|Teachers Insurance and Annuity Association of America
College Retirement and Equities Fund
730 Third Avenue
New York, NY 10017-3206
212 490-9000 800 842-2733
|Peter C. Clapman
Senior Vice President
and Chief Counsel,
July 1, 2002
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Subject: File No. S7-09-02
Dear Mr. Katz:
TIAA-CREF is pleased to offer its comments on the Proposed Rule, "Form 8-K Disclosure of Certain Management Transactions." TIAA-CREF is the largest private pension system in the world, providing pensions and other financial products to the education and research community. We manage approximately $275 billion in assets through TIAA, a New York licensed stock life insurance company, and CREF, a registered investment company that was the country's first variable annuity plan. TIAA-CREF and its affiliated companies also offer to the general public life insurance products, trust services, mutual funds, and tuition savings plans.
We applaud the SEC for proposing enhanced disclosure in this area , and support the Proposed Rule as an effective means of providing more timely disclosure of all directors' and executive officers' transactions in company equity securities, related derivative transactions, and company-made or company-guaranteed loans to executive officers and directors. We note in particular that the Proposed Rule addresses three serious problems in corporate disclosure.
First, TIAA-CREF has been concerned for some time that executives may be hedging exposure to their company stock in ways that escape detection by outside investors. In the 1990s, boards of U.S. companies typically added substantial equity-based compensation to top executives' (especially the CEO) existing pay, justifying those generous equity payments as aligning executive interests with stockholder interests. The wisdom of that approach is being questioned in light of the current wave of corporate scandals, but in any case, the alignment rationale does not make sense if executives can, in secret, hedge against the stock and options granted through zero-cost collars and other arrangements. In the March 2000 update of the TIAA-CREF Policy Statement on Corporate Governance, we urged that "information on grants to and holdings by individual members of management, where required, should be accompanied by disclosure of the extent to which these individuals have hedged or otherwise reduced their exposure to changes in the price of the company's stock." The SEC Proposed Rule addresses this issue.
Secondly, it has come to light in recent months that executives at Enron and other companies sold substantial numbers of shares back to their companies, avoiding requirements for timely disclosure. This allowed the executives to perhaps profit unreasonably at the expense of other shareholders, but more importantly, investors were misled about the extent of management ownership of company stock.
Third, inappropriate executive and director loan arrangements, involving credit extended or guaranteed for the purchase of equity and other purposes, have clouded corporate governance at a number of companies in recent years. We think it critical that shareholders have timely access to information about such loans and guarantees, including loan forgiveness. That disclosure should not be limited to loans related to equity purchases.
We support Commission efforts to make disclosure of these transactions as contemporaneous with the transactions as is possible. Because company directors and executives must carefully consider the timing of the transactions with their companies, including in many cases, clearance ahead of time, we believe that a 2-day reporting requirement seems reasonable. Related to this issue, we endorse the American Society of Corporate Secretaries' suggestion for a technical change that would help ease the burdens of quick filing requirements - prompt movement to a web-based system for filing, eliminating the need for Edgar software or formatting.
Were the Commission to opt for the suggestion made by at least one commentator of strengthened Section 16(a) requirements as an alternative approach, we would hope that none of the substance of the Proposed Rule would be sacrificed. In particular, it would be important to require electronic filing of Section 16(a) reports - which probably is desirable in any case - and inclusion of arrangements under Rule 10b5-1 and receipt of loans from, or guaranteed by, the company or an affiliate of the company.
We join the Association for Investment Management and Research Committees in urging the Commission to ensure that the covered individuals specifically include the principal financial and accounting officers, who may or may not be defined as "executive officers," as well as others with discretionary decision-making authority for the company as a whole or for a division, or who have the ability to affect the amount of their own equity-based compensation.
A tabular presentation of the information is desirable. We have some concern that insider trading 8-K filings could overwhelm 8-K filings currently required and proposed on other important matters. Because there are very different reasons for reporting on a Form 8-K, investors can not tell when one is filed, if it is an issue that would be important to them. We would support an initiative to more easily identify the different types of Form 8-K disclosures. We suspect that even with the other additions to current reporting that the SEC has proposed, disclosures could be grouped into a reasonable number of categories that could be designated in the form title.
We would be pleased to discuss these matters or others with the SEC and its staff at your convenience.
Very truly yours,
Peter C. Clapman