Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, NY 10006-1470
Facsimile (212) 225-3999
December 3, 2001
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Attention: Mr. Jonathan G. Katz, Secretary
Re: SEC Release Nos. 33-8016; 34-44868;
International Series Release No. 1250;
File No. S7-18-01
Proposed Rule: Mandated EDGAR Filing for Foreign Issuers
Ladies and Gentlemen:
We are pleased to submit our comments to the above-referenced Release (the "Release") of the Securities and Exchange Commission (the "Commission"). The Release solicits comments on proposed amendments to Regulation S-T, the rules that govern the Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. The amendments would require foreign governments and foreign private issuers to submit electronically documents filed with the Commission under the U.S. securities laws, including registration statements under the Securities Act of 1933 (the "Securities Act") and registration statements, periodic reports and other documents under the Securities Exchange Act of 1934 (the "Exchange Act").
We commend the Commission for its efforts to extend the electronic filing requirement to foreign governments and foreign private issuers, but we believe it would be prudent to continue to permit foreign issuers to submit summaries of foreign language documents. We agree with the Commission that electronic filing will foster the more rapid dissemination of information, facilitate research and analysis of data and increase market exposure for foreign issuers. These are worthwhile objectives, and we concur with the Commission's conclusions that these goals generally outweigh the additional burdens imposed on foreign issuers by mandated electronic filing. We believe there is one element of the Commission's proposal, however - the requirement that all foreign language documents be translated rather than maintaining the current option for a foreign issuer to provide a summary in English - that is likely to place significant additional burdens on foreign issuers relative to the modest benefits that we expect investors to gain from the mandatory translation of all foreign language documents.
Moreover, retaining the summary option would be consistent with the Commission's policy of imposing less rigid disclosure requirements on foreign issuers in certain respects in order not to impose burdens inconsistent with their home jurisdiction requirements. This policy has successfully encouraged foreign issuers, including those in emerging markets, to access the U.S. capital markets, which has allowed U.S. investors a broader array of investment opportunities while still affording them the protections of the U.S. disclosure regime. The continued success of this approach requires careful consideration prior to placing significant additional burdens on foreign issuers, which are currently subject to the burden of ongoing reporting on Form 6-K (in contrast to the less frequent periodic reporting required of domestic issuers on Forms 10-Q and 8-K). In sum, retaining the summary option would encourage the disclosure of material information while avoiding the imposition of significant additional burdens on foreign issuers.
In addition to our principal concern regarding the proposed elimination of the summary option, which we elaborate in part II of our letter, we have several additional comments to the Commission's proposal that are set forth in part III of our letter.
II. Foreign Language Documents
The proposal by the Commission to eliminate the summary option is unduly costly and burdensome. Currently, Securities Act Rule 403(c) and Exchange Act Rule 12b-12(d) permit a paper filer to submit a foreign language document as an exhibit to a registration statement or report, provided that the document is accompanied by a "summary, version or translation in the English language." The instructions to Form 6-K similarly permit a foreign private issuer to provide a summary rather than a full translation of a foreign language document required to be submitted. The Commission's proposal would eliminate the option of providing an English summary and, instead, would require foreign filers to comply with Regulation S-T Rule 306, which prohibits the filing of foreign language documents in electronic format.
We are concerned that the burden of the mandatory translation requirement is sufficiently onerous that it would have the unintended result of reducing the flow of information to investors. Of course, we would all agree in theory that the judgment of issuers and their counsel as to the materiality of a particular document should not be affected by the burden of preparing a translation. Unfortunately, a practical result of the adoption of the mandatory translation requirement is that issuers may evaluate the materiality of a particular document taking into account the cost (both in terms of time and money) of translation. Issuers may likely conclude that a foreign language document does not require filing unless it is clearly material and presents information that substantially adds to the mix of information already publicly known. Therefore, in evaluating whether to eliminate the summary option the Commission should consider whether on balance better disclosure would result from promoting disclosure of foreign language documents at the margin of materiality or from the full English translation of fewer foreign language documents.
The burden imposed by the proposed mandatory translation requirement is two-fold: foreign issuers would be required to bear a significant additional expense, and foreign issuers are likely to experience delays in filing their registration statements and reports. In terms of expense, relatively few foreign issuers have the internal resources to translate material contracts and other documents required to be filed with or submitted to the Commission. If the Commission's proposal were adopted, most foreign issuers would respond by using outside translators, which in our experience typically charge thousands of dollars for translations. Careful issuers would also require their U.S. counsel to review these translations, adding additional thousands of dollars to an issuer's expense. Full translations are also likely to require as long as several weeks to prepare, taking into account the work of translators and review by U.S. counsel and issuer representatives. The time required for translation could result in the delay of disclosure of material information to U.S. investors in the case of Exchange Act filings and may delay access to capital raising in the case of filings under the Securities Act. The expense and time burdens imposed by the Commission's proposal would be entirely incremental in the case of foreign issuers, in contrast to translations of foreign language documents by domestic issuers, which are typically prepared in the ordinary course for the benefit of management and employees in the United States.
