Securities and Exchange Commission
450 Fifth Street N.W.
Mail Stop 6-9
Washington, D.C. 20549
Attention: Jonathan G. Katz
Re: Securities Act Release No. 33-7606A
Exchange Act Release No. 34-40632A
File No. S7-30-98
Dear Mr. Katz:
I am writing on behalf of Navistar International Corporation ("NIC") and its wholly-owned finance subsidiary, Navistar Financial Corporation ("NFC"), to comment on the proposals
contained in the releases referenced above (the "Release"), commonly known as the "Aircraft Carrier
NIC is a publicly-traded company that is listed on the New York Stock Exchange and
that has a current market capitalization of approximately $3.2 billion. NIC and NFC are reporting
companies under the Exchange Act. NFC, through two special purpose subsidiaries, is an active
issuer of asset-backed securities in public offerings (approximately $6.4 billion since 1990). In
addition, each of NIC and NFC has issued debt securities in Rule 144A offerings followed by Exxon
Capital exchange offers for those securities.
As reporting companies and as registrants, NIC and NFC (together, "Navistar") are
concerned that various aspects of the Release will create substantial additional burdens on Navistar
at a cost that will be borne, ultimately, by investors in Navistar securities, without any significant
offsetting benefit to those investors. The purpose of this letter is to identify those problematic aspects
of the Release.
Exchange Act Proposals
Accelerating the Due Dates for Form 10-Q and Form 10-K Reporting. The SEC
has requested comment in the Release regarding whether the due dates for quarterly and annual
reports should be accelerated. We believe that such an acceleration is inappropriate.
The Release suggests that technological improvements over the past 30 years or more
have simplified the process of preparing these reports. We agree with that assertion. However, it
is also the case that the complexity of business has grown substantially over that period. Moreover,
both generally accepted accounting principles and SEC accounting bulletins are far more involved and
intricate than they were 30 years ago.
As a result, the process of preparing these reports remains extremely involved. Indeed,
as to the quarterly reports it continues to require virtually all of the allotted time. Although NIC does
regularly release quarterly earnings information within 30 days following the end of the quarter, it
does not generally file its reports on Form 10-Q until a few days prior to the deadline. Finally, we
are also extremely concerned about the possibility of the SEC requiring both an accelerated filing
deadline and the additional signature requirements described below, which would be extremely
Signatures on Exchange Act Reports. The Release proposes to expand the
signatures section of most Exchange Act reports, especially Form 10-Q, to require the signatures of
the principal executive officers and a majority of the directors of the reporting company. The Release
also proposes that each such signatory would certify that he or she has read the report and that it is
not materially false or misleading.
We are opposed to these proposals. We believe that they will serve little purpose
other than to expose the signatories to potential personal liability. NIC and NFC already take great
care in the preparation of their Exchange Act reports, and we believe that virtually all public
companies do likewise. The principal executive officers of NIC and NFC are well aware of the need
for accurate and complete Exchange Act reporting, and we devote substantial time and expense to
produce reports that meet this standard. As the SEC no doubt realizes, top management's
responsibilities include supervision of the reporting function, but top management is not in a position
to personally verify the information in the report.
We are even more concerned about the proposal to require a majority of the directors
to sign these Exchange Act reports and make these certifications. We are troubled both by the
logistical difficulties of this process and by the "micro-management" that it suggests. As to logistical
difficulties, we believe that the SEC has underestimated the amount of effort that would be involved
in providing a final report to each signatory prior to its filing, in order to comply with the apparent
requirement that the signatory have read the final report (in the proposed Form 10-Q signature
requirements). The directors of NIC include a number who are full-time executives of other public
companies or who otherwise have significant external responsibilities; it could be extremely difficult
to obtain the short turn-around that can be required for these reports.
As a substantive matter, we also question the propriety of requiring director signatures
on quarterly reports. We recognize that a majority of the directors must execute the Form 10-K, and
NIC has developed procedures for involving the directors in that process. Not incidentally, we
believe that the directors derive substantial comfort in that process from the presence of the auditors'
report on the financial statements. If NIC is required to implement director signature procedures for
reports on Form 10-Q as well, we believe that the directors may well be reluctant to sign these
reports without some type of comfort from the auditors. Such a process would go well beyond the
requirements of the Exchange Act, and could substantially increase NIC's expenses in preparing these
While we realize that instances of fraud have occurred at public companies which were driven by actions of top management, we believe that those events can be effectively addressed through existing enforcement mechanisms. We do not believe it is appropriate to require the individual executive officers or the directors of the company to make a 10b-5 certification. We fear that the principal impact of this certification will be to provide plaintiffs' lawyers with additional grounds for adding these signatories as defendants in their often-meritless securities lawsuits.
