06 September 2002
Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W., Stop 6-9
Washington, D.C. 20459
Re: Additional Form 8-K Disclosure Requirements and Acceleration of Filing Date-File No. S7-22-02
Dear Mr. Katz:
The U.S. Advocacy Committee (USAC) and the Financial Accounting Policy Committee (FAPC) of the Association for Investment Management and Research (AIMR)1 appreciate the opportunity to comment on the SEC's proposed rule to add new items that would trigger the filing of Form 8-K, and to shorten its required filing deadline.
The USAC is a standing committee of AIMR charged with responding to new regulatory, legislative, and other developments in the United States affecting the investment profession, the practice of investment analysis and management, and the efficiency of financial markets. The FAPC is a standing committee of AIMR charged with both maintaining liaison with standard setters who develop financial accounting standards and regulate financial statement disclosures, and responding to new regulatory initiatives.
The Committees strongly support measures to provide investors and the investing public with information on a more timely basis. We agree that certain information that is currently provided under the five business day- and fifteen calendar day-system is not responsive to investor or market needs, and does not reflect the pace at which today's market decisions are made. We thus support both prongs of the proposal to (1) add new items to the list of required disclosures that would trigger the filing of Form 8-K; and (2) significantly accelerate the Form 8-K filing deadline. Given the current state of technology, we believe that the burden on companies in making these disclosures on an accelerated basis is significantly outweighed by the benefit to investors.
We also support the approach of moving certain disclosure items that are required under other reporting structures into the Form 8-K. We believe that this effort to consolidate certain disclosures not only provides investors with a fuller picture of a company, but in some respects also eases the reporting burden on companies and results in better overall compliance.
While we are in general agreement with the objective and tenor of the proposal, we believe that certain provisions need further clarification by the SEC. These specific areas are discussed below.
Application of Materiality Standard
Several items that would trigger a Form 8-K filing require a determination of materiality (e.g., items 1.01, 1.02, 2.03, 2.04, 2.06). While the proposal does not define the materiality standard that should be used for these items, we support the approach to materiality that is consistent with SEC Staff Accounting Bulletin No. 99-Materiality. In particular, we strongly agree with the SAB 99 statement that it is inappropriate to rely exclusively on certain quantitative benchmarks in assessing materiality when preparing financial statements and provides additional guidance on the application of materiality. In keeping with this approach, we believe that both quantitative and qualitative factors should be considered in determining the disclosures that will trigger an 8-K filing.
Accordingly, we believe that most "bright-line" tests (such as use of a specific percentage) for quantifying the magnitude of a misstatement or, for purposes of this proposal, a triggering event, are an inappropriate test of materiality. While that approach may be helpful as a first step, it "cannot appropriately be used as a substitute for a full analysis of all relevant considerations," as noted in SAB 99. We therefore urge the SEC not to adopt a particular definition of materiality for the various items in the proposal that call for a materiality determination, but instead support an approach based on consideration of the "surrounding circumstances," including both quantitative and qualitative factors.
Section 1 - Registrant's Business and Operations
Entry into a Material Agreement (Item 1.01)
We support proposed item 1.01 that requires companies to file a copy of any letter of intent and other non-binding agreement with a Form 8-K filing. The Proposal, however, provides certain exceptions for when companies must file a copy of a material agreement not made in the ordinary course of a company's business. We suggest that this filing be required, without exception. To the extent that companies believe that material contracts are confidential and that they would not like to disclose them, we recommend that they be required to disclose to investors in the filed 8-K form the reason for the request and the length of time for which the request for confidential treatment is being made.
Termination of a Material Agreement (Item 1.02)
We believe that the termination of a material agreement can provide important information to investors and thus support the proposal that this be disclosed through a Form 8-K filing. We are concerned that disclosure by a company that is not the terminating party may be untimely if required only upon receipt of written termination notice by the terminating party. We therefore suggest adding a requirement that more timely disclosure is required in certain situations (e.g., where a counterparty is in default, 30 days have passed without cure of the default, and no notice of termination has been received).
Section 2 - Financial Information
Completing of Acquisition or Disposition of Assets (Item 2.01)
While companies will be filing disclosures at the inception of agreements to acquire or dispose of assets, we believe that these disclosures should not replace the required disclosures for the culmination of an agreement, and the actual transfer of assets. In addition, we believe that the threshold disclosure requirements of this item should be consistent with the various items of the proposal. Please refer to our earlier comments on "Application of Materiality Standard."
Creation of a Direct or Contingent Financial Obligation That Is Material to the Registrant (Item 2.03)
We agree that a company should disclose information whenever it or a third party enters into a transaction or agreement that creates any material direct or contingent financial obligation to which the company is subject, and that those disclosures should extend to the origination of financial obligations. We do not believe that this disclosure should be limited to only those obligations to which a specified level of probability exists that a contingency would occur. Accounting rules currently require companies to comply with ongoing disclosure obligations for loss contingencies for which there is at least a reasonable possibility of a loss. Disclosure supplementing the 8-K filing requirements as to the origination of the obligation will provide useful information to investors who are focusing on a company's assets and current and potential future claims to those assets.
We note that Instruction 5 to proposed item 2.03 defines "contingent financial obligations" to include "guarantees, co-obligor arrangements, obligations under keepwell agreements, obligations to purchase assets and any similar arrangements and all other obligations that exist or may arise under an agreement." For purposes of the instruction, a "keepwell agreement" means "any agreement or undertaking under which the registrant is, or would be, obligated to provide or arrange for the provision of funds or property to an affiliate or other third party." (Emphasis added.) We believe that an obligation that will be settled by transferring the issuer's equity securities also should be included in this definition and thus be subject to the specified disclosures.
