June 30, 1999
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Attn: Jonathan G. Katz, Secretary
Re: The Regulation of Securities Offerings, Securities Act Release
No. 33-7606A, 63 Fed. Reg. 67174 (December 4, 1998) Ė File No. S7-30-98
The Aircraft Carrier Release
Ladies and Gentlemen:
The Business Roundtable appreciates the Securities and Exchange Commissionís (the "Commission") efforts in the Aircraft Carrier Release (the "Release") to recast and streamline the regulatory scheme applicable to the sale of securities by virtually all issuers. The Business Roundtable represents many of the largest, most significant users of the worldwide capital markets. Efficient access to the capital markets is critically important to the financial structure of our domestic and global economic system. The Business Roundtable is pleased to submit these comments in response to the Commissionís Request for Comments with respect to the Release.
As sophisticated consumers of financial products, the companies we represent are constantly measuring the efficiency of the capital markets. Various sources of capital finance - private institutional lending, foreign capital sources and the U.S. public markets - compete daily to meet our finance needs. The quality of the various market systems that service our finance needs are measured by the competitiveness of their pricing, the speed of execution and investor confidence in the integrity and fairness of the process. Any legislative or regulatory change affecting the process of raising capital, especially a change as sweeping as contemplated by the Release, must be reviewed with a cautious eye on the effects it is likely to have on each of the following attributes: (i) the cost of capital (including residual liability costs from strike suits), (ii) execution efficiency (the ability to complete promptly a transaction prior to changes in market conditions) and (iii) the integrity of the market (the ability to detect and prevent fraud).
Based on our experience we are strongly of the view that the current regulatory system works well for larger, seasoned issuers. Although we support a number of the changes contained in the Release, we also feel strongly that some of the proposed changes will negatively impact the capital raising process.
Our most significant concerns are summarized below:
The foregoing points along with a number of other relevant issues are discussed below in more detail for your consideration.
More and Accelerated Form 8-K Disclosure
The Business Roundtable generally supports the concept of increased disclosure pursuant to Form 8-K and an acceleration of the filing deadline requirements with respect to certain events. Many larger, seasoned companies have a policy of filing all material press releases on a Form 8-K to insure ready and equal access to such information. In particular, disclosure of summary financial information through a preliminary earnings release is common. As proposed by the Commission in the Release, we support the initiative that all issuers should release summary financial information, and such financial information should be filed on a Form 8-K. The Commissionís proposed time frame for the release of preliminary information would not generally cause a problem, i.e., certain preliminary quarterly results could generally be released within 30 days of the quarter end, while preliminary year end results should be available within 60 days of the year end. The nature and amount of preliminary information to be disclosed should be designed to ensure that the rush to get preliminary information into the market does not spawn inaccuracy. Broad trend information as to "Sales/Revenues" and "Operating Profit/Loss" is the most significant information. The release of final numbers should be deemed to supersede and replace the preliminary disclosure for all purposes. In addition, the Commission should establish a "good-faith" safe harbor for companies providing that any preliminary financial information release that contains a cautionary warning that the final financial results may vary from the preliminary results will not subject the company to liability for the preliminary release of financial information, absent an affirmative showing of actual knowledge of falsity of such information.
With respect to other modifications proposed to the Form 8-K filing requirements, The Business Roundtable supports many of the items proposed by the Commission in the Release with certain qualifications. In substantially every Form 8-K disclosure item, there are normal and prudent internal procedures that need to be followed prior to public dissemination. Verification of facts, notification of affected parties and internal and external (lawyers and accountants) review of the applicable disclosure are a few of the procedural steps that are required before an appropriate, verified release of information can be made. Consequently, we suggest that all Form 8-K filing periods be five (5) business days. In the event that the Commission believes that earlier disclosure is necessary for certain events, we believe the appropriate minimum should be no shorter than two (2) business days to allow corporations the procedural time necessary to consider, prepare, review and approve the disclosure. In no case should any filing be required within one (1) day of the triggering event.
