July 2, 2002

Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Attention: Jonathan G. Katz

Re: File No. S7-09-02
Release No. 33-8090; 34-45742
Form 8-K Disclosure of Certain Management Transactions

Ladies and Gentlemen:

We submit this letter in response to the request of the Securities and Exchange Commission (the "SEC") for comments on its April 12, 2002, Release No. 33-8090/34-45742 entitled "Form 8-K Disclosure of Certain Management Transactions" (the "Release").

The group submitting this letter consists of a Stanford Law School securities law professor, securities lawyers practicing in the Silicon Valley area who collectively work for nine private law firms and lawyers from three corporations with headquarters in Silicon Valley. The views as reflected in this letter constitute a consensus of our individual perspectives. They do not reflect the official positions of the law firms or other organizations with which we are affiliated, or the clients of any of our law firms. Because this is a consensus document, we and our firms each reserve the right to express views that may not be fully reflected in this letter.

We have commented on numerous SEC proposals in the past, including most recently the proposal to accelerate Form 10-Q and Form 10-K filing dates (Rel. No. 33-8089; Comment Letter dated May 30, 2002). Previously, we submitted comments on the "aircraft carrier" proposal (Rel. No. 33-7606; Comment Letter dated October 8, 1999); the proposal to amend Form S-8 (Rel. No. 33-7506; Comment Letter dated April 23, 1998); and the executive compensation disclosure rules (Rel. No. 33-6940; Comment Letter dated August 24, 1992). We have also requested and received a number of interpretive letters, including three letters regarding the application of the Section 16 rules (Interpretive Letters to Joseph A. Grundfest et al. dated April 25, 1991, August 19, 1991 and March 4, 1992). We are often referred to as the "Grundfest Group."

The law firms with which we are affiliated primarily represent technology companies, and have been involved with a large majority of the capital formation activity in Silicon Valley. We are individually familiar with the issues that arise in the preparation and filing of reports by public companies and their insiders under the Securities Exchange Act of 1934 (the "Exchange Act"), and we believe that we have a broad insight into the workings of the public company reporting process in the high-technology industry, particularly as it has developed in Silicon Valley. In addition, we are uniquely situated to suggest innovative ways to use technology to improve the reporting process, as we observe, on a daily basis, our clients' use of the Internet in innovative ways to facilitate the gathering of information.



We appreciate the opportunity to comment on the SEC's proposals set forth in the Release. There is currently great interest from investors for more timely information on certain insiders' transactions in company securities, as a result of various well-publicized recent situations involving such transactions. We commend the SEC for the responsive action they have taken in preparing and promptly disseminating the Release.

The reporting system currently in use for insider transactions needs to be updated and improved. The current system results in duplicative, confusing reports that detract from the public's understanding of insider transactions. We generally agree with the SEC's view that investors would be better served, and investor confidence in the markets would be improved, by having more timely information about certain types of insider securities transactions. We are concerned, however, that the proposals set forth in the Release will not result in overall improvement of the insider transaction reporting system and may exacerbate some existing problems.

The current high level of interest in reforming the insider transaction reporting system presents an important opportunity to streamline and technologically update the system, for everyone's benefit. However, insider transaction reporting is one of the most technically complex areas in the federal securities laws. It is not an area conducive to hasty reform. We believe that using Form 8-K to report insider transactions is forcing a square peg into a round hole.

The technology and practical experience currently exist to create a more efficient insider transaction reporting system that would be easier for the general public to understand. It is precisely at times like these, when intense political and media pressure are brought to bear on regulatory structures, that our public markets need the technical expertise and practical insight of government agencies such as the SEC to carefully evaluate and craft a sensible, workable regulatory regime that will stand the test of time, rather than adopting a system whose primary benefit is the speed with which it can be implemented.

Therefore, we recommend that the SEC adopt a uniform insider transaction reporting system (which we refer to in this letter as the "Uniform Reporting System" and within our working group as the "Paperless Insider Transaction Tracker," or "PITT," system) that would permit all changes in beneficial ownership of a company's equity securities by its insiders to be reported on a single form that can be easily completed and filed over the Internet. This single report would be deemed to satisfy the reporting obligations with respect to the insider's changes in beneficial ownership under all applicable rules. As further discussed below, we propose that the Uniform Reporting System be based primarily on the forms, rules and reporting principles that have developed for reporting transactions under Section 16(a) of the Exchange Act, with some modifications designed to capture additional information that may be required under Exchange Act Section 13(d), Rule 144 under the Securities Act of 1933 (the "Securities Act") and proposed Item 10 of Form 8-K under the Release.

