SULLIVAN & CROMWELL
TELEPHONE: 1-212-558-4000
FACSIMILE: 1-212-558-3588
WWW.SULLCROM.COM

  125 Broad Street
New York, NY 10004-2498

LOS ANGELES
PALO ALTO
WASHINGTON, D.C.
FRANKFURT
LONDON
PARIS
BEIJING
HONG KONG
TOKYO
MELBOURNE

December 7, 2001

Jonathan G. Katz, Secretary,
       Securities and Exchange Commission,
            450 Fifth Street, N.W., Stop 6-9,
                   Washington, D.C. 20549.

 

Re:

 

Mandated EDGAR Filing for Foreign Issuers -
File No. S7-18-01                                              

Dear Mr. Katz:

                We are pleased to submit this letter in response to the Commission's request for comments on its proposal to require non-U.S. issuers to submit documents electronically via the Electronic Data Gathering, Analysis and Retrieval System ("EDGAR"), as contained in Release Nos. 33-8016 and 34-44868 (Sept. 28, 2001).

                We recognize that the Commission faces a difficult task in crafting regulations that will increase access to useful information without placing undue burden on issuers. We also commend the sensitivity that the Commission and its staff have demonstrated in the past in seeking to adapt their rules, regulations and practices in response to the challenges faced by non-U.S. issuers, many of which do not use English as their first language, are subject to effective home country regulation and have only a limited U.S. investor base.1 Consistent with this approach, the Commission should carefully weigh the benefits of its latest proposal against the cost of increasing the regulatory burden on non-U.S. issuers and thereby discouraging them from participating in the U.S. capital markets, particularly at a time when those issuers have more real choices than ever before about which markets to access.

                Our comments and suggestions in this letter are made with a view towards identifying and addressing the aspects of the proposal that create the greatest concern or burden for non-U.S. private and governmental issuers, with which we have extensive experience. While in some cases this burden may be inevitable, we respectfully suggest that certain aspects of the proposal can be modified so as to avoid substantial hardship for non-U.S. issuers without compromising the legitimate needs of investors.

I.  NON-U.S. PRIVATE ISSUERS

 

A.

 

General Concerns

                 We accept the Commission's reasons for proposing to require non-U.S. reporting companies to use EDGAR, but we respectfully suggest that the following general concerns should be addressed before any final rules are adopted.

 

  • We have serious doubts about the proposed timetable for effectiveness of the new rules and the ability of many non-U.S. issuers to begin using EDGAR so quickly.

     

  • We believe that the Commission's proposal would substantially increase the cost of complying with non-U.S. issuers' reporting obligations under Form 6-K.

     

  • We believe that the Commission's proposed elimination of the English language summary option and creation of a certification requirement would unnecessarily burden non-U.S. issuers and their employees.

     

  • We have serious concerns, reinforced by discussions with our non-U.S. clients, that certain operational aspects of the current EDGAR system would make their compliance with the new rules difficult and costly.

                    We discuss each of these concerns below.

                     Transition period. The Commission's proposed timetable for effectiveness of the new rules is aggressive, and a number of our non-U.S. clients have expressed serious doubts about their ability to prepare for and begin making electronic filings so quickly. Regardless of an issuer's past experience with electronic documents, learning to use the EDGAR system requires substantial time and resources as well as a meaningful trial period. Collectively, non-U.S. issuers represent dozens of countries, languages and cultures, which will undoubtedly present challenges for filing agents and the Commission's staff during the transition.

                     Based on our experience and discussions with non-U.S. clients, and consistent with the Commission's previous approach for U.S. issuers, we recommend a two-phase transition that would allow smaller non-U.S. issuers more time to prepare for EDGAR and the opportunity to benefit from the experience of larger non-U.S. issuers and their filing agents.2 In order to allow sufficient time for preparation, training and testing, we suggest allowing larger issuers to submit their first Form 20-F annual report due after adoption of the final rules in electronic or paper form at their option, while requiring them to submit their second Form 20-F annual report and all subsequent documents electronically. Smaller issuers would be permitted to submit their first two Form 20-F annual reports due after adoption of the final rules in electronic or paper form and required to submit their third Form 20-F annual report and all subsequent documents electronically. Using current data, the Commission could establish an appropriate threshold for dividing non-U.S. issuers into each category based on aggregate market valuation; we recommend establishing a threshold that would result in approximately 25-30% of non-U.S. reporting companies being designated as "larger" issuers.