Risk Factors in Exchange Act Filings
The Release would require risk factor disclosure in periodic reports filed pursuant to the Exchange Act. Today several standards of risk factor disclosure exist depending on the form and intended use of the document. Many issuers currently include risk factors in their annual and quarterly reports and consequently, we believe the establishment of a consistent standard of disclosure would be beneficial. With respect to the proposed disclosure, The Business Roundtable would support using the Private Securities Litigation Reform Act standard of risk factor disclosure, i.e., "important factors that could cause actual results to differ materially from those in the forward-looking statement." Further, we would propose that the risk factor disclosure be required in those cases where the issuer, in its reasonable judgment, believes such factors are applicable.
Proposed Changes To Annual Reports On Form 10-K And Quarterly Report On Form
The Business Roundtable opposes:
Deadline of Annual and Quarterly Reports: Larger, seasoned registrants often need to deal with the tasks of integrating and consolidating diverse operations and capital structures of worldwide business divisions and subsidiaries. Multiple subsidiaries and foreign operations present complex financial and tax issues that need to be addressed before a review or audit can even be conducted. With proposed increased emphasis on Exchange Act filings, there are no prudent shortcuts to preparing complete and accurate financial disclosure. Accelerating reporting deadlines will only encourage more "estimations" in the calculations, less diligence in the audit testing process and a general sacrifice of precision in the pursuit of speed. We do not believe such a compromise is consistent with the goals of the securities laws, or in the best interest of the reporting companies or the investing public.
Directorsí and Officersí Signatures and Certification: The proposal would require the chief executive officer of the registrant and a majority of its Board of Directors to sign Forms 8-A, 10-Q and various other Forms. The proposal also requires the Forms 10-Q and 10-K include a certification as to the accuracy and completeness of the disclosure. The Commission in the Release has expressed its concern that the signing process has historically had little significance as many directors sign blank signature pages to facilitate timely filings, but never read the document.
The Business Roundtable believes its member companies presently take very seriously the process of preparing and filing all documents with the Commission. Given our present attention to all public filings, the proposed requirement for the CEOsí and directorsí signatures on the Form 10-Qís, and certification by the signatories of the Companyís reports on both Form 10-Q and Form 10-K, as proposed by the Release, are of no meaningful benefit to the investing public and would be logistically impractical. The Release would require Quarterly Reports on Form 10-Q to be signed by a majority of the directors (already a Form 10-K requirement) and that each signing director would have to certify that he or she has read the document and that to his or her knowledge it does not contain any material misstatements or omissions. The Board of Directors of public companies must of necessity rely on the professionalism and integrity of the companyís management in the preparation of the Forms 10-Q and 10-K. The Audit Committee of the Board typically reviews the procedures used in preparing and testing the accuracy of the financial presentation. Although many companies review with the Board of Directors the quarterly financial results prior to finalizing the Form 10-Q, it is much rarer for the Board to review the Form 10-Q itself and, from a timing standpoint, such a review is difficult to schedule in our experience. We find no practical support for the Releaseís contention that requiring signatures of a majority of the Board, or that of the CEO for that matter, will improve the required disclosure in any meaningful way. The signature requirement will change the focus of the Board of Directors from the important task of establishing procedural safeguards to ensure quality management and disclosure, to becoming editors of disclosure documents focused on potential liability based on certification requirements. To impose such additional formal and potentially liability-creating duties on directors will only reduce the available pool of qualified directors willing to undertake the burdens of sitting on the Boards of public companies. It should be noted that relevant provisions contained in the Release require the signatories to certify that they read the report, not just a draft. Final drafting changes are often made up to the last minute and impose a practical constraint on the ability of directors to read the final copy. Directors rely extensively on their expert advisors and no additional meaningful protection is provided by the proposed certification.
The Business Roundtable believes that the directorsí efforts should continue to focus on a review of the process undertaken by the companyís financial personnel and outside auditor and not on inserting themselves into the process of gathering or testing the accuracy of information. We note that the Blue Ribbon panel report is dealing directly with the issues of directorsí and Audit Committee activity with respect to review of financial statements. We suggest that any change to the regulatory scheme in this area should be addressed in conjunction with legislative or regulatory proposals that come out of the Blue Ribbon panelís initiatives in this area.