Because we believe that adoption of a Uniform Reporting System would result in improved disclosure of insider transactions and would achieve a better balance of the responsibilities, costs and disclosure accessibility among issuers, insiders, investors, analysts and government agencies than the proposals set forth in the Release, we oppose adoption of the Release. We recognize, however, the high level of importance being placed on adopting accelerated reporting requirements for insider transactions. We also recognize that it would take at least several months to adopt and implement a Uniform Reporting System. We therefore recommend that the SEC promptly move forward in adopting a Uniform Reporting System, using on-line technology of the type we describe below. If the SEC nonetheless determines it necessary to adopt the proposals set forth in the Release prior to adopting a Uniform Reporting System, we urge the SEC to adopt the proposals as temporary rules with a specified sunset provision, in anticipation of adopting as soon as possible an on-line Uniform Reporting System.


Four separate sets of rules and reports currently require disclosure of insider ownership of and transactions in company securities.1 The proposals set forth in the Release would add a fifth form and yet another set of rules to this mix by requiring that companies report on Form 8-K certain securities transactions and other arrangements involving insiders within two to eight days of the transaction date.

Under the proposals set forth in the Release, almost all equity securities transactions by an issuer's insiders would have to be reported at least twice, and sometimes as often as four times. Consider, for example, the reporting that would be required in connection with an open market sale of an issuer's stock by an executive officer. Unless the proposed sale is below the Rule 144 notice filing thresholds, the officer must file a Form 144 to report the proposed sale no later than the date a sell order is placed with a broker. Next, the sale would need to be reported under Item 10 of Form 8-K, either within two business days of the transaction or by the close of business on the second business day of the following week, depending on the aggregate value of the transaction. Then, under Section 16(a), the officer would be required to report essentially identical information regarding the sale of shares on Form 4 within ten days following the end of the month in which the sale occurred. Finally, the officer may be obligated to report the change in beneficial ownership either promptly on Schedule 13D or within 45 days after the end of the calendar year on Schedule 13G, depending on which form the officer was eligible to use.

We believe that the new reporting obligations set forth in the Release will exacerbate the burdens and inefficiencies already imposed by the current reporting regime. They would impose undue burdens on issuers, reporting persons and investors, by increasing not only the cost of compliance to the issuer and the reporting person, but also the cost and confusion to investors, analysts and the press of collecting and analyzing redundant information from multiple sources. Furthermore, adding more reports will increase the likelihood that investors and the press may misinterpret duplicative reports as each representing discrete transactions.

In contrast, under the on-line, Internet-based Uniform Reporting System recommended in this letter, a single filing would be deemed to satisfy simultaneously an insider's reporting obligations under all applicable rules. We believe that this approach will minimize reporting burdens (both in cost and in time), while at the same time make it easier for investors to use the information collected.

Standardized reporting formats and data will improve the quality of the information collected and enhance its transparency and utility for investors, analysts, journalists and government agencies alike. To the extent that analysts and investors deem the information included on these reports important, making those data available in a consistent, electronically-filed form will facilitate detailed analysis, while minimizing inaccuracies in analysis that may now result because a single transaction is reported on multiple forms in different ways. Further, eliminating paper filing of Form 144 and Forms 3, 4 and 5 would reduce the cost to the government of handling, storing and providing access to these paper forms.


A. Single Form

The first step in adopting a Uniform Reporting System would be to adopt a single disclosure form (the "Integrated Form") that captures all the information necessary to satisfy the various rules governing insider beneficial ownership and transaction reporting.2 This simple step will allow the party or parties required to report a transaction to collect all transaction information and report the transaction only once on the Integrated Form. To the extent that other rules require reporting of the same transaction, either by the insider, other insiders (as in the case of a "group" under Section 13 or Section 16), or the issuer, such parties can be deemed to have satisfied the additional reporting requirements through the prior filing of the Integrated Form.

For example, to the extent that an officer's open-market sale of shares is subject to accelerated reporting under proposed new Item 10(a) of Form 8-K, under the Uniform Reporting System either the issuer or the officer could file the Integrated Form by the applicable Item 10(a) filing deadline. The filing of the Integrated Form would also satisfy the officer's Section 16(a) reporting obligation with respect to the transaction, because the Item 10(a) deadline as proposed will never be later than the Form 4 deadline. Finally, to the extent the officer is required to report the resulting revised beneficial ownership on Schedule 13G, the Integrated Form will satisfy that reporting requirement as well. It is our recommendation, as discussed more fully below, that the Form 144 filing requirement that currently applies to the proposed sale of the officer's shares under Rule 144(h) be eliminated as de facto redundant.

The current Form 4 under Section 16 could be easily adapted to accomplish what we envision in an Integrated Form. The Section 16 reporting system provides disclosure both of holdings of and transactions in company securities. Thus, it should be capable of efficiently handling information regarding beneficial ownership (as currently reported on Schedule 13G) and information regarding sales of securities (as currently reported on Form 144) without significant changes. We believe that enhancement of Form 4 to include additional items such as the information applicable to groups that Schedule 13G requires and the details required to be reported as to Rule 10b5-1 trading programs (if proposed Item 10(b) of Form 8-K is adopted) should be fairly simple to accomplish. The Integrated Form should also include space for filers to include explanatory details relating to reported holdings or transactions, through footnotes or otherwise.

