[LETTERHEAD OF JERRY W. POWELL]
VIA E-MAIL AND UPS OVERNIGHT EXPRESS
September 5, 2002
Securities and Exchange Commission
450 Fifth Street
Washington, D.C. 20549
Attention: Jonathan G. Katz, Secretary
Re: Proposing Release No. 33-8106 and 34-46084 (the "Proposing Release"); File No. S7-22-02
On behalf of Compass Bancshares, Inc. ("Compass"), we respectfully submit these comments relating to the Commission's proposal to, among other things, accelerate the reporting deadline for information reportable on Form 8-K, expand the inventory of items reportable on Form 8-K and transfer to Form 8-K two disclosure items currently required to be included in a company's annual and quarterly reports. We support the Commission's continuing effort to improve the quality of information available to the investing public. Without question, the free flow of clear, accurate, meaningful and timely information is essential to the efficient operation of our capital markets.
The proposals set forth in the Proposing Release (the "Proposals") are intended to provide capital market participants with "better and faster disclosure of important corporate events". As the Commission observed in the Proposing Release, the Securities Exchange Act of 1934 (the "Exchange Act") established a disclosure system, an integral part of which is that of current disclosures. We generally agree with the Proposals; however, we have significant concerns regarding certain aspects of the proposals.
Compass is a financial services company that was organized in 1970 and operates approximately 340 full-service banking offices in Alabama, Arizona, Colorado, Florida, Nebraska, New Mexico and Texas. Compass has $23.5 billion in assets and is among the top forty (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 would be subject to the proposed filing requirements set forth in the Proposing Release.
SUMMARY OF PROPOSALS
In the Proposing Release, the Commission proposes the following:
(1) Adding the following eleven (11) items to the list of events that must be reported by public companies on a current report on Form 8-K;
(2) Making considerable changes to existing items reportable on Form 8-K, including the following:
(3) Transferring to Form 8-K the following two (2) items currently reportable on other periodic reports:
Our general comments to the Proposing Release are set forth immediately below, followed by our comments to particular Proposals. We have segregated our specific comments using the item numbers set forth in the Proposing Release.
ACCELERATED FILING DEADLINES
We understand that the proposed acceleration of the filing deadline for current reports is intended to satisfy the investing public's demand for " more `real-time' access to a greater range of reliable information concerning important corporate events"; however, we do not believe that the proposed acceleration will have the desired results. In our estimation, the proposed accelerated filing deadline will succeed in providing the investing public with more timely, or "real-time", information, but, in doing so, it will risk providing information that is less clear, accurate and meaningful and, therefore, less reliable. We believe the need for the investing public to receive reliable information far outweighs its need for "real-time" information, and, therefore, strongly oppose the Commission's proposal to accelerate the filing deadline for current reports on Form 8-K.
We believe that, in formulating its proposal for acceleration, the Commission failed to adequately consider the process involved in filing a current report on Form 8-K. This process involves (i) detecting the reportable event, (ii) investigating the reportable event to collect all relevant information, (iii) preparing a clear, accurate and meaningful current report, (iv) providing for the review of the current form by management, and perhaps the audit committee, outside counsel and the company's independent auditors,1 (v) obtaining the appropriate signatures for the current report and (vi) formatting the current report for filing with the Commission.2
We encourage the Commission to consider a five-business day deadline rather than the proposed two-business day deadline. A five-business day deadline provides public companies the time required to prepare current reports that are clear, accurate and meaningful and, we believe, does not unduly restrict the investment public's need for timely information.
MANDATORY GENERAL DISCLOSURE OBLIGATION
The Commission seeks comment as to whether it should include, under each section of the Form 8-K requirements, a general item requiring disclosure of other important events similar to those required in that section. Additionally, the Commission seeks comment as to whether the Commission should adopt a broad principle requiring disclosure of important corporate events, leaving a company to determine the trigger for and scope of the necessary disclosure. We do not believe that either of these proposals is necessary or desirable.
Serious consequences accompany a failure to file a current report on Form 8-K in a timely manner, including potential legal liability and the loss of short form registration statement eligibility. A general requirement to disclose all "material" or "highly significant" events and/or information would result in a fundamental shift in the disclosure requirements under securities laws. Currently, there is no general duty for issuers to disclose material non-public information, rather public companies are required to disclose certain specified information subject to a materiality standard. Without this context of the duty to disclose, the materiality standard inappropriately becomes the complete standard of disclosure.