The Release would further require the signatories to a Report on Form 8-K to certify that copies have been delivered to the directors in advance of the filing. Many Form 8-K reporting events occur without warning and the expedited filing requirements make it impractical for directors to meaningfully participate in the review of the required disclosure filing. We strongly support active involvement of all directors in significant corporate matters, but as a practical matter, the directors cannot be expected to review in advance all Form 8-K filings. To require delivery to them in advance of each Form 8-K filing could imply a duty to actively participate in the disclosure and drafting process, and failure to participate, no matter how impractical under the circumstances, may result in claims against such directors. We believe it both impractical and inappropriate to imply that there is such a duty on directors, creating an unreasonable expectation on the part of the public and potential liability for directors. Delivery of Form 8-Ks to the directors after filing should be sufficient assurance that directors will continue to monitor the accuracy of such public filings.
Management Report to Audit Committee: The proposal would impose a requirement on management to submit a written report to the Audit Committee, which would be filed as an exhibit to the Companyís Annual Report on Form 10-K. The object of the report would be to describe the procedures, if any, that had been established to assure the accuracy and adequacy of disclosure contained in the Exchange Act reports. Although establishing procedures to diligently review and accurately reflect required disclosure in Exchange Act reports is a matter of good practice and in certain cases could possibly lead to better disclosure, the Business Roundtable believes there is currently sufficient incentive on the part of management and the Board of Directors to encourage prudent behavior. The filing of such a report is unnecessary and will potentially only encourage the development of boilerplate procedural steps rather than open and thoughtful interaction between the Audit Committee and management. Further, specific changes to Audit Committee duties should be addressed in the legislative and regulatory process, if any, arising out of the Blue Ribbon panel report.
Securities Offering Process; Maintain the Shelf Registration Process for Larger, Seasoned Issuers
For larger, seasoned issuers, the present system has proven to be extremely effective in allowing ready access to the capital markets. Efficient and timely execution ultimately reduces the economic cost of capital raising and, consequently, directly benefits our companies, shareholders and the investing public.
Shelf Registration: Current law and practice makes shelf take-downs of investment grade debt, preferred securities and common equity the method of choice to raise capital for most large public companies. Assuming an appropriately flexible shelf, this type of offering can be underwritten and funded almost instantaneously. The process is quick and provides ready access to issuer information for potential investors.
With regard to typical shelf registration statements, at the time an issuer decides to do a take down, the basic disclosure documents (the prospectus, indenture, etc.) will have already been prepared and be on file with the Commission, as would the master form of underwriting agreement.
Pursuant to the Release, upon commencing the underwriting process, the underwriters would need to satisfy themselves as to the eligibility criteria for the issuer. The issuer and underwriter would each need to also satisfy themselves that none of the relevant partiesí officers, directors, etc. were disqualified pursuant to the "Bad Boy" provision. To hold an issuer responsible for prior offenses of officers or directors of an underwriter is unreasonable unless the issuer knowingly violates that statute. We suspect the underwriters will echo this same sentiment with respect to issuers. We strongly urge the Commission to establish separate lines of responsibility (and liability) between issuers and underwriters for violations of the "Bad Boy" provisions.
Additionally, upon commencement of the underwriting process as proposed by the Release, the entire registration statement plus all exhibits and other "offering material" and "free writing" would need to be prepared, reviewed by underwriters, and filed upon filing the Form B registration statement or prior to first use. This is in contrast to the present shelf registration system in which (i) prospectus supplements may be filed two days after pricing, (ii) no auditorsí consent is required and (iii) all prospectus supplement information is effective upon filing.
Further, and perhaps most troubling, a term sheet (or prospectus) setting forth the material terms of the securities must be sent to all investors in advance of the date that investors make an investment decision. No sale can be made prior to delivery of the term sheet (or prospectus). We view this as a significant setback in the efficiency of the capital raising process for larger, seasoned issuers. Since pricing is typically done after the market closes, the new term sheet delivery requirement may in fact delay the offering 24 hours or more, not counting the time it takes to draft and approve the definitive term sheet. In volatile markets, the potential time delays may adversely affect the offering. We are of the opinion that the effect of the Release, if adopted as presently proposed, will be to increase the cost of capital raising to issuers. Although we understand the Commissionís concerns, we do not share its view that the current practice leaves the market place without material information for an excessive period of time, we do believe that such concerns could be resolved by a requirement that an issuer disseminate information relating to the offering pursuant to a press release filed promptly after the sale of securities.