                     We respectfully disagree with the proposed treatment of registration statements "in progress" at the time the relevant issuer becomes subject to mandatory electronic filing. Creating an exemption for such registration statements that is subject to a one-month limitation would introduce needless uncertainty and pressure on issuers and the Commission's staff during the review process. We recommend that the Commission instead exempt fully such registration statements and any related documents, including amendments and Rule 430A prospectuses, with no time constraint.

                     Form 6-K. We urge the Commission to retain the provision in General Instruction D of Form 6-K that permits non-U.S. issuers to provide only "brief descriptions" of documents other than press releases and direct shareholder communications (in lieu of the documents themselves) where an English translation or summary is not otherwise available. Form 6-K is used to furnish material press releases, shareholder communications and public information filed with home country regulators and securities exchanges. As noted in the release, a high percentage of material falling under the broadly defined "public information" category consists of lengthy and heavily formatted reports created under local customs for home country regulators, as well as internal company records, minutes of board meetings regarding "routine" matters and other information not regularly filed by U.S. registrants with the Commission. In light of the frequency with which Form 6-K material is submitted under the "public information" category and the substantial costs and delay that would result from requiring these submissions to be fully translated into English and transmitted to the Commission via EDGAR, the option of furnishing brief descriptions currently provides essential relief for many non-U.S. issuers. We respectfully disagree with the Commission's proposal to withdraw this option at a time when the Commission is proposing other, essentially unrelated action (i.e., mandatory EDGAR) that will already impose significant new costs on non-U.S. issuers.3

                    We further urge the Commission to require non-U.S. issuers to submit Form 6-K via EDGAR only in the case of press releases and shareholder communications, permitting them to continue submitting all other Form 6-K material on paper. As discussed above, current General Instruction D makes a sensible and important distinction between press releases and shareholder communications, on the one hand, and the voluminous and frequent submissions made under the "public information" category, on the other hand. We believe that this distinction has served investors and issuers well over the years and should be employed in separating the type of information that companies should be required to submit electronically from the type that they should be permitted to continue submitting on paper. Requiring non-U.S. issuers to prepare EDGAR-compatible electronic versions of all Form 6-K documents would create an enormous if not impossible burden (especially in light of the operational concerns about EDGAR discussed below), far exceeding any incremental benefit to investors of making them available in electronic form versus paper form.4 Indeed, a number of our clients have indicated that if all Form 6-K material became subject to mandatory electronic submission (as opposed to just press releases and shareholder communications), they would almost certainly be forced to seek exemptive relief from the Commission for many documents, creating substantial additional work for the staff and regulatory uncertainty for issuers.

                     English language summaries. We believe that the proposed changes to the current rules permitting English language summaries of non-English language documents are unnecessary and will substantially increase the cost to non-U.S. issuers of complying with the U.S. securities laws. We are not aware of any evidence suggesting that the Commission's current approach of permitting summaries of certain documents in lieu of full translations has in any way lessened the quality of non-U.S. issuer disclosure. On the contrary, this approach permits them the flexibility to supply information to the marketplace more quickly and efficiently than otherwise by preparing summaries of material terms without undertaking time-consuming and costly translations in every instance. In our experience, issuers have not abused this option, eschewing summaries in favor of complete translations where appropriate to avoid questionable materiality judgments. Further, as noted by the Commission in the release, the staff already restricts this option for the most sensitive exhibits as a matter of policy. This balanced approach has served issuers and investors well over the years and should be preserved.

                     We believe that the Commission should not adopt the proposed requirement for a written representation signed by a designated officer as to the fairness and accuracy of English language translations. Such a requirement would consume important company resources, unfairly burdening high-level employees with the ministerial task of verifying often lengthy translations. At least one of our non-U.S. clients noted that none of its officers had the requisite proficiency in English to warrant translations of legal or technical documents, and that this task is normally outsourced to professional translation services. We suspect that this is also true for many other non-U.S. companies. Finally, in addition to being onerous, we believe that this requirement is unnecessary in light of the general antifraud provisions of the U.S. securities laws.

