VIA E-MAIL AND FEDERAL EXPRESS
June 24, 2002
Securities and Exchange Commission
450 Fifth Street
Washington, D.C. 20549
Attention: Jonathan G. Katz, Secretary
Re: Proposing Release Nos. 33-8090, 34-45742 (the "Proposing Release"); File No. S7-09-02
On behalf of Compass Bancshares, Inc. ("Compass"), we respectfully submit these comments on the proposed amendments to require public companies to file current reports describing certain transactions and arrangements of directors and executive officers involving company equity securities and loans obtained from or guaranteed by a company. We share the Commission's view of the importance of access by the markets to clear, accurate and timely information and appreciate the opportunity to comment on these important proposals. We assume that the proposals contained in the Proposing Release are a part of the Commission's initiative to restore confidence in our capital markets system, and we support the Commission's efforts in connection with that initiative.
Compass is a financial services company with $23 billion in assets that was organized in 1970. Compass operates 340 full-service banking offices in Alabama, Arizona, Colorado, Florida, Nebraska, New Mexico and Texas and is among the top 40 bank holding companies in the United States in terms of assets. Shares of Compass' common stock are traded on the Nasdaq stock market under the symbol "CBSS". Compass is a financial holding company and a bank holding company and would be subject to the proposed filing requirements for purposes of the Proposing Release.
AMENDMENT TO CURRENT REPORT ON FORM 8-K
The Commission proposes to amend the current report on Form 8-K to require companies with equity securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), to disclose information regarding (collectively, "Reportable Events"):
(1) Transactions by directors and executive officers in a company's equity securities, including transactions involving derivative securities and transactions with the company;
(2) Arrangements for the purchase or sale of a company's equity securities by a director or executive officer intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) of the Exchange Act; and
(3) Loans of money to a director or executive officer made or guaranteed by a company or an affiliate of the company.
Under the proposed amendments, a company would be required to file a current report on Form 8-K within two (2) business days following a Reportable Event with an aggregate value of $100,000 or more. For Reportable Events involving a lesser aggregate value, a company would be required to file a Form 8-K by the close of business on the second business day of the following week. Reports of Reportable Events involving an aggregate value of less than $10,000 could be deferred until the cumulative aggregate value of unreported Reportable Events for the same director or executive officer exceeds $10,000. The date of the Reportable Event would be the date on which the parties enter into an agreement leading to a Reportable Event.
The Commission believes that the proposed amendments to Form 8-K "would enable investors to make investment and voting decisions on a more timely and better informed basis, provide more timely information regarding management's view of company performance or prospects, protect investors, and promote fair dealing in company equity securities". We do not disagree that investors would benefit from the timely reporting of information concerning Reportable Events and that this information may have the ability to promote fair dealing in a company's equity securities; however, we do not agree that this information will necessarily offer investors the insights and protection sought by the Commission. In addition, we do not believe that the Commission's proposed method of delivering the information concerning Reportable Events is the most efficient, effective or appropriate.
While we agree with the Commission that "[c]hanges in securities ownership and some management transactions ... can provide information regarding management's view of the company's performance and prospects", we do not agree that this information necessarily does so. Executive officers and directors may have any number of reasons for purchasing or selling company equity securities or engaging in another Reportable Event, only some of which rely on their "view of the company's performance and prospects".
The Commission also suggests in the Proposing Release that the information concerning the Reportable Events will expose "shifts in the alignment between management's and shareholders' economic interests". Again, while the information concerning Reportable Events may have the ability to expose changes in the alignment of the economic interests between management and shareholders, it does not necessarily do so and certainly cannot do so without the existence of other relevant information.
To suggest that the information concerning Reportable Events will expose shifts in the alignment of the economic interests of shareholders and management and necessarily will provide investors with an insight into the view of the company by management, as the Commission has suggested, is misleading and potentially dangerous. As part of its initiative to restore investor confidence in the capital markets, the Commission is seeking an increased emphasis by investors on the long-term fundamental value of companies rather than short-term performance. It is hard to imagine how this goal is served by leading investors to believe that every sale of equity securities by an executive officer or director represents a view by that executive officer or director that the company's performance and/or prospects are unfavorable or that that executive officer's or director's economic interests are no longer aligned with those of shareholders of the company. In our opinion, the proposed amendment to Form 8-K would encourage investors to rely on unsubstantiated presumptions rather than solid evidence of the long-term fundamental value of the company.
Investors armed with the information concerning Reportable Events are free to presume whatever motivation they choose for the directors or executive officers having engaged in a Reportable Event; however, the Commission should avoid leading investors to any particular presumption. As discussed below, we believe that requiring companies to include the information concerning Reportable Events on Form 8-K rather than Section 16 reports may lead investors to these potentially false conclusions regarding the motivation of directors and executive officers to engage in Reportable Events.