B. Rules Governing the Integrated Form

To gain the greatest efficiencies through a Uniform Reporting System, it will be critical that a single, consistent set of definitions, reporting conventions and disclosure rules apply. We believe that the reporting rules that have evolved under Section 16(a) of the Exchange Act should be the foundation for rules governing an Integrated Form and a Uniform Reporting System. The Section 16(a) rules are not only the most comprehensive rules governing insider transactions that exist, but there is also a well-developed, practical understanding of the application of these rules. To comply with the Section 16(a) rules, almost all issuers currently have in place procedures designed to collect transaction data from insiders on a monthly basis. Issuers and insiders are familiar with the forms, the codes and the timing under Section 16(a). In addition, over the years, the SEC has provided guidance in the form of hundreds of interpretive letters discussing various reporting issues under Section 16.

To the extent the current Section 16(a) rules do not cover all information that would be required to be reported on an Integrated Form, it would be necessary to incorporate provisions that are responsive to the disclosure requirements of Rule 144, Section 13(d) and, if adopted, proposed Item 10 of Form 8-K into the rules for the Integrated Form. It will, we believe, be more efficient to expand and amend the existing Section 16 forms, rules and literature to create the proposed Integrated Form than to adopt any other approach.

C. Specifics of New Rules

In addition to simplicity, other important virtues of the Integrated Form and the Uniform Reporting System are flexibility and comprehensiveness. The Integrated Form would be able to accommodate reporting of any transaction by any party required to report the transaction. Because the Uniform Reporting System and the Integrated Form are to a large extent independent of whatever rules are eventually adopted, we do not address in this comment letter our views regarding many of the specific technical and mechanical issues raised in the Release.3


Adopting a Uniform Reporting System requires careful analysis of the impact of the Uniform Reporting System on each set of existing insider transaction disclosure rules that are affected. It will be important to keep in mind the purpose behind each set of rules in order to design a system that does not detract from those purposes. This section identifies some of the issues and effects that should be considered.

A. Section 16

Section 16(a) requires that officers, directors and greater than 10% stockholders file an initial statement of beneficial ownership of the issuer's securities on a Form 3 when they become Section 16 reporting persons. Subsequent statements of changes in beneficial ownership are to be reported on Forms 4 and 5 on a monthly and annual basis, respectively. The purpose of the Section 16 reporting rules is to provide a means by which to monitor compliance with the strict liability short-swing profit rules of Section 16(b) that apply to a company's officers, directors and greater than 10% stockholders. Nothing about the Uniform Reporting System that we propose would detract from this purpose. As described above, we believe the Form 4 currently in use should be the foundation for the Integrated Form.

In order to permit an insider's reporting obligations under Section 16 to be met by the proposed new Uniform Reporting System, the SEC should consider:

B. Section 13(d)

Reports under Section 13(d) of the Exchange Act, specifically Schedules 13D and 13G, provide information regarding beneficial ownership of securities for persons holding in excess of 5% of a class of securities registered under Section 12 of the Exchange Act. For this purpose, the definition of "beneficial ownership" is based on the voting or investment control test found in Rule 13d-3. This is the same test that is used under Section 16 to determine whether a person is a greater than 10% stockholder and therefore a Section 16 reporting person by virtue of his or her beneficial ownership. However, the actual "beneficial ownership" information that is reportable on Forms 3, 4, and 5 under Section 16 is based on the pecuniary interest test set forth in Rule 16a-1(a)(2).

We propose eliminating the existing Schedule 13G and replacing it with the Integrated Form. However, we do not propose to replace the existing Schedule 13D with the Integrated Form. Stockholders and groups that are required to report on Schedule 13D are typically not affiliated with the issuer as an officer or director. Accordingly, they do not fit well into a system such as the Uniform Reporting System that is designed primarily to deal with insiders. In addition, Schedule 13D filers are by definition engaging in transactions for the purpose of influencing or gaining control of the issuer. For this reason, and due to the purposes underlying the Williams Act, the disclosure required in a Schedule 13D goes far beyond the simple basics of their beneficial ownership and transactions, and it includes a host of additional data and disclosure that are not relevant to the vast majority of insider transactions.4 For persons eligible to use Schedule 13G, however, there is very little information required that goes beyond their beneficial ownership information. In addition, in our experience, officers and directors are in some cases Schedule 13G filers merely because their ownership of the issuer's stock is in excess of 5% at the time the issuer goes public.5

We therefore favor eliminating Schedule 13G and instead requiring that the necessary information be included, when applicable, on the proposed new Integrated Form. To accomplish this, we recommend adding columns for beneficial ownership under Rule 13d-3 (including separate columns for sole voting, shared voting, sole dispositive and shared dispositive power plus a column for total beneficial ownership under Rule 13d-3), because such ownership data would not necessarily be the same as the pecuniary interest beneficial ownership reported under Section 16. We would also add a box on the Integrated Form to indicate whether the filer is a Section 13(d) group and provide the boxes that currently exist under Item 3 of Schedule 13G to indicate the basis on which the reporting person is eligible to use Schedule 13G rather than Schedule 13D. Any additional information from the existing Schedule 13G form that the SEC deemed necessary or appropriate to include could be disclosed in a footnote.