                     EDGAR-compatible formats. The ability to file documents via the Internet has somewhat lessened the burden on filers of using EDGAR. And while the shift towards acceptance of HTML files has the potential to make EDGAR significantly easier to use, the initiative as implemented thus far has not achieved this goal. Many issuers are familiar with standard HTML format and most word processors and spreadsheet programs are automatically able to convert files into this format, but we note that the EDGAR system does not accept standard HTML format. Rather, EDGAR filers must use an outdated version of HTML and manually purge all documents of characters not included in a designated character set, rendering an otherwise straightforward process time-consuming and expensive. We believe that modifying the EDGAR system so as to permit filers to transmit standard HTML files of the type automatically generated by popular word processors and spreadsheet programs would substantially reduce the time, difficulty and cost of filing documents electronically.

                     Further, several non-U.S. clients expressed concerns about the current EDGAR policy of not accepting portable document format (PDF) for official submissions. PDF is widely regarded as the most convenient and reliable format in which to disseminate documents electronically. Some of them believe that the Commission should not require non-U.S. issuers to use the EDGAR system until PDF documents are accepted as official filings, because creating an EDGAR-compatible HTML or ASCII document involves much greater cost and effort and the integrity of the presentation is much less reliable. We understand that in four of the six jurisdictions cited by the Commission in its proposal where electronic filings are permitted or required,5 securities regulators accept PDF documents as official filings. We respectfully urge the Commission to explore further the possibility of accepting PDF documents as official filings in light of the many advantages of this format for investors and U.S. and non-U.S. issuers.

                     Given the advanced state of technology, which the release cites as a principal reason in favor of requiring non-U.S. issuers to begin using EDGAR, we urge the Commission to explore the possibility of addressing the concerns discussed above prior to the date on which electronic filing becomes mandatory for them. We note that our suggestions on making EDGAR-compatible files easier to create, if implemented, would also benefit U.S. issuers that are currently required to file electronically. We believe that it is appropriate and efficient for the Commission to consider making changes to the EDGAR system that would benefit all EDGAR filers at a time when it proposes to subject a significant number of additional issuers to mandatory electronic filing. Also, as the Commission is aware, many U.S. issuers have resisted migrating from ASCII to HTML files for the purposes of transmitting documents electronically, in large part because the current EDGAR system fails to realize many of the potential advantages of the HTML format. We suspect that more U.S. issuers would abandon the archaic ASCII format if standard HTML or PDF files were accepted as official filings.

                     Hours of operation. Another general concern relates to EDGAR's hours of operation. Currently, the EDGAR system operates from 8:00 a.m. until 10:00 p.m. (Eastern Time) on weekdays other than federal holidays. These limited hours of operation would result in an unfair and substantial disadvantage for non-U.S. issuers in different time zones, particularly in respect of lengthy filings. Issuers located in Asia, for example, will be able to transmit documents during their night hours only. We believe that extending EDGAR's hours of operation to 24 hours a day from Monday through Friday would substantially reduce the burden on non-U.S. issuers of complying with mandatory electronic filing. Extending filer support hours concurrently will be critical to realizing the benefits of extended EDGAR operating hours.

     

    B.

     

    Specific Comments

                     Aside from the general concerns described above, we also wish to address certain aspects of the Commission's proposal on which comments were specifically requested.

                     Annual shareholder reports. We see no reason to require non-U.S. companies to submit their "glossy" annual report to shareholders via EDGAR while permitting U.S. companies to do so on paper. In adopting this exemption for U.S. companies, the Commission correctly noted the graphic-intense nature of these documents.6 This is no less true of "glossy" annual reports prepared by non-U.S. companies for their shareholders, and the Commission should likewise permit them to submit these reports under cover of Form 6-K on paper.