METHOD OF DELIVERY
The Commission has recognized that in order to restore the investing public's confidence in our capital markets, "transparency" of disclosures must be improved. The Commission has not provided a definition of "transparency", but we assume for purposes of our comments that public company disclosures that are clear, accurate, meaningful and timely provide adequate transparency. In requiring information regarding Reportable Events to be reported on Form 8-K, we believe that the Commission will have succeeded in providing disclosures more quickly but, in our estimation, will risk providing disclosures that are less clear, accurate and meaningful and, therefore, less transparent.
For a number of reasons, we do not feel that Form 8-K is the appropriate form of disclosure for Reportable Events. Among these reasons are:
(1) Including information concerning Reportable Events on Form 8-K will be confusing for investors, particularly given the Commission's proposal of June 17, 2002 to further increase the types of information to be included on Form 8-K.
(2) A great deal of unnecessary confusion will result from the fact that there will be differences in the persons covered by Section 16 of the Exchange Act and the persons covered under the amendments to Form 8-K.
(3) With the exception of loans obtained from or guaranteed by a company, the proposed amendment may lead to confusion among investors as to the source and quality of the information reported on Form 8-K.
We believe that each of these problems can be easily overcome without sacrificing any of the Commission's objectives with the implementation of the suggestions set forth immediately below.
We would suggest that, rather than amending Form 8-K to include information relating to Reportable Events, the requirements of Section 16 of the Exchange Act should be amended to include the information concerning Reportable Events as suggested in the Proposing Release and to require that Section 16 reports be filed in an electronic format in a more timely manner. In addition, the Commission should consider revising the reporting format of Section 16 reports to provide a standardized reporting format, incorporating the formats suggested in the Proposing Release. These formats are clearer and provide investors with meaningful information.
Some of the information that a company would be required to report with respect to Reportable Events must currently be reported by directors and executive officers under Section 16(a) of the Exchange Act. We agree with the Commission that "Section 16(a) requires disclosure that may be filed too slowly for the public to obtain the maximum benefit from the information, and the reports are not always readily accessible because they are not required to be filed electronically"; however, we wonder why the Commission has chosen not to suggest an amendment to the current "insider" reporting structure rather than creating an additional structure which will largely be redundant of the current structure.
The Commission has indicated that, in the future, it intends to mandate the electronic filing of Section 16(a) reports. If, in addition, the Commission shortened the filing deadlines for Section 16(a) reports to comply with the deadlines set forth in the Proposing Release, the Commission could meet its objectives with little added work for companies or directors and executive officers. As the Commission notes, as a practical matter "[m]any of these companies help their officers and directors fulfill their Section 16(a) reporting obligations".
Although none of these requirements of the Proposing Release is particularly onerous for a company, they have the potential for being confusing to the investing public. Rather than providing investors redundant sources for information, we believe that the Section 16 reporting rules should be amended with a view to providing investors a single source for information. It is entirely unclear to us what benefit is derived from redundant systems of reporting.
AVOID CONFUSION REGARDING FORM INFORMATION
According to the website maintained by the Commission, the purpose of the Section 16 forms is to report a "person's relationship to the company and on purchases and sales of ... equity securities", while the purpose of the current report on Form 8-K is "to report the occurrence of any material events or corporate changes which are of importance to investors or security holders and previously have not been reported by the registrant". The amendments to Form 8-K suggested in the Proposing Release appear to blur the distinction between the purposes of the two (2) types of reports without a clear reason for doing so. Not only will information relating to "insider" activity be unnecessarily difficult to locate, but information traditionally reported on Form 8-K also may be lost in the sea of "insider" activity reported on Form 8-K.
Investors interested in locating information relating to "insider" activity have traditionally looked to Section 16 disclosures. If the amendments to Form 8-K are adopted, these investors will be forced to sift through all of a company's other Form 8-K filings to locate the information they seek prior to the filing of the Section 16 reports. These Form 8-K filings are intended to contain information regarding "material events or corporate changes" not information regarding a "person's relationship to the company". While one can argue that the occurrence of a Reportable Event may be a material event or corporate change vis-à-vis the issuer, this would reach beyond the intended purpose of Form 8-K disclosure.
The inclusion of information concerning Reportable Events would certainly diminish the importance and visibility of information traditionally included in Form 8-K filings. In addition, investors seeking information relating to material corporate events or changes would now be forced to search through the potential mountains of Form 8-Ks that address Reportable Events to obtain the information they seek. The volume of Form 8-K filings will only increase, particularly given the increased number of reportable Form 8-K events proposed by the Commission on June 17, 2002.