In addition, the determination of which events or information is "material" or "highly significant" is based upon on analysis of relevant facts and circumstances on which reasonable people could differ, resulting in excessive occasion for the judgment of a company to be second-guessed. We therefore encourage the Commission to continue to provide specific requirements for current reports on Form 8-K with plainly identified materiality thresholds and trigger events.
ADDITIONAL FORM 8-K ITEMS
The Commission has proposed reorganizing the Form 8-K disclosure requirements into eight sections, each containing a number of specific items. Each Form 8-K item would be designated a three-digit number containing a decimal point, rather than the current single digit. We compliment the Commission on its reorganization, and do not suggest any changes to the proposed structure.
Below are the items that the Commission has proposed to add to the inventory of items reportable on Form 8-K. Our comments are set forth following a brief description of each item.
Item 1.01. Entry into a Material Agreements. As proposed, Item 1.01 would require a company to disclose the fact that it has entered into a material agreement not made in the ordinary course of the company's business. We generally support the basic premise of the proposal; however, we have the following concerns with the proposal as drafted.
(a) Reporting Standard. Public companies currently are required, pursuant to Item 601(b)(10) of Regulation S-K, to disclose material agreements and attach such agreements to quarterly and annual reports as Exhibit 10. We understand that the investing public has a valid interest in learning of a company's entry into such an agreement on a timelier basis and believe that Form 8-K is the appropriate vehicle for such disclosure; however, we do not understand the need for an additional standard of materiality. We encourage the Commission to harmonize the materiality standards for Items 1.01 and 1.02 with those of Item 601(b)(10) of Regulation S-K, by requiring disclosure relating only to material agreements that are currently-required exhibits under Item 601(b)(10) of Regulation S-K.
(b) Exhibits. Given the degree of disclosure required for Form 8-K, we do not believe that it necessary that the agreements be attached as exhibits to Form 8-K. The considerable burden of converting the agreements into the EDGAR format and proofing them for accuracy on an accelerated deadline is far outweighed by the very limited benefit to the investing public of access to these documents, if any benefit exists. Therefore, we urge the Commission to require the filing of a copy of the agreement only upon the filing of the company's next annual report on Form 10-K or quarterly report on Form 10-Q, as applicable.
(c) Non-Binding Agreements. We are strongly opposed to the required filing of letters of intent, non-binding agreements and other similar documents. The announcement of such non-binding agreements would likely result in competitive harm to public companies and cause a material disruption of the ability of public companies to negotiate agreements effectively. It is not unusual for companies to enter into a letter of intent long before a definitive agreement is executed, if it is executed at all. This delay is often the result of the finalization of the details of the transactions and/or further negotiations. Disclosure of this type of information would be misleading to investors and harmful to the parties. We urge the Commission to weigh the perceived benefits to the investing public of learning of speculative transactions that may never be consummated, or that are consummated on substantially different terms than disclosed, versus the costs to companies that may result from premature disclosures, including potential competitive harm and the potential chilling effect on transactions.
(d) Business Combinations. We agree with the Commission's suggestion that the Form 8-K for Item 1.01 include a box on the cover page that, if checked, would allow a registrant to satisfy obligations under Rule 165, Rule 14d-2(b) and/or Rule 14a-2. Any reduction in the duplication of disclosures would not only aid public companies in their filing obligations but would also benefit investors by reducing the mountain of information through which they must wade in order to locate the relevant information for which they are looking.
Item 1.02. Termination of a Material Agreement. As proposed, Item 1.02 would require a company to disclose the termination of a material agreement not made in the ordinary course of business. While we generally agree with the Commission's proposal to require the disclosure of the termination of a material agreement, we have the following comments:
(a) Reporting Standard. We believe that the standard of disclosure for Item 1.02 should be harmonized with those of Item 1.01 and Item 601(b)(10) of Regulation S-K as set forth in Item 1.01 above. Accordingly, we believe that Item 1.02 should require disclosure of the termination of a material contract only if that contract previously was required to be filed as an exhibit under Item 601(b)(10) of Regulation S-K.
(b) Trigger Event. The trigger event as proposed is unclear. Disclosure is not required during negotiations or discussions regarding termination; however, disclosure is required once the company receives written notice of the termination. Often, the receipt of a termination letter is merely the starting point for such negotiations. For example, many contracts contain termination procedures pursuant to which termination procedures commence with a notice of intent to terminate the contract. Such notices of intent to terminate are often followed by a written objection and negotiations to preserve the contractual relationship. Requiring a company to disclose such an event as a termination likely will significantly reduce the probability for successful negotiations. We therefore urge the Commission to require disclosure of the termination of material agreements only after such agreements are terminated and the company determines that negotiations to preserve the contractual relationship will not be successful.