                     Form CB. Some of our clients have expressed concern about the proposal to require submission of Form CB electronically, suggesting that it would undermine the Commission's stated goal of encouraging bidders and issuers to include U.S. investors in cross-border rights offerings, tender and exchange offers and business combinations. While the Commission made a policy judgment to require Form CB for some transactions in the face of opposing comments from issuers and bidders,7 we respectfully suggest that the Commission should not further increase the burden on these parties by requiring them to submit the form via EDGAR. Such a requirement is unlikely to provide any significant offsetting benefit to U.S. investors, since by definition they should represent only a small percentage of the total investor pool (i.e., ten percent or less). We note that the exemptive rules for cross-border transactions already require the dissemination of information to U.S. holders "on a comparable basis to that provided to security holders in the home jurisdiction." In this regard, the proposal conflicts with the Commission's fundamental approach to cross-border transactions, which is intended to lessen the burden to bidders and issuers of including U.S. investors by deferring to home country regulation (which may or may not require electronic dissemination and surely does not require creation of EDGAR-compatible electronic files). Based on our experience and recent discussions with members of the financial community, we fear that adding a requirement to submit Form CB electronically may prove decisive in some cases, prompting a greater number of bidders and issuers simply to exclude U.S. investors.8 For these reasons, we urge the Commission to continue permitting bidders and issuers to submit information under cover of Form CB (and any related Form F-X) in paper form.

                     Rule 12g3-2(b) companies. We endorse the Commission's proposal to continue accepting applications and supporting documents in paper form from non-U.S. companies seeking an exemption from reporting obligations pursuant to Rule 12g3-2(b). As noted in the release, these companies have only limited access to U.S. capital markets, thus reducing any perceived incremental benefit in making their submissions available in electronic form versus paper form. Further, this approach is consistent with the Commission's historic aversion to burdening non-U.S. issuers that have not sought a public market for their securities in the United States through public offering or stock exchange listing. For the same reasons, we support the retention of the English language summary and description options in Rule 12g3-2(b)(4), as contemplated by the release. In our experience, non-U.S. companies submitting information pursuant to Rule 12g3-2(b) frequently rely on these options and would be substantially and adversely affected by their elimination. We urge the Commission to preserve these aspects of the proposal.

    II.  FOREIGN GOVERNMENTS AND SUPRANATIONAL ENTITIES

                     We recommend that Schedule B issuers be permitted to continue filing documents on paper. Historically, the Commission has treated foreign governments with deference based on considerations of comity. Given the considerable effort and cost involved in complying with the EDGAR system, we believe that the same considerations support exclusion of these issuers from the Commission's proposal.

                     Schedule B issuers already confront substantial logistical difficulties and delays arising from language barriers and time zone differences, as well as significant delays arising from formal government approval processes. At least one of our Schedule B clients has expressed concern that the additional time required to convert documents into EDGAR-compatible electronic format would jeopardize its ability to prepare and file prospectus supplements on a timely basis pursuant to Rule 424(b). We also note that neither the Commission nor these issuers have any experience with the electronic submission of Schedule B documents since no relevant electronic form types currently exist. Creating these form types and permitting foreign governments to use EDGAR on a voluntary basis - an important preliminary step that we support - would allow issuers and the staff to gain relevant experience before a mandatory regime is considered. Finally, we understand from members of the financial community that the information contained in annual reports on Form 18-K receives very little attention from investors, particularly since it is usually less current than many other sources of reliable political and economic information on sovereign issuers. Many multilateral agencies and other organizations collect and disseminate data that are much more current, and various government offices routinely supply the public with up-to-date economic reports. In this context, burdening sovereign entities with EDGAR compliance would achieve no real goal at the expense of comity.

                     Should the Commission nonetheless decide to adopt its proposal to require Schedule B issuers to use EDGAR, we would recommend designating, at the earliest, Form 18-K in respect of the fiscal year ending on (or next after) December 31, 2003 as the first form required to be filed electronically. This would allow sufficient time for preparation, training and testing, the need for which is compounded by the lack of any experience on the part of the staff and the sovereign issuer community with the electronic submission of Schedule B documents via EDGAR. Also, we believe that the proposed rules should be modified to clarify that the issuer's option to file its annual budget in paper form instead of electronic form is not contingent on the unavailability of an English translation. The difficulty and cost of converting these voluminous, heavily formatted documents into EDGAR-compatible electronic format are no less significant because an English translation exists, and, in any event, foreign governments should not be discouraged from or penalized for producing English translations by thereby losing their option to submit annual budgets on paper.

                     In the case of supranational entities, we support the proposal to create electronic form types for these issuers and encourage them to use EDGAR on a voluntary basis. We recommend that the Commission refrain from imposing any electronic filing requirement on them for essentially the same reasons we would exclude Schedule B issuers.

