The Commonwealth of Massachusetts
Secretary of the Commonwealth
State House, Boston, Massachusetts 02133
August 19, 2002
Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: Release Nos. 33-8106; 34-46084; File No. S7-22-02 (the "Rule Proposal")
Additional Form 8-K Disclosure Requirements and Acceleration of Filing Date
Dear Secretary Katz:
I write to you as the chief securities regulator for Massachusetts. Through the Massachusetts Securities Division, the Office of the Secretary of the Commonwealth administers and enforces the Massachusetts Uniform Securities Act, M.G.L. c.110A.
The Massachusetts Securities Division submits the following comments on the Commission's proposals for additional Form 8-K (current report) requirements and acceleration of the Form 8-K filing date. The Division strongly supports all parts of the Rule Proposal. We also ask the Commission to add Form 8-K filing and disclosure requirements for transactions in company equity securities by officers and directors, as proposed by the Commission on April 12, 2002 in Releases 33-8090 and 34-45742.
By way of background, the Securities Division receives a steady stream of inquiries and complaints from investors in public companies and from company benefit plan participants. These investors often complain about the lack of and limited nature of disclosure that public companies provide. These complaints focus primarily on inadequate disclosure about company financial condition and about transactions by insiders in company equity securities.
Participants in company pension and other benefit plans are a particularly vulnerable group. We observe that these investors are starved for information about their pension investments and about the impact company-level events have on their pensions.
The Rule Proposal is a needed modernization of the information that is provided under Form 8-K and of the timeline for providing that information to the marketplace.
Form 8-K currently consists of nine disclosure items. Six of the items describe specific events that require companies to file Form 8-K. Those events are:
A seventh item requires companies to furnish exhibits and to list any financial statements and pro forma financial information included as part of Form 8-K in connection with a business acquisition. Another item permits companies, at their option, to disclose events that they deem to be of importance to their shareholders. The ninth item permits companies to use Form 8-K as a non-exclusive method to satisfy their public disclosure requirements under Regulation FD.
In the Rule Proposal, the Commission proposes to add 11 new items to the list of events that require a company to file a current report on Form 8-K. In addition, the Commission proposes to make significant changes to existing Form 8-K items, and to move two items from other Exchange Act reports to Form 8-K. We concur with the Commission's view that these items represent events that presumptively have, or can have, such significance that timely disclosure is necessary for the market to perform properly and efficiently.
The new disclosure items proposed to be added to Form 8-K are:
The Commission also proposes to move the following two items from other Exchange Act reports (10-Q and 10-K) to Form 8-K:
The Commission also proposes to expand the current Form 8-K item that requires disclosure about the resignation of a director to require disclosure regarding the departure of a director for reasons other than a disagreement or removal for cause, the appointment or departure of a principal officer, and the election of new directors. The Rule Proposal also would combine the current Form 8-K item regarding a change in a company's fiscal year with a new requirement to disclose any material amendment to a company's articles of incorporation or bylaws.
The substantive requirements included in two of the proposed disclosure items, Material Modifications to Rights of Security Holders and certain aspects of Events Triggering a Direct or Contingent Financial Obligation That Is Material to the Registrant, formerly had been included in Form 8-K. In 1977, the Commission moved those items into Form 10-Q. In light of the importance of such information to investors, the Commission proposes to move these items back into Form 8-K.
Comments on Specific Sections of the Rule Proposal.
We have the following comments on specific sections of the Rule Proposal, as listed below:
Section 3 - Securities and Trading Market.
The Division supports Item 3.03, which would require the disclosure of unregistered sales of equity securities in a Form 8-K. Such transactions can be dilutive to existing investors. Also, these sales can adversely affect the rights of existing investors, depending on the characteristics of the securities sold.
In response to the Commission's question, we believe that this disclosure should be made in a Form 8-K in addition to providing this disclosure in company quarterly and annual reports. We believe that an aggregate listing of such unregistered transactions in Forms 10-K and 10-Q would be valuable to the investors, so it should be provided along with the transaction-by-transaction information provided in Form 8-K.
Section 4- Matters Related to Accountants.
Under the proposed Item 4.01, a change in the registrant's certifying accountant triggers the requirement to file an 8-K.
In response to the Commission's question, we strongly recommend that the Commission also require similar disclosure regarding a change in the auditor of a company's employee benefit plan if that auditor is different from the company's independent accountant. In our view, this information would be particularly valuable to benefit plan participants.
Benefit plan participants are among the least sophisticated investors we encounter, and they often lack up-to-date information about the their plan and about their public-company employer. These investors will benefit from whatever additional information is made available to them. For this reason, a current report on Form 8-K should be required if the auditor for a company's benefit plan changes.
Section 5 - Corporate Governance and Management.
The Division strongly supports proposed Item 5.04 - Material Events Regarding the Registrant's Employee Benefit, Retirement and Stock Ownership Plans.