Events Triggering a Direct or Contingent Financial Obligation that is Material to the Registrant (Item 2.04)
We agree that a company should disclose events that trigger a direct or contingent material financial obligation, including any default or acceleration of an obligation. We also support disclosure of other items that are highly important to investors as they assess the claims on a company's resources, but that may not fit squarely into any of these categories. Among these are actions or events that preclude access to capital markets (particularly if a company has a demonstrated reliance on those markets), or the withdrawal of a backstop facility.
Exit Activities Including Material Write-offs and Restructuring Charges (Item 2.05)
We strongly support the timely disclosure of material write-offs or impairments, restructuring charges, and exit activities. We agree that disclosures should include the date, description of the course of action and reasons for the write-off or charge, description of the asset subject to the write-off, an estimate of the amount and the portion that will be incurred in cash, an analysis of the effect on the company, and the segment affected. Companies also should be required to disclose the number of employees affected.
The accounting for restructuring charges is unusual in that it permits companies in many circumstances to record a liability based on management's intent. We recommend that the supplemental 8-K disclosures should include information when the company's board commit to a course of action on restructuring. In addition, they should provide subsequent disclosure when details related to the restructuring such as any related costs, potential write-downs (reclassification), impact on operations, recognition of any liabilities, and time frame are better known. Furthermore, we would include cost estimates to improve timely disclosure.
Companies also should be required to update the disclosure if there is any material change in the previously disclosed information. These changes could include a determination that the charge previously disclosed in an 8-K or 10-Q filing would be materially different and, for example, a reversal of the charge would be recorded in the quarter.
Section 3 - Securities and Trading Market
Rating Agency Decisions (Item 3.01)
We agree that a registrant should provide disclosure when notified by a rating agency of any initiation, withdrawal or change in credit rating assigned to the company or any class of debt or preferred security or other indebtedness of the company (including securities or obligations as to which the company is a guarantor or has a contingent financial obligation). We agree that the placement of the disclosure should be uniform, so that investors know where to look for this information.
Section 4 - Matters Related to Accountants
Non-Reliance on Previously Issued Financial Statements or a Related Audit Report (Item 4.02)
We support the timely disclosure of any decision rendered by the audit committee, the board of directors, or the company's officers that any of the company's previously-issued financial statements should no longer be relied upon. We believe that non-reliance on financial statements should be assessed from the perspective of investors, and their ability to make informed investment decisions. Accordingly, non-reliance would not be limited to only negative impact or changes.
Section 5 - Corporate Governance and Management
Departures of Directors or Principal Officer; Election of Directors; Appointment of Principal Officers (Item 5.02)
As we understand the proposal, item 5.02(a) would require a company to disclose the substance of written correspondence provided by a director addressing the reasons for a departure, even if the director had not formally requested the company publicly disclose the matter.
We support the disclosure of additional information about the resignation or unwillingness of a director to stand for reelection due to a disagreement. If a director provides any written correspondence to the company regarding the director's resignation, declination, or removal, that correspondence should be required to be filed, even if not expressly requested by the director, as is now required. We also generally support the procedures provided in the Proposal, including that the company should be required to describe the circumstances of the director's withdrawal, and that the director should be offered the opportunity to file in writing a letter indicating whether the he or she concurs with the description. While we realize that this approach may, in some situations, result in disclosures that are of relative insignificance to investors, we believe that, in general, investors stand to benefit from information relating to the company's operations, policies, or practices.
Finally, while we appreciate the distinction the proposal draws between the nature of the relationship between directors and shareholders, as a basis for the expanded procedures for directors but not for officers, the FAPC questions whether this is a distinction that should be made for purposes of disclosure thresholds. Consequently, the FAPC would support comparable disclosures in similar circumstances for principal officers.
Applicability to Foreign Private Issuers
As proposed, foreign private issuers would not be affected by the Form 8-K changes, as they currently furnish reports on Form 6-K. However, as we consistently have stated, we believe that foreign issuers generally should provide information that is comparable to what is required of other market participants. We see no reason why exceptions should be made in this case, and encourage the SEC to explore ways to harmonize the applicable requirements.
We appreciate the opportunity to comment on this proposal. Today's investor needs prompt disclosure of a company's health. We believe that the proposed changes to Form 8-K to add information related to events addresses a variety of important areas that provide investors on a timelier basis with useful information on which to base their investment decisions.
If we can provide additional information, please do not hesitate to contact us.
| /s/ Deborah A. Lamb
Deborah A. Lamb
| /s/ Ashwinpaul C. Sondhi
Ashwinpaul C. Sondhi, Ph.D.
cc: U.S. Advocacy Committee
Financial Accounting Policy Committee
Patricia D. Walters, Ph.D., CFA - Sr. Vice President, AIMR Professional Standards and Advocacy
Rebecca T. McEnally, Ph.D., CFA - Vice President, AIMR Advocacy
Nazir Rahemtulla, CFA - Professional Standards and Advocacy
Linda L. Rittenhouse, Esq. - Professional Standards and Advocacy
G:\PDM\ADVOCACY\F A P C\Comment Letters\S E C\8K Disclosure\Additional 8K Disclosure No 33-8106;34-46084 File S7-22-02\SEC-Expanded Form 8-K Electronic FINAL.doc
9/6/2002 5:25 PM Polly Johnson
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