(c) Exhibits. For the reasons stated in Item 1.01 above, we do not believe the terminated agreement need be attached as an exhibit. A cross-reference to the agreement previously attached as an exhibit would suffice.
(d) Other Concerns. We do not believe that the expiration of a material agreement pursuant to its terms need be disclosed, as this information previously would have been disclosed to the investing public.
Item 1.03. Termination or Reduction of a Business Relationship with a Customer. As proposed, Item 1.03 would require a company to disclose that a customer terminates or reduces the scope of its business relationship with the company when the company becomes aware of such termination or reduction. We generally agree with the Commission's proposed Item 1.03; however, we have the following comments:
(a) Reporting Standard. We believe the standard of disclosure should be harmonized with the requirements of Item 101(c)(vii) of Regulation S-K. Item 101(c)(viii) requires the disclosure of any customer and its relationship if sales to that customer equal or exceed ten percent of the company's consolidated revenues and the loss of that customer would have a material adverse effect on the company. These customer relationships appear to be the same relationships on which Item 1.03 focuses. Therefore, we believe that Item 1.03 should require disclosure of the termination or material reduction of a business relationship with a customer only if that customer is reportable pursuant to Item 101(c)(vii).
(b) Trigger Event. The trigger event identified in the proposal, "awareness" that an event has occurred, requires a great deal of speculation and potentially may be harmful to the company. Such speculation is of little value to an investor. We therefore urge the Commission to revise the triggering event to provide a more objective disclosure requirement. We suggest that disclosure under Item 1.03 should be required only upon the confirmation with a customer that a termination or reduction has occurred and a conclusion by the company that such termination or reduction cannot be avoided by further negotiations.
Item 2.03. Creation of a Direct or Contingent Financial Obligation that is Material to the Registrant. As proposed, Item 2.03 would require a public company to disclose certain information regarding the creation of any material direct or contingent financial obligation to which the company is subject. We support the basic premise of the proposal; however, we have the following concerns with the proposal as drafted.
(a) Reporting Standard. We suggest that the Commission only require the disclosure of the creation of financial obligations that are assessed as "probable" under generally accepted accounting principles.3 In addition, we believe that, since Item 2.03 addresses financial obligations, the appropriate materiality standard should be a financial standard. We suggest that an appropriate standard would be ten percent of consolidated assets.
(b) Exhibits. For the reasons stated in Item 1.01 above, we do not believe that the agreement pursuant to which a financial obligation is created need be attached as an exhibit.
Item 2.04. Events Triggering a Direct or Contingent Financial Obligation that is Material to the Registrant. As proposed, Item 2.04 would require a company to disclose events that trigger a material direct or contingent financial obligation of the company. We generally agree with Item 2.04 as proposed; however, we have the following comments:
(a) Reporting Standard. We suggest that the Commission only require the disclosure of declared events of defaults or acceleration. In addition, for the reasons stated in Item 2.03 above, we believe the appropriate materiality standard should be a financial standard. We suggest that an appropriate standard would be ten percent of consolidated assets.
(b) Trigger Event. We suggest that disclosure under Item 2.04 should be required for disputed declarations of default or acceleration only upon the determination by the company that negotiations will not affect such declaration of default or acceleration.
(c) Other. We agree with the Commission that negotiations of waivers or amendment to triggering events should not be disclosed.
Item 2.05. Exit Activities Including Material Write-Offs and Restructuring Charges. As proposed, Item 2.05 would require a company to disclose the fact that a company is committed to a course of action that will require the company to incur a material write-off or restructuring charge under generally accepted accounting principles. We do not disagree with proposed Item 2.05 generally; however, we have the following comments:
(a) Reporting Standard. We encourage the Commission to require disclosure only after the company has (i) determined the amount and accounting treatment of the write-off or charge, (ii) incurred the initial liability and (iii) taken action to execute the commitment. Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS No. 146"), creates a number of changes in accounting principles related to exit or disposal activities. For example, under EITF Issue No. 94-3,4 a liability for an exit cost could be recognized at the point of commitment by the company to a course of action. Under SFAS No. 146, a number of criteria must be met before liability is incurred, rather than mere commitment to a course of action. We wonder whether a commitment is the correct basis for requiring disclosure regarding a company's material exit activities.
(b) Other. Under current practice, companies that decide to exit activities that are material attempt to coordinate the exit with interested parties on a confidential basis. Such interested parties may include community officials, employees, the press and the investment community. Companies often do not start this process until after board approval is obtained. Disclosure prior to such notification is not necessary or desirable. Requiring specific disclosures within two days of making the decision to exit an activity does not allow adequate time to coordinate such efforts.