    *     *     *

                     We appreciate this opportunity to comment on the Commission's proposal to require non-U.S. issuers to submit documents via EDGAR. We would be happy to discuss any questions the Commission may have with respect to this letter. Any questions about this letter may be directed to Angel L. Saad (202-956-7535) in our Washington office, Frank H. Golay, Jr. (310-712-6620) in our Los Angeles office, Richard C. Morrissey (011-4420-7710-6520) in our London office, or John T. Bostelman (212-558-3840) or Frederick Wertheim (212-558-4974) in our New York office.

     

    Very truly yours,


    SULLIVAN & CROMWELL

     

     

    
    
    Footnotes

    1

     

    We note that recent rulemaking in the area of cross-border transactions carries forward this important tradition. Release Nos. 33-7759, 34-42054 and 39-2378 (Oct. 26, 1999) (Cross-Border Tender and Exchange Offers, Business Combinations and Rights Offerings).

    2

     

    When the EDGAR system was first implemented for U.S. reporting companies, the Commission extended mandatory electronic filing to larger issuers first "allowing [smaller issuers] to take advantage of the substantial body of experience gained by those who precede them." Release Nos. 33-6944, 34-30951, 25-25587, 39-2285 (July 23, 1992) (Rulemaking for EDGAR system). Non-U.S. issuers use different form types and face different challenges than U.S. issuers; accordingly, smaller non-U.S. issuers would benefit greatly from a body of experience developed by larger non-U.S. issuers.

    3

     

    We believe the concerns that prompted the Commission to adopt current General Instruction D remain valid and support our recommendations in this and the next paragraph. Noting the negative reaction to a proposal requiring all Form 6-K material to be translated or summarized in English, the Commission noted: "The proposals as well as the present Form 6-K requirements were also criticized on the basis that documents or reports furnished, because of differing customs and practices particularly in the financial reporting area, might be considered misleading and otherwise result in unnecessary and burdensome submissions... The Commission believes that this compromise [of requiring submission of press releases and shareholder communications only] will benefit United States shareholders and at the same time alleviate to a great extent the concerns of and burdens on foreign issuers." Release No. 16371 (Nov. 29, 1979) (Rules, Registration and Annual Report Form for Foreign Private Issuers).

    4

     

    We believe that these documents should be excluded from mandatory electronic submission regardless of whether an English language version or summary is otherwise available, for the reasons provided in this section. However, should the Commission decide to require submission of this material via EDGAR despite the concerns expressed in this letter, we would strongly recommend that the "brief description" option in General Instruction D be made available for all documents submitted under the "public information" category (such that those documents themselves need not be EDGARized and transmitted) even where an English language version or summary is available.

    5

     

    These are Argentina, Canada, France and Spain. We understand that Korean securities regulators accept documents in standard SGML format and then convert them to PDF files for investor access, while Brazilian regulators accept documents in Microsoft Word format and Italian regulators accept documents in PDF or Microsoft Word format. We identified no jurisdiction where the preparation of electronic documents for submission to securities regulators is so labor-intensive as it is in the United States.

    6

     

    Release Nos. 33-6977, 34-31905 and 35-25745 (Feb. 23, 1993) (Rulemaking for EDGAR System).

    7

     

    As acknowledged by the Commission, many commentators felt that the Form CB requirement, which in most cases requires the translation into English of lengthy documents, would represent a significant burden for bidders and issuers and, in some instances, would lead them to exclude U.S. investors despite the substantial relief provided under the then-proposed exemptive rules for cross-border transactions. Nevertheless, the Commission chose to retain the Form CB requirement when it adopted the final rules. Release Nos. 33-7759, 34-42054 and 39-2378 (Oct. 26, 1999) (Cross-Border Tender and Exchange Offers, Business Combinations and Rights Offerings).

    8

     

    Of course, bidders who are already EDGAR users may view the requirement to submit Form CB electronically as less onerous. But this raises the possibility that such parties will enjoy an unfair advantage vis-a-vis non-EDGAR users that are required to submit Form CB electronically. Conversely, allowing non-EDGAR users to submit Form CB in paper form while requiring EDGAR users to submit it in electronic form would also result in unequal treatment. The proposed treatment of Form CB described in the Release contemplates both of these possibilities.