Two instances highlight the burden imposed by a full translation: the submission on Form 6-K of documents required to be disclosed based on legal or regulatory requirements in an issuer's home country and the filing of foreign language material contracts as exhibits to registration statements and annual reports on Form 20-F. In each instance, the foreign language document can be voluminous and in virtually all cases is likely to contain only limited portions that are material to investors. For example, home country documents can contain highly formatted tables of financial, statistical and other data submitted to foreign regulators. Typically, this information has already been made public in the United States by means of an earnings press release submitted on Form 6-K, resulting in a significant burden without any corresponding benefit to investors. Similarly, other home country documents often contain significant text required under local law that is not material to investors in the United States. The same analysis holds true for foreign language material contracts, where it is difficult to imagine a contract that could not be fairly summarized in substantially fewer pages than a full translation of the contract itself.
In our experience, the Commission's assumption that the burden on foreign issuers of the full translation requirement would be modest due to the Commission's historically narrow interpretation of "summary, version or translation" may prove to be inaccurate, particularly in the context of filings under the Exchange Act, such as submissions on Form 6-K and exhibits to annual reports filed on Form 20-F. We believe currently many foreign issuers appropriately rely upon the summary option, particularly where the materiality of an exhibit or a document is limited, as is generally the case, to identifiable sections or portions. The burden imposed by elimination of the summary option is especially onerous for foreign issuers given the ongoing reporting requirements applicable to foreign issuers under Form 6-K, which requires foreign issuers to submit certain documents that would not be required to be filed by a domestic issuer on Form 8-K or as an exhibit to a Form 10-Q. The Commission acknowledged the special burdens resulting from the ongoing reporting requirements of Form 6-K by providing that English summaries submitted on that form are not required to be accompanied by the corresponding foreign language document.
An adequate framework for the disclosure of material information in foreign language documents already exists, and the costly and burdensome translation proposal is likely to result in only marginal benefits. Currently, a foreign issuer that includes a foreign language material contract as an exhibit to a registration statement or annual report would describe the contract in the body of the filing and include a translation or summary accompanying the exhibit. In the case of a foreign language document required to be submitted on Form 6-K, a foreign issuer would either translate or summarize the document. In either case, the existing framework adequately requires the disclosure of the material information contained in the foreign language document. Moreover, the risk of liability under the U.S. federal securities laws is a powerful and sufficient incentive for issuers to provide the appropriate level of disclosure to investors. Our view is supported by the fact that the Commission has not cited any evidence of abuse by foreign issuers of the summary option. Insofar as elimination of the summary option is motivated by a desire to make foreign issuer submissions fully compatible with EDGAR, we believe this goal could be achieved by retaining the summary option. To the extent the Commission believes a summary is insufficient, a less burdensome approach would be to require a paper filing on Form SE of foreign language documents that have been summarized in submissions on Form 6-K. This approach would better balance the benefits to investors of electronic filing with the burdens being imposed upon foreign issuers.
III. Other Issues
We agree that there is less public interest in, and therefore less need for electronic access to, submissions by a foreign company that has been granted an exemption under Rule 12g3-2(b) under the Exchange Act. For this reason, we agree with the Commission's proposal to continue to permit foreign private issuers to submit on paper applications and supporting documents pursuant to Rule 12g3-2(b). To avoid denying foreign private issuers the full benefit resulting from this accommodation, we suggest that the Commission permit paper filings on Form F-6 with respect to American depositary shares representing underlying securities of issuers exempt from the reporting requirements of the Exchange Act pursuant to Rule 12g3-2(b).
With regard to foreign government filers, we strongly support the Commission's proposal to continue to apply the "annual budget exception" in Regulation S-T Rule 306, which requires a foreign government that is filing a Form 18 or Form 18-K to submit an English translation of its latest annual budget only if one is available. If an English translation is not available, the foreign government would be required to file a paper copy of the foreign language version of its latest annual budget on Form SE.
We also believe that the proposed transition period of four months is inadequate given the nature of the proposal and the unanticipated delays and implementation difficulties that will likely result. We suggest a transition period of at least eight months so as to permit two quarterly cycles or one semiannual cycle for experimentation.
Finally, we would like to highlight the desirability of making EDGAR compatible with electronic reporting systems in other jurisdictions. Currently, for example, we understand that the French electronic reporting system, known by its French acronym SOPHIE, accepts and makes available PDF versions of filings. We understand that many foreign issuers find the PDF format easier to produce and that investors find it easier to retrieve documents in this format. We encourage the Commission to evaluate the merits of electronic filing systems used in other jurisdictions with a view towards incorporating the virtues of these other systems and harmonizing EDGAR with these systems so as to reduce the burden on issuers required to report electronically in multiple jurisdictions. The Commission has demonstrated its desire to accommodate issuers reporting in multiple jurisdictions through its recent efforts to conform the disclosure requirements in Form 20-F to those adopted by the International Organization of Securities Commissions. We encourage the Commission to undertake the same effort in the context of electronic reporting.
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We are very pleased to have had this opportunity to comment on the Release and the very important matters and questions raised therein. We would be happy to discuss with you any of the comments described above or any other matters you feel would be helpful in your review of the proposal. Please do not hesitate to contact Leslie N. Silverman or Jorge U. Juantorena of our New York office (telephone 212-225-2000) or Edward F. Greene of our London office (telephone 44-20-7614-2200).
Very truly yours,
CLEARY, GOTTLIEB, STEEN & HAMILTON