Item 2.06. Material Impairments. As proposed, Item 2.06 would require a company to disclose the conclusion that the company is required to record a material charge for impairment to one or more of its assets, including an impairment of securities or goodwill, under generally accepted accounting principles. We have the following comments regarding Item 2.06:
(a) Reporting Standard. We urge the Commission to require the disclosure of such information only after the company determines the actual amount of the impairment charge and records such a charge. The accounting for impairment of assets involves two distinct phases. The first is the recognition that an asset has become impaired, and the second is a measurement of the impairment charge. The fact that a company has determined that it will record a material charge for the impairment is not necessarily informative to the investing public without the corresponding amount of the impairment charge.
(b) Other. We also urge the Commission to incorporate a materiality standard into Item 2.06 measured as a percentage of consolidated assets.
Item 3.01. Rating Agency Decisions. As proposed, Item 3.01 would require a company to disclose when it receives a notice or other communication from any rating agency to whom the company provides information to the effect that the rating agency has decided to (i) change or withdraw the credit rating, or outlook on, the company or its indebtedness, (ii) refuse to assign a credit rating to the company or its indebtedness, (iii) place the company on credit watch or (iv) take any similar action. We generally agree with this proposal; however, have the following comments:
(a) Reporting Standard. We encourage the Commission to limit required disclosure to decisions of (i) nationally recognized rating agencies and (ii) agencies from which the company has solicited a rating. Rated companies are generally aware of, and responsive to, actions of the nationally recognized agencies and other agencies from which they have solicited ratings, but may not be aware of the actions of other agencies. Alternatively, we would suggest that the Commission clarify that the term "providing information" does not include supplying an insignificant amount of information to a rating agency, such as responding to a one-time request.
(b) Trigger Event. We urge the Commission to require disclosure of such information only after the rating agency has issued its press release publicly. In many cases, a rating agency will provide a courtesy call alerting a company to the downgrade. Rating agencies generally ask the affected company not to make any public announcements. This practice need not be disturbed by the Commission.
Item 3.02. Notice of Delisting or Failure to Satisfy Listing Standards; Transfer of Listing. As proposed, Item 3.02 would require a company to disclose certain notices received from a national securities exchange or national securities association that serves as the principal trading market for a class of the company's common stock. These would include notices that the company no longer satisfies the listing requirements or standards of such exchange or association or that such common stock has been delisted by such exchange or association. We agree with Item 3.02 as proposed.
Item 4.02. Non-Reliance on Previously Issued Financial Statements or a Related Audit Report. As proposed, Item 4.02 would require a company to disclose the decision by its audit committee that the previously issued financial statements can no longer be relied upon. We do not disagree with this proposal.
Item 5.04. Material Events Regarding the Registrant's Employee Benefit, Retirement and Stock Ownership Plans. As proposed, Item 5.04 would require a company to disclose events known to the company that would materially limit, restrict or prohibit participants in employee benefit, retirement or stock ownership plans from acquiring, disposing of or converting their holdings. We do not believe that this disclosure is either necessary or desirable. Existing law adequately addresses disclosure of information concerning such plans to their participants, and the disclosure of such information is completely irrelevant to non-participants.
MINOR REVISIONS TO EXISTING FORM 8-K ITEMS
Below are the existing Form 8-K items to which the Commission has proposed making minor revisions. Our comments are set forth following a brief description of each proposal.
Item 2.01. Completion of Acquisition or Disposition of Assets. As proposed, Item 2.01 basically would require the same disclosures required under current Item 2. While we generally agree with the Commission's proposed Item 2.01, we would suggest the following:
(a) Reporting Standard. The thresholds should, as the Commission suggests in its questions, be harmonized with the other proposed items. We urge the Commission to revise Item 2.01 to require disclosure of the completion of an acquisition or disposition of assets pursuant to an agreement, only if such agreement were disclosed under Item 1.01. Thus, in conjunction with Item 1.02 above, after a company has entered into a material agreement, the investing public will be informed when either the agreement is consummated or is terminated.
(b) Other. The Commission should take this opportunity to delete the filing requirements set forth in Item 601(b)(10)(c) of Regulation S-K which calls for the disclosures of "any contract calling for the sale of any property, plant or equipment for a consideration exceeding 15% of such fixed assets on a consolidated basis". The Form 8-K should be the exclusive vehicle for disclosing acquisition and divestiture agreements.