Risk factor disclosures in 10-Qs and 10-Ks. The Release proposes to require risk
factor disclosure in annual reports on Form 10-K, with updates to reflect changes in risk factors
required to be included in quarterly reports on Form 10-Q. We question the efficacy of this proposal.
It seems to us that the established practice of requiring risk factor disclosure for companies
(particularly new companies, for whom there is no public track record) who are selling securities, but
not for companies which are merely engaged in periodic reporting, is appropriate. Once a company
has been engaged for a number of years in reporting under the Exchange Act, and particularly when
that company is widely followed by analysts, the existing reporting requirements will present a very
thorough picture of the company to investors. We believe that risk factor disclosure would not help
Securities Act Proposals
Delivery of Preliminary Prospectus Information. The Release proposes to mandate
delivery of a securities term sheet or a preliminary prospectus to "each person offered securities" and
that this information should be sent so as to arrive prior to the time that "the investor makes a binding
For Form B issuers (a designation for which NIC and NFC would currently qualify
and which we are assuming for purposes of this comment letter will also be available for asset-backed
securities registrations by NFC's special purpose subsidiaries), it does not appear that there is any
minimum time period which must elapse between delivery of the term sheet or preliminary prospectus
and the sale to an investor. However, the need to file a Form B registration statement or a post-effective amendment could extend the period of time between the launch of an offering and the time
that the sale can be confirmed. We are concerned about the delay that this requirement will
introduce, compared to the ability of issuers under the existing regime to sell securities (particularly
investment grade debt securities) on a very expedited basis. Proposed Rule 172 will introduce delays
into the process, and that will increase risk of execution, which will likely result in greater spreads
to compensate investors or greater underwriting fees to compensate underwriters for taking this
The requirement that every offeree receive this information and that it be sent prior
to the time that investors make binding investment decisions seems to us to be both internally
inconsistent and problematic. First, we do not understand why the rule initially focusses on offerees,
but then switches to investors. We do not understand why the SEC would require such a strict
standard as every offeree for delivery of this information; we believe that the more appropriate
standard is one comparable to existing Rule 15c2-8, under which only those persons expected to
purchase in the offering are required to receive information. Second, and perhaps more
fundamentally, we are troubled by the requirement for physical delivery to these investors; it seems
to us that a better approach (or, perhaps, an alternative means of "delivery") would be to make
investors aware of the website from which such information could be obtained. Third, we are not
certain what the Proposal means by requiring delivery prior to the time that the investor makes a
"binding investment decision." Does that mean that the "final" term sheet or prospectus, including
pricing information, must be included in the information that is delivered? Does that mean that an
investor cannot "circle" an investment prior to that time, or simply that a confirmation of sale cannot
be sent until that information is delivered?
Exxon Capital Repeal. The Proposal indicates that the SEC would repeal the Exxon
Capital line of no-action letters if the Proposal is adopted. The Proposal suggests that the ability of
large, seasoned issuers to register on Form B, and the ability of small, unseasoned issuers to register
on Form B sales made solely to QIBs, should be adequate substitutes for Exxon Capital exchanges.
We disagree with the SEC's view on these substitutes, and we believe it is
inappropriate to repeal the Exxon Capital no-action letters. We note that the Exxon Capital type
transactions effected by NFC in the recent past were done at a time that NFC was not investment
grade and would not otherwise have qualified for the use of Form B, so we are quite sensitive to the
situation in which Form A issuers could find themselves.
Fundamentally, the Proposal cites no reason why the Exxon Capital transactions
should be outlawed. These transactions are almost entirely effected with institutional investors, and
they have resulted in a large and active market in which the securities ultimately are registered. If the
result of Exxon Capital repeal is to drive these transactions back into unregistered offerings, then the
market will have taken a large step backwards.