Our proposal would eliminate the apparent redundancy of the existing reporting scheme and instead provide the necessary information on an Integrated Form that is modeled after, and is quite similar to, the Section 16 forms that the insiders are accustomed to filing. It may also make sense to harmonize the timing of the different filing requirements that apply under Section 16 and Section 13. For example, the annual Schedule 13G due date could be changed from 45 days after calendar year end to 45 days after the issuer's fiscal year end, thereby making it the same as the due date for the annual Form 5 filed under Section 16. Whether or not the due dates are harmonized, to the extent that adoption of an Integrated Form is accompanied by any acceleration of filing deadlines, an earlier filing should be deemed to satisfy a later filing requirement.

C. Rule 144

Rule 144(h) requires the filing of a Form 144 in connection with sales of restricted securities by non-affiliates whose holding period is less than two years and sales of any securities held by affiliates. Although the Form 144 contemplated by the rule is intended to be a "notice of proposed sale," in practice it is rarely received by the SEC prior to the sale. There are two reasons for this. First, although the form purports to disclose the total amount of securities proposed to be sold under Rule 144 during the following three months, in practice brokers (on behalf of sellers) nearly always file a Form 144 for each individual sale of stock, indicating only the number of shares proposed to be sold on that day rather than the number of shares proposed to be sold during the next three months.6

Form 144 is not required to be filed via EDGAR and in our experience is rarely filed electronically. This means that, other than for sales under Rule 10b5-1 plans, the form is typically mailed to the SEC on the date the sale order is executed. As a result, the Form 144 is often not received by the SEC until a day to a week after the actual transaction, depending on the location from which it is mailed.

In most cases, therefore, the Form 144 is not available to the public until after the sale has occurred. In addition, Form 144 is not reporting an actual sale and does not include basic transaction information, such as the sale price and the number of shares sold at that price. Because "proposed sales" reported on Form 144 do not always match "actual sales" reported on a Form 4 or Form 5, members of the public do not always realize that the two forms may actually be reporting the same transaction. For all of these reasons, the continuing utility of Form 144 seems marginal at best.

We suggest that the current requirement to file a Form 144 be entirely eliminated. To the extent that a Form 144 filing relates to sales by affiliates, the actual information with respect to the sale, including the price (which is not included on a Form 144), will be filed on the Integrated Form. With respect to non-affiliates selling restricted stock, due to the lack of utility of the form and the lack of significance to the market of sales by non-affiliates, elimination of the requirement to file the Form 144 seems long overdue.

Other issues that should be considered with respect to integrating Rule 144 requirements into a Uniform Reporting System include:

D. Form 8-K

As indicated above, we do not support an insider transaction reporting structure that would utilize Form 8-K. We believe that the filing of Forms 8-K will proliferate, as a result of adoption of the Release as well as adoption of the proposals set forth in the SEC's Additional Form 8-K Release.9 We recommend that, at most, Form 8-K be used as a means to report insider transactions only until the SEC can adopt rules creating a Uniform Reporting System.10

E. Item 405 of Regulation S-K

If the SEC decides to implement a Uniform Reporting System, it should also revise Item 405 of Regulation S-K to require disclosure in the issuer's proxy statement and Form 10-K of any missed or delinquent Integrated Form filing. Such a requirement would hopefully encourage insiders to promptly disclose their transactions to the issuers to enable a timely filing of the Integrated Form.


The costs of implementing any enhanced and accelerated insider transaction reporting system, whether it takes the form proposed in the Release or the structure suggested in this letter, will require companies and their insiders to develop improved practices and procedures for compiling the necessary transaction information. A critical reason for our suggesting a Uniform Reporting System is to minimize expense and burden for issuers, insiders, investors, journalists and government agencies involved in preparing, filing, monitoring and analyzing insider transaction information. Duplicative transaction reporting results in unnecessary expense, detracts from the efficiency of our market system and fails to provide optimally comprehensible disclosure.

In Section VII.C of the Release, the SEC acknowledges the additional costs likely to be imposed if the reporting system proposed in the Release is adopted. The SEC estimates cost increases in two additional areas: the (unknown) cost of instituting or enhancing compliance procedures to permit company reporting, and the costs of preparing and reviewing the new forms, which the SEC estimates would cost approximately $416 per additional filing.

We believe that the SEC is dramatically underestimating the costs of this new reporting requirement. In particular, the Release does not address the cost of converting insider transaction reports to the EDGAR format that the SEC requires for electronic filing.

A. EDGAR Conversion Costs

Although the SEC designed EDGAR to be a user-friendly system, due to the fast pace of software development, EDGAR already represented a legacy system by the time it was fully implemented in 1996. As a result, many issuers found they needed to use specially-trained personnel to convert standard word-processing documents to EDGAR format. Even with the subsequent EDGAR system upgrade to permit filing of HTML-formatted documents, special, extensive training is often required, because EDGAR uses an older version of HTML than the current commercial standard. There are also special restrictions on the inclusion of graphics and active links in EDGAR filings that need to be addressed.

