can be helpful for investors, through interpretive guidance and, when the practice is abused, enforcement actions.|
|6||The Commission itself estimated that the new critical accounting policies discussion would add six pages of text and take on average an additional 56 hours to complete per company.|
|7||Making Audit Committees More Effective, Address by Robert K. Herdman, Chief Accountant, Tulane Corporate Law Institute (March 7, 2002).|
|8||See note 5 above regarding use of pro forma financial information in earnings releases. To the extent the Commission considered further action necessary to prevent abuses in the use of pro forma information, it could codify its interpretive guidance as part of the Form 8-K filing requirement (e.g., by requiring a reconciliation to GAAP).|
|9||In footnote 27 to the Release, the SEC notes that quarterly earnings announcements are on average issued approximately 27 days after quarter-end. Thus, under the Commission's proposal, any registrant whose earnings announcements are average or slower than average would have three days or less to prepare the necessary analysis. This is clearly impossible. In footnote 49 to the Release, the Commission cites some statistics from the National Investor Relations Institute Survey. One statistic cited is that 46% of the respondents "stated that they would not anticipate any significant problems filing their quarterly reports within 30 days after the end of each fiscal quarter." The flipside of this is that 54% of the survey respondents would have significant problems meeting the proposed 30-day deadline.|
|10||The need to provide for a cure for the of availability of Rule 144/S-3/S-8 beyond the current Rule 12b-25 grace period would be especially acute under the Commission's proposal.|
|11||The Commission should also make clear the specificity required for that link. If a link to www.sec.gov were considered too general, a link to the EDGAR search site itself (www.sec.gov/edgar.shtml) should suffice because of its ease of use. We would not consider it necessary to link to the specific company listing and it certainly should not be necessary to link to specific documents because that would be inefficient, require constant website modifications and result in a proliferation of links.|