Linda L. Rittenhouse
Vice President, Advocacy,
Legislative & Regulatory Affairs
Tel: (804) 963-6828
Fax: (804) 980-9730
Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W., Stop 6-9
Washington, D.C. 20549
June 30, 1999
Re: The Regulation of Securities Offerings
--File No. S7-30-98
Dear Mr. Katz:
The Association for Investment Management and Research (AIMR)1 is pleased to comment on the Securities and Exchange Commission’s (SEC) proposals to modernize and clarify the regulatory structure for offerings under the Securities Act of 1933 (the Aircraft Carrier Proposal). AIMR’s Aircraft Carrier Subcommittee2 and the Advocacy Advisory Committee3 (collectively, the AIMR Committees) offer their comments below.
First, the AIMR Committees provide a brief overview of AIMR’s past involvement in the move toward a "company-based" registration system and voice their strong support of the overriding goals of the Aircraft Carrier Proposal. In Parts I-IV, the AIMR Committees provide specific comments on aspects of the Proposal relating to the following areas: (i) eligibility requirements; (ii) periodic reporting; (iii) communications around the time of offering; and (iv) prospectus delivery requirements. Finally, the AIMR Committees offer additional comments on the need for guidance from the SEC in areas related to, but not directly addressed by, the Aircraft Carrier Proposal.
Background and General Comments
AIMR has long-recognized the limitations of the existing public offering system. In 1995, the AIMR Task Force on Capital Formation was formed to work with the SEC in its effort to revamp the registration system, including providing several comment letters to the Wallman Capital Formation Advisory Committee4 and meeting with SEC officials to discuss ways to improve the registration system. The AIMR Committees appreciate the opportunity to continue to participate in this process through its comments on the Aircraft Carrier Proposal, the most recent step in the reformation of the registration system.
Many aspects of the Aircraft Carrier Proposal seek to improve the timeliness and quality of information provided to investors, securities analysts, investment managers, and other market participants. In particular, one of the express goals of the Proposal is to enhance the level and reliability of the disclosure provided to investors in the secondary markets on an ongoing basis, not just at the time of an offering. In this effort to increase the flow of information needed by investors and market participants, the Proposal places great emphasis on the enhanced disclosure that would be required as part of an issuer’s periodic reports.
In addition, under the Proposal, market analysts and market participants, in general, would be provided with information on a basis designed to counter the incidence of selective disclosure. In essence, information would be disseminated to the market on a "real time" basis, with the ultimate goal of creating a "level playing field" among market participants.
The AIMR Committees support the Aircraft Carrier initiatives that will measurably improve the quality and timeliness of the information provided to market participants. The range and number of problems that result from delays in the public offering process and the costs of maintaining the current transaction-based system confirm the need for a new approach. However, the AIMR Committees strongly believe that increased flexibility in the offering process cannot come at the expense of sacrificing important investor protections. To achieve a balance between issuer flexibility and investor protections, the AIMR Committees provide the following comments and recommendations on the Aircraft Carrier Proposal.
I. Eligibility Requirements
Under the proposed system, issuers would use Form A or Form B5 depending on their "seasoned" status. In this regard, the AIMR Committees believe that the flexibility afforded seasoned issuers under the Proposal should be a privilege, not a right, and should be based on the presumption that a seasoned issuer presents a reliable body of information and experience that qualifies it for the added flexibility. Thus, the criteria for determining "seasoned" status must be closely correlated with a result likely to maintain adequate investor protections.
The SEC has proposed that issuers may use Form B if they have reported one complete fiscal year and filed an annual report under the Securities Exchange Act of 1934 (Exchange Act) and maintain either (1) a public float of $75 million or more and average daily trading volume in the United States of at least $1 million, or (2) a public float of $250 million. The AIMR Committees do not support the levels of the proposed minimum public float and average daily trading volume requirement on the basis that they are too low to adequately measure a "seasoned" issuer. Furthermore, the AIMR Committees believe that one year of public reporting does not provide the market with sufficient information about the issuer, particularly given the low float and trading volume requirements.
1. Minimum Float and Trading Volume
The AIMR Committees do not suggest that the minimum float requirement be eliminated, but that it should be increased significantly, particularly in light of the rapid movement toward the 24-hour trading of equities. The rationale behind allowing Form B registration is that large, seasoned issuers have provided substantial information on operations and have a certain experience "track record." However, under the proposed threshold levels, smaller companies arguably could manipulate their public float and trading volume figures to meet the Form B eligibility requirements, while skirting the intention of the Form. The AIMR Committees agree that the ability to use Form B should apply only to those issuers who are the largest and most seasoned in the marketplace or have otherwise demonstrated that they can be entrusted with the concomitant flexibility and access to the marketplace.6
The AIMR Committees recognize the SEC’s goal to expand the public markets by easing registration requirements so that more issuers can enter the market. Such flexibility allows more companies to make public offerings, which in turn provides more investment opportunities for investors. However, adequate limitations must be in place to ensure that only those companies providing sufficient information to the market are allowed to benefit from the ease and flexibility offered by a Form B registration. The AIMR Committees suggest establishing a tiered approach to the Form B eligibility requirements.