EDGAR training can be expensive. For example, Glasser LegalWorks offers EDGAR training at various sites throughout the country and charges $1,295 per person for a two-day training session. We have been advised by a public company that in-house training programs could easily cost $5,000 or more, simply for the out-of-pocket class fee. This amount does not include the many hours of follow-up training and test filing needed to reliably be able to make EDGAR filings internally.

Accordingly, many public companies that we represent, both small and large, do not have sufficient resources to handle EDGAR conversions in-house. These companies typically outsource their EDGAR filings to a financial printer. In fact, a recent on-line survey conducted by The Corporate Counsel indicated that 68% of 215 companies responding used a financial printer for their Form 8-K filings.11

Outsourcing is also expensive. Based on our conversations with financial printers, typical charges currently for EDGAR conversions are approximately $500 - $700 for a relatively simple filing, with a one-day turn-around time. More complicated filings, including tabular presentations, such as a typical earnings release on Form 8-K, cost approximately $1,200 - $1,500. Based on the SEC's own estimate of 21 new Form 8-K's per year as a result of these rules, the new requirement would add $10,000 to $30,000 per year in new EDGAR filing costs. Actual EDGAR charges may be greater because companies will be more likely to need accelerated turn-around due to the very short filing deadlines being proposed by the SEC (two business days in some cases) that are certain to trigger printer overtime charges.

Because documents are typically converted to EDGAR on an individual basis, there are few economies of scale in making multiple EDGAR filings. Companies may save money by aggregating several insider transactions on a single Form 8-K, but for the reasons discussed in Section B below, we believe that such aggregation will be difficult to implement successfully.

Even companies who currently manage their EDGAR process in-house would have to devote substantial additional resources to EDGAR filing. Because of the specialized nature of the EDGAR system, many companies have devoted only a very small staff to EDGAR filing mechanics - as few as one or two people. It is possible to operate with a small EDGAR-literate staff when the EDGAR filing process is confined to discrete reporting dates (i.e., for Form 10-K and Form 10- Q), and the number of Form 8-K filings is limited. However, if the number of Form 8-K filings is dramatically increased, these companies will have to train and devote several additional people to EDGAR conversions so that filings can be accomplished any time during a quarter on short notice. The accelerated filing times may also require these companies to incur additional overtime expense for these EDGAR-trained employees.

B. Aggregation of Multiple Transactions on a Single Form 8-K

The SEC's estimate of 21 additional Form 8-K filings per year may underestimate actual filings that will be required. In our experience, the officer/director group typically consists of 10-14 people. The SEC's estimate therefore represents less than two transactions per insider per year, which seems unrealistically low. For example, if several officers had Rule 10b5-1(c) sales programs with monthly sales, the number of Form 8-K's that needed to be filed could easily be twice as high as the SEC's estimate.12

Footnote 76 in the Release indicates that the SEC estimates that a significant number of insider transactions would be able to be aggregated by an issuer to reduce the number of Form 8-K filings.13 We believe that the SEC has overestimated the amount of aggregation that will actually be possible to achieve in practice. While it is certainly true that option grants often tend to be made to a number of insiders on the same day, many other transactions, including open market purchases and sales, and transactions under Rule 10b5-1 programs, are made independently of any issuer events. The SEC's observation that simultaneous option exercise and sale of option shares often tend to be grouped close in time is certainly correct, but this is probably because many issuers have established insider trading policies that restrict transactions to designated "window" periods. However, due to the complicated, three-deadline system the SEC has proposed, aggregation of transactions other than option grants will be difficult to achieve.

The Release sets forth three deadlines for insider transaction reports: (A) two business days for transactions or $100,000 or more; (B) the second business day of the following week for transactions between $10,000 and $100,000; and (C) an indeterminate reporting date for de minimis transactions, for which reporting can be deferred until the aggregate value for a particular reaches $10,000. Because it generally takes at least 24 hours to do an EDGAR conversion, most companies will begin preparing the filing for transactions in group (A) immediately.14 The filing preparation process for transactions in group (B) that occur later in the week will likely also begin immediately. Companies will be able to achieve aggregation efficiency only for group (B) transactions that occur early in the week, and group (C) de minimis transactions. Ironically, the Release's proposal for reporting insider transactions on Form 8-K may actually provide an incentive for issuers to delay reporting of some transactions in an effort to reduce EDGAR conversion costs by aggregating multiple transactions on a single Form 8-K. However, we believe that, in practice, many issuers will decide to report each transaction (other than option grants) on an individual Form 8-K.