Finally, the Commission itself seemed to acknowledge this argument when it noted in the Proposing Release that "[r]eportable transactions would be substantially similar, but not identical, to those that the director or executive officer is required to report under Section 16(a)". If the requirements of Section 16 were to be amended, no unnecessary redundancy or confusion would be created.
COVERED DIRECTORS AND EXECUTIVE OFFICERS
Under the proposed amendments to Form 8-K, companies would be required to report only those Reportable Events applicable to executive officers and directors. Section 16 requires "insiders", including directors, executive officers and principal security holders, to report their transactions in a company's securities. This distinction may lead to unnecessary confusion as to the persons whose transactions must be reported. We believe that investors are equally interested in transactions involving "insiders" other than directors and executive officers and that this distinction is unnecessary.
We do not disagree with the definition of the directors and executive officers covered under the Proposing Release; however, it is unclear why a distinction is made between directors and executive officers and other "insiders". If Section 16 regulations were amended rather than Form 8-K requirements, all transactions of "insiders" would be available to investors, and there would be no necessity to make further and potentially confusing distinctions.
SOURCE OF INFORMATION
In the Proposing Release, the Commission attempts to draw a distinction between the purposes for Form 8-K reports and Section 16 reports. As discussed above, Section 16 forms report a "person's relationship to the company and on purchases and sales of equity securities". According to the Commission, Form 8-K reports detailing information relating to Reportable Events would involve those transactions that "appear to reflect management's views of the company's prospects or sever the link between executive compensation and company equity securities performance". We do not agree with the Commission's conclusion.
Again, directors and executive officers may enter transactions involving a company's equity securities for any number of reasons. The suggestion that the appearance of a transaction on Form 8-K somehow necessarily reflects the view of management as to the company's prospects is mistaken. Without other information regarding the Reportable Events, the motivation behind a Reportable Event by a director or executive officer cannot be determined with any degree of certainty.
With the exception of loans obtained by or guaranteed by a company, the source of the information regarding Reportable Events is the insider, not the company. A company must rely on the information provided by the director or executive officer in order to complete the Form 8-K. Requiring such disclosures on a Form 8-K may give investors a false sense that the information is somehow more credible than that provided by the director or executive officer in Section 16 reports.
Further, reporting by a company of a Reportable Event on Form 8-K assumes a certain amount of cooperation and agreement between the company and its directors and executive officers. As the Commission notes in the Proposing Release "the company's relationship to these beneficial owners, which in some cases may even be hostile, does not necessarily facilitate current reporting by the company". Although the chance is fairly slim, as was noted in the Hewlett-Packard / Compaq merger, the potential for hostility is the same for directors at a given time. In addition, a possibility exists that a company and a director or executive officer will disagree as to the specifics of a transaction.
We believe that requiring companies to disclose Reportable Events on Form 8-K may lead investors to erroneously believe that the information is somehow "blessed" by the corporation or that the corporation is the source of the information. With the exception of a loan obtained from or guaranteed by a company, the information required in the Proposing Release comes to the company from the director or executive officer.
Banks, savings and loan associations and broker-dealers extending credit under Federal Reserve Regulation T, such as Compass' state banking corporation subsidiary, should not be required to disclose, under any circumstances, the terms of any loans made or guaranteed by it or any of its affiliates to any directors and/or executive officers; provided that such loans are (i) are made in the ordinary course of business, (ii) are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and (iii) did not involve more than the normal risk of collectability or present other unfavorable terms.1 The terms of such loans would not be of interest to investors in making their investment decisions and, therefore, should not be disclosed. The disclosures of the terms of those loans would encourage directors and executive officers to obtain loans from competing financial institutions in order merely to protect the confidentiality of this information.
We do not believe this was the intent of the Commission in proposing the amendment to the current report on Form 8-K and request that the Commission continue to require only the disclosures set forth in Item 404 of Regulation S-K relating to loans made or guaranteed by a financial institution to its directors or executive officers.
While we support efforts to improve the accuracy, timeliness and availability of financial information, we do not believe the proposals accomplish these goals in the most efficient and appropriate manner. We therefore urge the Commission to reject the proposals contained in the Proposing Release and consider alternative means of providing investors with the information desired.
We respectfully submit these comments with the hope that they are helpful to the Commission's consideration of the proposed rule changes. We would be happy to meet with representatives of the Commission to discuss our comments.
/s/ Jerry W. Powell
Jerry W. Powell
General Counsel and Secretary
Compass Bancshares, Inc.
|See Instruction 3 to Paragraph (c) of Item 404 of Regulation S-K of the Exchange Act.|