A tiered approach would require a higher minimum float and trading volume for companies with fewer years of financial reporting and a lower minimum float and trading volume for companies with more years of financial reporting. Such an approach furthers the goal of providing the market with adequate information about issuers. In an efficient market, investors will have adequate information about seasoned companies, particularly those with several years of financial reporting. When a company has fewer years of financial reporting, a high minimum float and trading volume would serve as an adequate, though less desirable, indicator of seasoning. A high float and volume is evidence that adequate information about the issuer has been made available to the market through other means. As discussed in the next section, three years of financial reporting should be the minimum requirement in the tiered approach.
2. Financial Reporting Requirement
The AIMR Committees strongly oppose having only one annual report filing as one of the minimum requirements for determining a "seasoned" issuer. One annual report filing does not provide enough historical information about the issuer’s performance and its management’s ability to oversee its operations in which to properly evaluate and assess the investment and make an informed decision.
The AIMR Committees believe that the number of years of financial reporting by an issuer should be the primary criteria for determining Form B eligibility. The AIMR Committees believe that in order to register on Form B, an issuer should have filed at least three consecutive years of annual reports with the SEC, which would reflect five years of audited financial information. In addition, the Committees believe that Form B issuers that are involved in any unresolved and outstanding issues, or investigations with the SEC regarding these reports or the reported periods should not be afforded the privilege of expedited access to the capital markets.
The AIMR Committees also believe that the accessibility of information to investors should be another factor in determining an issuer’s eligibility to use Form B. Truly seasoned issuers should post their financial reports on the Web, offer information via fax-on-demand, or have an investor relations service that provides timely information to investors. Given the existing advances in technology, there is little reason that all institutional and individual investors should not have equal access to issuer press releases, public statements, and investor information conference calls. The AIMR Committees believe that easily accessible company information, including timely financial reports, is important for the early dissemination of company information to investors.
3. Additional Eligibility Criteria
The AIMR Committees believe that the following additional criteria would be appropriate for determining Form B eligibility:
For example, the AIMR Committees believe that any SEC enforcement actions within the past three to five years against a company should disqualify it from enjoying the speed and flexibility of the proposed registration process. On the other hand, the AIMR Committees do not believe that the number of analysts that follow a company is an appropriate factor in determining eligibility. Not only is such an approach easily manipulated, it also would be difficult to decide which analysts to count, especially for international issuers.
Under the Proposal, Form A registration would be available for companies ineligible to use any other form. These registrants would typically be smaller issuers and larger unseasoned issuers. Form A issuers would generally be subject to pre-effective review and would not be allowed to incorporate by reference, unless they meet certain "seasoning" requirements. Seasoned Form A issuers would enjoy much of the same registration flexibility that Form B issuers have under the Proposal.
Form A issuers would be considered seasoned if they have been a reporting company for 24 months and have a public float of at least $75 million or filed two annual reports. In accordance with its discussion above on Form B eligibility seasoning requirements, the AIMR Committees believe that the proposed requirements are not sufficient for deeming an issuer to be seasoned. Instead, the AIMR Committees suggest a tiered approach that parallels the Form B approach. Similarly, three consecutive years of annual reports, reflecting five years of audited financial information should also be the baseline requirement to be considered seasoned. The proposed flexibility in the registration process for seasoned issuers poses a risk of inadequate disclosure to the market. Therefore, the requirements to be considered a seasoned issuer should be set very high to ensure that adequate information is provided.
The Aircraft Carrier Proposal places more reliance on the periodic reports filed by issuers to counterbalance the increased flexibility given to these issuers when making public offerings. The AIMR Committees strongly support many of the proposed changes to the periodic reporting system, but believe additional requirements should be included in the proposal to improve periodic reporting and provide better investor protections. Additionally, the AIMR Committees believe that all issuers (both domestic and foreign) should be required to provide the same information within the same filing deadlines.