Through the Release and the Additional Form 8-K Release, the SEC is considering, in the aggregate, a substantial increase to the number of Current Reports on Form 8-K that an issuer must file each year. Using the public-access EDGAR system as it currently exists, an investor must click on and open each Form 8-K filing individually to determine the subject matter. Although the proposals set forth in the Release will, if implemented, certainly make information on insider transactions available to the public more quickly than the existing Form 4 monthly reporting system, a large increase in the number of Form 8-K's may continue to make it difficult for members of the investing public to access the information quickly.

C. Other Compliance Costs

The SEC has asked for comment on the compliance effort that would be required to implement the new rules proposed by the Release. As the Release notes, the estimate of additional time needed to comply with the new rules does not take into account the costs associated with developing a new internal reporting system. Even for issuers that have existing compliance procedures, the costs of enhancing existing systems to cope with the accelerated filing deadlines will be substantial. In addition to the review of existing insider trading policies and compliance procedures, issuers will need to train insiders to report additional categories of transactions (e.g., loans and gifts) that are not currently reportable under the system now in place. We estimate that the time required to implement appropriate new compliance policies, and to provide training, would be 80-90% of the time required to design and implement an insider trading program for new public companies. Within our drafting group, and without being able to achieve any precision on the estimate, we have discussed that the likely time commitment for each company will be in the range of 30 to 70 hours.


As discussed above, we believe that the SEC should ultimately adopt a single-form system for reporting insider transactions. A user-friendly on-line form could be filled out and filed by the insiders themselves, avoiding the costs and hassles of converting documents to EDGAR format. Such a system would be more efficient for insiders and issuers, who could file their own reports without expensive intermediaries, as well the general public, who could access the information more quickly and easily and with less confusion. An on-line form, whether or not filed under cover of Form 8-K, could be indexed in such a way that investors would have an easier time identifying and segregating "insider transaction" reports from other current reports. We also believe that an on-line form that is easy to complete and file will facilitate earlier reporting of insider transactions.

A. On-Line Filing Mechanics

The construction of on-line forms is not a difficult task. With the assistance of the staff of the Stanford Law School Library, and through the application of standard off-the-shelf software packages, we have created a demonstration on-line Form 4 that can be viewed at This rudimentary on-line form will have to be materially amended in accordance with the modifications previously discussed in this letter in order to serve as a functional Integrated Form. This on-line form should also be amended to incorporate a detailed list of "pull down" menus that can be used to respond to many of the queries required by the form. The use of detailed "pull down" menus will facilitate precision in the filing process and make it easier and cheaper for investors to construct spreadsheets that they can use to monitor insider transaction activity.

Definition of appropriate pull-down menus should also not be a difficult task. Several commercially available sources provide sample Forms 3, 4,and 5 that are completed in a manner that describes the overwhelming majority of filings likely to be made on the proposed Integrated Form. See, e.g., Peter J. Romeo and Alan L. Dye, Section 16 Forms and Filing Handbook (E.P. Executive Press, 2000) (containing 167 model complete Forms 3, 4 and 5 with accompanying explanatory text). These sources are a natural starting point for the definition of pull-down menu choices.

To the extent that the ability to complete the on-line Integrated Form is restricted to issuers who also have the ability to file on EDGAR, a password protection scheme identical to that used to authenticate EDGAR filings can be relied upon to authenticate filings on the proposed Integrated Form. Over time, it will be desirable to allow individuals with filing obligations covered by the Integrated Form to file directly on their own behalf. This step will, however, require a material expansion of the agency's ability to authenticate individual filings. Accordingly, we appreciate that the most appropriate first step in the introduction of an on-line Integrated Form filing system is limited to filings by issuers on their own behalf or on behalf of insiders, but recommend that the Commission move quickly to implement a system that will permit direct, on-line filings by individuals subject to statutory filing obligations.

B. Benefits of On-Line Filing

The proposed on-line filing system has several major benefits and will promote the objectives of the Release far more effectively than the contemplated Form 8-K system. As noted above, on the current version of the EDGAR system Form 8-K's are not coded or tagged in any manner that allows for quick and cheap extraction of specific data items that investors might view as material to the analysis of shareholder transactions. Form 8-K filings also generate the risk of double counting as a consequence of later, redundant filings. In contrast, the proposed on-line system will provide far greater precision and clarity from the investors' perspective, and because the proposed "pull-down menu" structure of the form will facilitate the construction of consistent customized databases by the investor community, the information provided to the market will be more informative and useful. Because the proposed on-line system will make information available to the market on a more prompt basis, it will also better promote the SEC's interest in timely reporting to the investing public. Moreover, these advantages can be obtained without incurring the cost of working within the current antiquated EDGAR system.

C. Security Issues

We appreciate that any proposal to allow on-line filing raises natural and appropriate concerns regarding the integrity and security of information provided through the Internet. We will not in this letter undertake to design a security and authentication protocol responsive to these concerns, other than to observe that these problems can all be readily resolved given the current state of the art. Indeed, if the Internal Revenue Service can permit on-line filing of tax returns, the U.S. Treasury can permit on-line purchase of Treasury securities, airlines can allow on-line booking of reservations, and credit card companies can facilitate many billions of dollars of on-line transactions, we are confident that the suitable protocols can be designed to facilitate on-line submissions of an Integrated Form.