Indeed, it seems to us quite likely that the repeal of Exxon Capital would not result
in more public offerings. For Form A issuers, we do not believe the QIB-only offering will be
attractive. It seems to us that a "public offering" in which the securities are required to "come to rest"
with the investors is at best a contradiction in terms. At worst, it seems to re-introduce the extremely
problematic "presumptive underwriter" doctrine that the SEC had seemingly eliminated in 1983 in
the American Council of Life Insurance no-action letter. We believe that QIBs would not wish to
purchase securities under this type of provision, and we believe that issuers would be very concerned
about possible retroactive loss of Form B eligibility due to an investor's subsequent resales being
deemed a "distribution."
Form B Disqualifications. The SEC has proposed to exclude various categories of
issuers from eligibility for the use of Form B for registered public offerings, which provisions are
colloquially referred to as the "bad boy" provisions. We are principally concerned about the third and
fourth categories of issuers that you identified, which include the following issuers:
We believe that these Form B disqualification provisions are draconian responses to
a relatively minor problem. We are particularly concerned about the last two bullet points identified
above. The disqualification of a registration statement on Form B because the issuer selected an
underwriter that, unbeknown to the issuer, had been a bad boy could cause grave problems for an
innocent issuer (and we note that there is no exception in this proposal for issuers who have made
a good faith effort to ascertain that their underwriters are not bad boys). Given the tremendous scope
of activities and size of the major underwriting firms, we are somewhat concerned that almost any
such firm could be disqualified under this rule. In this respect, we note that the cross-referenced rule
in which these bad boy infractions appear, Section 15(b)(4)(B) of the Exchange Act, the SEC must
issue an order following the occurrence of a specified activity in order to limit the actions of an
underwriter. In this proposal, by contrast, the impact seems to be automatic.
The final grouping, which is of issuers who have failed to resolve comments with the
SEC on Exchange Act reports, also troubles us. This provision would seem to give SEC examiners
a substantial degree of leverage, beyond their current authority, to insist on adherence to their views.
We fear that many issuers would be intimidated by an examiner's ability to cut off Form B
registration. Although we have not had and do not anticipate having substantial disagreements with
the SEC staff over Exchange Act reporting issues, we are aware of other issuers that have had such
disagreements, including in some instances where we believe that the SEC staff was taking
unprecedented positions on issues. Accordingly, we oppose this type of disqualification from Form
Asset-Backed Securities. The Proposal acknowledges that Form A and Form B, as
proposed, do not contemplate offerings of asset-backed securities, and the Proposal solicits comments
regarding the treatment of asset-backed securities ("ABS") under the new regime.
Preliminarily, we wish to note that we believe it is imperative that the SEC take action
to clarify many unresolved questions regarding ABS under the securities laws. ABS practice seems
to have developed in large measure through informal interaction between the SEC staff and ABS
practitioners and issuers. However, only a very few of the rules are in writing; the rest are unwritten
and, as a result, unprovable. Such a process does not promote consistency and predictability. As a
consequence, registrants are uncertain how to approach many issues.
We strongly believe that the SEC should permit the ABS market to continue to
develop without major regulatory impediments or significant changes in current practices. The
actions of the SEC in 1992, both in adopting Rule 3a-7 under the Investment Company Act and in
permitting shelf registration for ABS, were extraordinary and beneficial. As a result of Rule 3a-7,
many more asset classes could be sold in public offerings than had previously been the case. As a
result of shelf registration, the ability to execute transactions on a timely basis was tremendously
enhanced. The rapid growth of the ABS market since then is testimony to the SEC's leadership in
this important sector of the capital markets.
The ABS market has also been a model in terms of the performance of the issued
securities. Downgrades of outstanding publicly issued ABS are very rare, and defaults are almost
non-existent. With the type of track record that the ABS market has posted, it should not be the
subject of a major regulatory retraction.
However, we recognize that the SEC does not wish to leave the ABS market as a
completely unregulated marketplace. We believe that prudent, limited oversight is both appropriate
and beneficial, and that the SEC should establish standards for the registration of ABS that will be
clear and appropriate.
In terms of the relationship of the ABS regime to the registration provisions in the
Release, we offer the following thoughts:
We appreciate the opportunity to comment upon the Proposal. If you have any
questions, please do not hesitate to call the undersigned, at (312)836-2157, William W. Jones,
General Counsel of NFC, at (847)734-4465, or our outside counsel, Kenneth P. Morrison of Kirkland
& Ellis, at (312)861-2347.
Very truly yours,
/s/ Steven K. Covey
Steven K. Covey