The Business Roundtable believes that proposed changes for Form B issuers contained in the Release fail to improve the present system in any material way, either by reducing costs or creating quicker execution, and in fact will noticeably slow the sale process down as a result of its required information filing and delivery requirement. We also note anecdotally that we are unaware of any significant concerns being raised by investors in our companies with respect to the timing or adequacy of disclosures under the current system, particularly, offerings of MTNs, investment grade securities and "fully-bought" offerings. Consequently, in our view, it is important that the Commission retain the current shelf registration process that has proven so effective for large U.S. companies and that the proposed requirement for pre-delivery of a term sheet/prospectus and proposed filing requirement should be deleted from the Release with respect to (i) MTN programs, (ii) investment grade securities, and (iii) "fully-bought" offerings. For the same reason, the issuer should be allowed to incorporate future Exchange Act filings into its registration statements, and not be required to make a filing merely to update its incorporation by reference of Exchange Act documents.
144A/Exxon Capital Transactions: Although less relevant to many of the companies represented in The Business Roundtable, the use of private placements pursuant to Rule 144A and a registered exchange under the "Exxon Capital" line of no-action letters has become an important method of raising capital in the United States for foreign companies and high-yield issuers. Since the 144A marketplace is of less significance to the companies we represent, we have chosen not to comment on the Commissionís proposal to curtail the process that has been established by the Exxon Capital no-action letter.
Expanded Free Writing
The Business Roundtable supports the initiative of the Commission to increase the availability of information to the market place during the offering period. The expanded safe harbors for analyst research reports under Rules 137, 138 and 139 will serve to increase investor information at the most critical time during an offering for the potential purchasers. We concur in the Commissionís view that valuable issuer information is available from research analystsí reports and current regulation often causes these reports to be suspended prior to and during an offering. In addition, the Release proposes to substantially relax the constraints on issuer communication before and during offering periods for Form B issuers and again we support this concept
With respect to Form B issuers, all "offering information" and "free writing" disclosed during the "offering period" must be filed either at the time of the filing of the Registration Statement, or prior to first use if after the filing of the Registration Statement. We note, however, that there will be significant difficulty in coordinating with underwriters as to free writing material produced for the brokerage community. Consideration should be given to the necessity for EDGAR filing of such information.
Similar uncertainty is created by the requirement that during the offering period, all material disseminated "by or on behalf of the issuer" must be filed. What constitutes "by or on behalf of the issuer"? Numerous potential disclosures by parties other than the issuer may fall outside the safe harbor as a result of being deemed "by or on behalf of the issuer." The failure to file non-material information, that otherwise qualifies as offering material, could create Section 11 and/or 12(a)2 liability for issuers, underwriters and other participants in an offering under the Release. Indeed, as proposed, the all-inclusive disclosure provisions of the Release could substantially increase Section 11 and/or 12(a)2 liability of issuers, underwriters, directors, officers and others with respect to material not previous considered part of the registration statement.
We are also concerned with the ambiguities inherent in the definition of "offering period" as proposed in the Release. The offering period is deemed to commence 15 days prior to the "first offer" by a Form B Issuer. The Release fails to establish a bright line with respect to the start of the offering period. As increased information flow is encouraged and testing-the-water (discussed below) is permitted, determining the "first offer" as a practical matter may be difficult. The Commissionís guidance and case law under Section 2(3) of the Securities Act -- assuming the same standard of an "offer" was intended to apply pursuant the Release ó does not provide a clear definition of "first offer." Without more clarity as to the starting of the "offering period," we suspect it will be difficult to persuade issuers, underwriters and other participants that the desired freer information flow is in fact safe, as the failure to file required information would constitute a violation of Section 5 of the Securities Act. If issuers are unable to confidently establish the specific date when the obligation to file offering material began, the intended benefit of more inclusive disclosure will never be attained. Issuers and underwriters will simply continue to take the defensive approach of "going silent" whenever an offering is contemplated.