These authentication and security protocols will, moreover, be far superior to the procedures currently applied by the Commission to its current, largely paper-based insider transaction reporting system. When receiving EDGAR filings, the SEC typically takes no steps to assure the authenticity of any filings or signatures unless a specific issue is raised. In contrast, a well-designed authentication and security procedure can provide substantially greater assurance in every instance that a filing is, in fact, being made by an authorized person, or someone acting on their behalf, and not just when a specific issue is raised.


A. Transition Period

An on-line Uniform Reporting System will in the end simplify reporting burdens and lower costs for companies and insiders. However, as with any regulatory change, there will inevitably be transition costs incurred by issuers associated with implementing and adapting existing procedures to conform to new requirements. Before adopting a Uniform Reporting System, careful thought should be given to minimizing those implementation costs and burdens, especially as companies and insiders may have just borne the cost of adapting to the interim reporting system established by final adoption of the Release. Accordingly, we believe that a period of at least 180 days from final adoption of a Uniform Reporting System until its effective date would be appropriate.

B. Consequences of Failures to File Integrated Forms

With respect to the consequences of compliance failures under a Uniform Reporting System, to the extent that the reporting obligation rests with individual insiders, we believe that the current enforcement system used under Section 16 (Regulation S-K Item 405 disclosure and the potential for SEC enforcement actions) is appropriate. A company's failure to report an insider transaction, to the extent required under a Uniform Reporting System, should not have any effect on its eligibility to use Forms S-2, S-3 or S-8, or on the availability of Rule 144 or resale registration statements filed on Form S-3 with respect to sales of its stock. Any such failure by a company should not create any new duties for the company under the antifraud provisions of the federal securities laws or result in any private right of action. We also believe that reports on an Integrated Form should not be regarded as "filed" under the Exchange Act, and should not automatically be incorporated by reference into Securities Act registration statements.


For the reasons described above, we believe that companies, insiders, analysts, the press and the SEC would all benefit from adoption of an on-line Uniform Reporting System. We enthusiastically support the adoption of such a system, as we believe the existing insider transaction reporting system is overdue for updating and improvement. Adoption of a Uniform Reporting System would also be responsive to public, media and political pressure to reform existing insider transaction reporting rules.

We recognize, however, that implementation of such a new system will take a significant amount of the SEC's time and energy, and will raise numerous issues, particularly with respect to transition from the current reporting regime. We have tried to address some of these concerns in this letter. Additional questions and issues will inevitably surface if serious consideration is given to adopting a Uniform Reporting System. If it would be helpful, we would be happy to work with the SEC on an ongoing basis in drafting a model Integrated Form and proposed rules relating to the Integrated Form, analyzing interpretive and transition issues that will result from adopting a new reporting regulatory structure, and providing test software applications for the on-line filing system.

We would be happy to discuss our comments with members of the Staff, at your convenience.

Respectfully yours,

/s/ Joseph A. Grundfest

Joseph A. Grundfest
William A. Franke Professor of Law and Business
Stanford Law School
Stanford, CA 94305

By: /s/ Sharon J. Hendricks
By: /s/ Linda M. DeMelis
Sharon J. Hendricks
Linda M. DeMelis
2775 Sand Hill Road
Menlo Park, CA 94025
(650) 854-4488

By: /s/ Ann Yvonne Walker
Ann Yvonne Walker
650 Page Mill Road
Palo Alto, CA 94304
(650) 493-9300

By: /s/ William H. Hoffman
William H. Hoffman
1755 Embarcadero Road
Palo Alto, CA 94303-3340

By: /s/ Marie Oh Huber
Marie Oh Huber
1501 Page Mill Road
MS 4U-10
Palo Alto, CA 94304-1126
(650) 236-5540

By: /s/Lior O. Nuchi
Lior O. Nuchi
1900 University Avenue
East Palo Alto, CA 94303
(650) 849-4400

By: /s/ S. James DiBernardo
S. James DiBernardo
2000 University Avenue
East Palo Alto, CA 94303
(650) 331-8000

By: /s/ Nancy Wojtas
Nancy Wojtas
Five Palo Alto Square
Palo Alto, CA 94306
(650) 843.5000

By: /s/ Michael R. Jacobson
Michael R. Jacobson
Senior Vice President, Legal Affairs
2145 Hamilton Avenue
San Jose, CA 95125

By: /s/ Horace L. Nash
Horace L. Nash
Two Palo Alto Square
Palo Alto, CA 94306-2122
(650) 494-0600

By: /s/ Kyle Guse
Kyle Guse
275 Middlefield Road
Menlo Park, CA 94025-3506
(650) 324-7000

By: /s/ William D. Sherman
William D. Sherman
755 Page Mill Road
Palo Alto, CA 94304-1018
(650) 813-5602