Item 2.02. Bankruptcy or Receivership. As proposed, Item 2.02 contains minor changes to current Item 3 which are designed to make it "more readable". We do not suggest any changes to Item 2.02 as proposed.
Item 4.01. Changes in Registrant's Certifying Accountant. As proposed, Item 4.01 substantively requires the same disclosures as current Item 4. We do not disagree with this proposal.
Item 5.01. Changes in Control of Registrant. As proposed, Item 5.01 substantively requires the same disclosures as current Item 1. We have no comments to Item 5.01.
Item 5.02. Departure of Directors or Principal Officer; Election of Directors; Appointment of Principal Officers. As proposed, Item 5.02 requires a company to disclose (i) when a director resigns or declines to stand for re-election due to a disagreement or is removed for cause, (ii) when the company's principal executive officer, president, principal financial officer, principal accounting officer or principal operating officer resigns or is terminated from that position and (iii) when the company appoints a new principal executive officer, president, principal financial officer, principal accounting officer or principal operating officer. We are in generally agreement with Item 5.02 as proposed, subject to the following comments:
(a) Item 5.02(a). The requirement under Item 5.02(a)(3) would require a company to, among other things, request that certain former directors furnish the company with a letter stating whether he or she agrees with the company's disclosure regarding the resignation or removal. Since a company cannot require a director to provide the company with such a letter, the proposal should make it clear that the company need only supply such letter if supplied by the director. In addition, the proposal should clarify that the company is not responsible for inaccurate statements made by a director in such a letter.
(b) Item 5.02(b). The requirement under Item 5.02(b) to disclose the reasons for the resignation or termination of an officer could expose companies to defamation lawsuits in situations where an officer and a company disagree about whether, and to the extent to which, the officer's performance has been unsatisfactory. We therefore urge the Commission to require disclosure of the reasons for the resignation or termination of an officer only when the officer or the company otherwise publicly disclose this information.
Item 5.03. Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year. As proposed, Item 5.03 would require a company to disclose any amendment to its articles of incorporation or bylaws if the amendment was not disclosed in the proxy materials or other statement filed by the company. We agree with this proposal as stated.
ITEMS MOVED TO FORM 8-K FROM PERIODIC REPORTS
Below are the items that the Commission has proposed moving to Form 8-K from other periodic reports. Our comments are set forth following a brief description of each item.
Item 3.03. Unregistered Sales of Equity Securities. As proposed, Item 3.03 would require a company to disclose the information contained in paragraphs (a) through (e) of Item 701 of Regulation S-K regarding the company's sale of equity securities in a transaction that is not registered under the Securities Act of 1933 (the "Securities Act"). Such transactions are currently reportable in annual reports on Form 10-K and quarterly reports on Form 10-Q. We generally agree with the Commission's proposal, subject to the following comments.
(a) Reporting Standard. We urge the Commission to provide a threshold below which unregistered sales of a company's equity securities are not reportable. We suggest a threshold of one percent of the company's total outstanding shares.
(b) Other. We urge the Commission to permit companies to aggregate sales occurring within a thirty-day period.
Item 3.04. Material Modifications to Rights of Security Holders. As proposed, Item 3.04 would require a company to disclose material modifications to the rights of holders of any class of the company's registered securities. We do not disagree with this proposal.
While generally we are in agreement with the Commission's proposals as set forth in the Proposing Release, we urge the Commission to weigh the burden that each of its proposals may place on public companies against the potential benefit to the investing public and to proceed accordingly.
We respectfully submit these comments with the hope that they are helpful to the Commission's consideration of the proposed rules. We would be happy to meet with representatives of the Commission to discuss our comments.
/s/ Jerry W. Powell
Jerry W. Powell
General Counsel / Secretary
Compass Bancshares, Inc.
|1||As part of its initiative to restore the confidence of the investing public in our capital markets system, the Commission is encouraging corporate governors and professional advisors to devote more time and energy on financial disclosures to provide more meaningful disclosure and to avoid the use of standardized, boilerplate language. The Commission views the audit committee as a key to realizing this objective, as the audit committee role is considered central to assuring the integrity of financial disclosures. We wonder how reducing the timeframe for filing current reports encourages corporate governors and professional advisors to spend more time making disclosure more clear, accurate and meaningful.|
|2||We, like many public companies, employ the services of an outside service provider to format our documents for filing with the Commission. The process of EDGARizing a current report of any length may require one full day to complete, leaving one day for the completion and review of the substance of the current report.|
|3||Statement of Financial Accounting Standards No. 5, Accounting for Contingencies.|
|4||EITF Issue No. 94-3 will be superceded upon the adoption of SFAS No. 146.|