The failure of the Release (i) to clearly establish a bright line test for beginning the period for filing offering material and (ii) to firmly establish what constitutes offering material and free writing "by or on behalf of the issuer," and the expansion of liability to documents filed under the Exchange Act, will only serve to limit the intended benefit of the Release. We encourage the Commission to address the foregoing concerns by (i) definitively establishing the beginning of the offering period by linking it to a specific event, such as the filing of the Registration Statement on Form B, (ii) not requiring the filing of all free writing, particularly, if not prepared by the issuer or used directly in the process of selling securities, (iii) not imposing Section 11 or Section 12(a)(2) liability on an issuer or other participants for offering communications that are "false or misleading" except to the extent they were prepared by the issuer or specifically authorized for use by the issuer, and (iv) clarifying that material that is otherwise not "offering material" as such term is presently understood, which is included in a document that contains "offering material", is not subject to Section 11 liability simply as a result of its presence in such document, and that Section 12(a)(2) liability will be applied only with respect to a participant in an offering to the extent that such participant actually prepared or distributed such material for purposes of selling securities. Generally, we support the efforts to increase communication, but substantial refinement and clarity needs to be added to the proposals contained in the Release to encourage issuers to meaningfully increase disclosure.
The Business Roundtable strongly urges the Commission to revise the Release to eliminate the restriction of on-demand effectiveness simply based on the existence of any unresolved issues with the staff concerning reports filed under the Exchange Act. The Release shifts the emphasis of disclosure from the Registration Statement and prospectus to the required filings made pursuant to the Exchange Act, particularly Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Periodic Reports on Form 8-K. The Commission has indicated that it intends to shift resources to more thorough and frequent reviews of Exchange Act filings if the Release is adopted. The corresponding benefit to more scrutiny of the Exchange Act filings under the Release is effectiveness on request for registration statements by larger, seasoned issuers with no pre-effective review thereof. However, as a practical matter, the Release effectively eliminates the intended benefit to the issuers by making the registration process a hostage to any unresolved disputes with a staff examiner relating to any Exchange Act filing. Disputes that arise in good faith with the staff during their review of an Exchange Act filing, may or may not be material to the operations and financial conditions of a company. In the rare case, under current practice, the issuer, along with its counsel and advisors, evaluates the risk to an offering and chooses to proceed or not to proceed after careful analysis of the significance of pending comments and the inherent risk of doing so. Currently, a shelf registration take down would require careful analysis of any issues raised by the staff with respect to pending comments relating to Exchange Act filings, but the funding would not necessarily be blocked by arguably non-material disclosure issues. The Commission currently has adequate tools to deal with improper disclosure contained in Exchange Act filing and The Business Roundtable does not believe it necessary to condition the eligibility for use of Form B on resolving all disputes with the staff concerning Exchange Act filings.
Testing-the-Waters; Integration of Private and Public Sales
The Business Roundtable strongly supports the proposed changes contained in the Release to provide clarity concerning the difficult integration issues that currently exist. The draconian consequences of an integration problem are appropriately addressed by the Release. The proposed amendment to Rule 152 and creation of a safe harbor with respect to an abandoned registered offering followed by a private placement will create significant flexibility for issuers without any negative effects on investors.
Because of the significant concerns expressed above, The Business Roundtable cannot support the enactment of the Release as a whole as currently proposed. However, we encourage the staff to adopt as stand alone regulations many of the initiatives addressed in the Release. In particular, many of the proposed Exchange Act rule amendments with modifications, as discussed above, could be adopted promptly without adverse effect on the Commissionís ability to refine and repropose other areas of the Aircraft Carrier Release in the future. A number of the regulatory initiatives contained in the Release would improve the current regulatory scheme immediately upon enactment. For example, expansion of the safe harbor for analyst reports will provide beneficial information at the time of an offering and should be adopted not withstanding continued development of other important elements of the Release. Another significant item that should be advanced promptly is the clarification of the integration rules as proposed. Substantial other aspects of the Release can be easily bifurcated and enacted while the Commission refines its approach to the offering process to address some of the concerns raised by this letter.
Representatives of the Business Roundtable would be happy to address with you or your staff in more detail the issues raised by this letter and to work with the staff on alternative proposals.
We would be happy to discuss our views further at any time. Please feel free to call Terence Gallagher, Chairman Corporate Governance Coordinating Committee at (212) 573-3273.
Very truly yours,
cc: The Honorable Arthur Levitt, Chairman
The Honorable Norman S. Johnson, Commissioner
The Honorable Isaac C. Hunt, Jr., Commissioner
The Honorable Paul R. Carey, Commissioner
The Honorable Laura S. Unger, Commissioner
Harvey J. Goldschmid, General Counsel, Office of General Counsel
Brian J. Lane, Director, Division of Corporation Finance
Anita T. Klein, Senior Special Counsel, Division of Corporatioin Finance