By: /s/ Sergio Garcia-Rodriguez
Sergio Garcia-Rodriguez
3480 Campus Dr.
Fremont, CA 94555

1 We refer to Rule 144 under the Securities Act, the rules under Section 13(d) and Section 16 of the Exchange Act, and the Regulation S-K requirements that require issuers to report certain information related to insider transactions in certain Securities Act registration statements and Exchange Act periodic filings and proxy statements. We do not intend anything in this letter to suggest that compensation arrangements that do not result in changes in an insider's beneficial ownership of company securities should be included in the Uniform Reporting System. We believe that general compensation arrangements should continue to be reported under Items 402 and 404 of Regulation S-K, on an appropriate periodic basis.
2 We note the SEC's reference in Footnote 98 of its "Additional Form 8-K Disclosure Requirements and Acceleration of Filing Date" Release, dated June 17, 2002, Release No. 33-8106 (the "Additional Form 8-K Release") to the possibility that the SEC may determine it appropriate to move insider trading reports from Form 8-K to a separate form as a result of the comment process. We are hopeful that in making this reference the SEC has also considered the benefits of using a single form.
3 Please see Note 10 below, regarding the possible need for Congressional action to accelerate the deadlines applicable to reporting insider transactions.
4 While we do not advocate including Schedule 13D information in the Uniform Reporting System, it is quite likely that such reports could also benefit from an Internet-based filing system similar to the one we are proposing here.
5 We note that Form 13G filers who are not company insiders (e.g., mutual funds and similar holders outlined in Exchange Act Rule 13d-1(b)) should be able to use the Integrated Form.
6 The principal exception to this practice is in the context of Rule 10b5-1 sales plans, where brokers may advise sellers to file a Form 144 that does actually report the maximum number of shares that could be sold over the next three months under that plan. As Rule 10b5-1 sales plans are still relatively new, practice in this regard is still not yet fully evolved.
7 The definition of "affiliate" under Rule 144 is more subjective than the definition of "officers," "directors" and greater than 10% stockholders for purposes of Section 16. However, we note that the SEC's most recent proposals to amend Rule 144 (Rel. No. 33-7391, February 20, 1997) included a safe harbor that would, for all practical purposes, assure that persons who are not Section 16 reporting persons are not affiliates for purposes of Rule 144, and leave open the question as to whether there may be Section 16 persons who are not affiliates.
8 The definition of "person" under Rule 144(a)(2) has the practical effect of treating others who are deemed to be the same "person" as the affiliate as being themselves affiliates for purposes of Rule 144 sales. This sometimes conflicts with the Section 16 indirect ownership rules. For example, under Rule 144(a)(2)(ii), if an affiliate has a 10% or greater beneficial interest in a trust or serves as trustee of the trust, then the trust is the same "person" as the affiliate. Under Rule 16a-8, however, an insider is only deemed to have a pecuniary interest in a trust if the insider has or shares investment control and has a direct or indirect pecuniary interest in the trust. We think it would be appropriate to evaluate whether there is sufficient reason to treat a trust over which the affiliate has no investment control as the same "person" under Rule 144 to justify this confusing difference. We believe that the current Section 16 approach (adopted in 1991) is more appropriate than the older Rule 144 formulation (adopted in 1972).
9 See Note 2 above.
10 We note that, if the Release is adopted with a sunset provision, and in the absence of Congressional action addressing these matters, the first deadline applicable to reporting insider transactions would be the Form 4 (10 days after the month in which the transaction occurred) deadline that currently applies to individual insiders under Exchange Act Section 16(a).
11 See The survey was completed as of May 30, 2002.
12 This is because, as it currently stands, the Release would require reporting of the establishment and modification of Rule 10b5-1 programs on Form 8-K, as well as Form 8-K reporting of the actual Rule 10b5-1 program transactions themselves. We recommend that the Release as finally adopted not require Form 8-K reporting of actual transactions if the establishment and modification of the Rule 10b5-1 program has been timely reported. Form 4 reporting of the actual program trades will provide sufficiently timely and detailed disclosure until a Uniform Reporting System can be adopted.
13 The SEC estimates 341,000 transactions will require reporting on Form 8-K, which would be aggregated into 215,000 Form 8-K filings.
14 Although the SEC did not specifically address the issue of EDGAR filing times in this Release, we would like to note that companies located in the Pacific time zone experience particular problems with accelerated filing deadlines because of the East-Coast-based hours of the EDGAR filing system. Currently, any filing made after 2:30 p.m. Pacific time is given the following day's filing date. This means that the "two business day" filing deadlines specified in the Release may in practice be only 1½ days for West Coast companies. In addition, the EDGAR filing desk does not accept any filings at all between 7 p.m. and 5 a.m. Pacific time. We understand that, in connection with the Release mandating EDGAR filing for foreign private issuers, the SEC is considering expanding the EDGAR filing hours. We support that initiative. We also believe that companies should be able to meet their filing requirement if the filing is made by 5:30 P.M. local time (based on the company's principal place of business), rather than 5:30 East Coast time.