This proposed new item would require a company to disclose in a Form 8-K any known event that would have the effect of materially limiting, restricting or prohibiting participants in an employee benefit, retirement or stock ownership plan from acquiring, disposing or converting their holdings, other than a periodic or other limitation, restriction or prohibition based on presumed or actual knowledge of or access to material non-public information if that plan is broadly available to the company's employees.
This item would require a company to disclose the period or expected period of the limitation, the nature of the limitation, and the circumstances surrounding, or reasons for, the limitation. Such notice is important to investors who are plan participants in making financial decisions and who are entitled to the benefits of the disclosure regime of the U.S. securities laws.
This proposed disclosure would not be necessary when a company imposes temporary trading "black-outs" on its senior officers and directors because they possess material non-public information, such as during the period surrounding the announcement of an earnings release or during negotiation of a merger agreement.
In response to the Commissions questions regarding proposed item 5.04,
-We urge that this information does belong in Form 8-K, primarily because benefit plan participants are a significant part of the shareholder base of many companies. Moreover, in many instances events relating to a benefit plan can also have an effect on the employer, and therefore be important to all investors, regardless of whether they are plan participants.
-We do not believe that there is a significant risk that investors who are not part of a relevant plan would believe that the transfer limitations apply to them, causing unjustified market reaction. We urge that the potential for any such confusion can be minimized by clear explanations and disclosure in Form 8-K.
-The Commission appears to have made a correct distinction in creating "carve-outs" for trading blackouts applicable to those with presumed or actual knowledge of or access to non-public information. We expect that these carve outs would involve only plan participants in upper management and/or plan participants involved in transactions that would give rise to knowledge of or access to non-public information.
-We encourage the Commission to adopt Item 5.03, even though Congress is considering legislation that addresses similar issues. As noted above, employee benefit plan participants are sometimes unexpectedly made subject to lockouts on how and whether they can sell or convert their investments. These participants are typically small investors and savers who are starved for information relating to their plan interests. This proposal will be an important step to protect these investors.
Proposals to Move Information Out of Forms 10-K and 10-Q into Form 8-K.
The Commission has asked whether the requirements to disclose (i) unregistered sales of Equity securities by the company and (ii) material modifications to the rights of holders of the company's securities should be moved from Forms 10-Q and 10-K into Form 8-K. We believe that requirements to disclose these items should be maintained in Forms 10-Q and 10-K and be added to Form 8-K.
Proposed Additional Disclosure Items.
The Commission also inquires whether there should also be disclosure in Form 8-K of (i) waivers of corporate codes of ethics or conduct or (ii) any change in a critical company accounting policy. We believe both of these events should require disclosure on a Form 8-K.
Acceleration of the Requirement File Form 8-K.
The Massachusetts Securities Division strongly supports the acceleration of the requirement to file Form 8-K to two business days after the occurrence of the triggering event from the current five business day and 15 calendar day deadlines. As the proposing release indicates, the existence of the Commission's EDGAR system, the widespread use of computers by public companies and the wide dispersion of computers and sophisticated computer software among investors all point to the adoption of a shorter timeline for the filing and distribution of Form 8-K information. It is a truism that the markets have become increasingly fast moving; the requirements to provide corporate disclosure to the marketplace must also become quicker in order for this information to be timely and useful to investors.
The Massachusetts Securities Division's Recommends that Transactions in Company Equity Securities by Officers and Directors be a triggering events for Form 8-K Disclosure.
We strongly support the Commission's proposals in Release Nos. 33-8090 and 34-45742 "Form 8-K Disclosure of Certain Management Transactions," which would require companies to file current reports on Form 8-K to disclose (i) insiders' transactions in company equity securities ("Item 10(a) Reports"), (ii) insiders' entry into and modification and termination of any contract, instruction or written plan for the purchase or sale of stock intended to satisfy the affirmative defense under Rule 10b5-1(c) (a "Rule 10b5-1 Plan"), and (iii) company loan arrangements with insiders (collectively, "Item 10 Reports").
It has been noted widely that the current system for reporting insider trades provides this information to the marketplace slowly and in an awkward, non-electronic form.
Insider transactions reported under Rule 144(h) are typically filed with the Commission on a paper Form 144 and are mailed on the day the transaction is placed or executed. Because Form 144s are typically filed on paper, they are not readily accessible investors using the Commission's EDGAR system.
Insider transactions reported under Section 16 of the Securities Exchange Act of 1934 on Form 4 may be filed as late as 10 days after the end of the month when the transaction took place. While these filings may be made electronically through the EDGAR system, non-EDGAR filings on paper are more common.
The current system for disclosing insider transactions creates severe blind spots for investors who want to know if company insiders are buying or selling company securities. Requiring that these transactions be promptly disclosed on Form 8-K would address this gap in the public company reporting system.
We appreciate this opportunity to comment on the rule proposal.
William F. Galvin
Secretary of the Commonwealth