Moreover, the AIMR committees believe that periodic reports must be accessible on an equal basis to all investors. Currently, there is a lag-time between when filed periodic reports with the SEC are available on the its web site versus availability through other subscription data-retrieval services or other on-line services. The AIMR Committees recommend that this time difference be eliminated to disseminate this public information fairly and equally to all users. Until the timing difference is eliminated, the AIMR Committees suggest that alternative sources for free information (such as FreeEDGAR) be provided to the public on the SEC’s web site, possibly under "Other Sites to Visit." Providing information that has been filed with the SEC to investors for free should be ubiquitous as "free quotes" or easy-to-use trading systems. Recent studies indicate that half of the North American population over age 16 is now on the Internet and over half of them "go online" in search of financial information.
The SEC proposes to allow Form B issuers and seasoned Form A issuers to incorporate by reference their previously-filed Exchange Act reports into their registration statements. The AIMR Committees support this approach when the reports are readily and widely available. However, the AIMR Committees believe that issuers wishing to use this flexibility should be held to certain additional requirements which serve the interests of investor protection and maintenance of confidence in the U.S. capital markets. The following conditions should be required for issuers who choose to incorporate by reference:
Where the SEC does allow incorporation by reference, the AIMR Committees urge the SEC to require the issuer to provide a short summary of the information contained in the referenced documents and that the filing date of the report should be included in the preliminary prospectus or the term sheet. Consequently, investors would be provided timely and salient points regarding incorporated-by-reference information even without the ability to immediately access the actual filed report.
While technology to disseminate information has advanced considerably, the AIMR Committees recognize that not all investors have the ability to access documents electronically. Therefore, the AIMR Committees believe that simply making reference to certain documents may not result in investors receiving all the information they need to make informed investment decisions. The AIMR Committees recommend that the SEC make every effort to ensure that investors are given an ability to obtain information through other means that are equally as accessible as the Internet, such as: fax-on-demand services or through direct contact (e.g., investor relations personnel of the issuing company).
The SEC has proposed accelerating the deadlines for filing quarterly and annual reports to 30 days and 60 days, respectively, following the quarter and fiscal year periods. In addition, the deadlines for reporting material events on Form 8-K have been accelerated to one to five calendar or business days depending on the type of event reported, except when reporting selected financial data from quarter and fiscal year end periods. This reporting would be due on the earlier of: 1) the date the company issues a press release containing earnings information; or 2) 30 days after the end of the first three quarters or 60 days after the end of its fiscal year.
The AIMR Committees strongly support the proposed filing deadlines for the various periodic reports. In the current fast-paced marketplaces, financial and non-financial information is most useful when it is disseminated quickly and widely. Additionally, such dissemination of information promotes efficient allocation of capital within these marketplaces. Moreover, the larger, more seasoned filers should be required to provide this information on a more timely basis, especially since they will have more flexibility and timely access to the markets as Form B filers.
Currently, the Exchange Act (Rule 12h-3 under Section 15(d)) permits a company to suspend its reporting to the SEC if the number of its record holders falls below 300. The AIMR Committees believe that this "300 holder rule" is obsolete because most stock is held in street name rather than the beneficial owner’s name. The practice of holding securities in the street name (name of the broker or custodian) is prevalent because it facilitates the transfer of shares at the time of the sale. Consequently, publicly traded companies that have a substantial number of beneficial owners, but less than 300 holders of record, are exempt from filing periodic reports with the SEC.
Bondholders are also seriously affected by the "300 holder rule." As an illustration, an enterprise that has both common stock and debt issues publicly traded and outstanding decides to go private through a leveraged buyout or is acquired by a foreign enterprise which is not required to file under the Exchange Act. In these cases, the enterprise’s common stock is no longer publicly traded and thereby, it is not required to file periodic reports even though debt issues have not been retired or are still publicly traded. As a result, the bondholders’ interests have been greatly compromised because they are unable to monitor the performance of the enterprise and anticipate issues that may significantly impact the value and liquidity of their holdings.
The AIMR Committees believe that any benefit of this "300 holder rule" is outweighed by the need for information. Bondholders, as well as equity shareholders, need to have timely, reliable, and relevant information in order to evaluate companies’ performances and make appropriate investment decisions. This rule can impair the liquidity of the debt securities subject to it because it is more difficult to price and trade without public information for such securities. Furthermore, this rule does not serve the interests of investors or promote an efficient capital market. The AIMR Committees urge the SEC to eliminate such an exemption from filing periodic reports.
Under the Proposal, all companies would be required to disclose risk factors in Exchange Act periodic reports, which are currently disclosed in Securities Act registration statements. The AIMR Committees believe that risk factors disclosure provides investors or users of this information with business and market elements that may significantly affect the viability and financial position of an enterprise. This information is essential for projecting cash flows and, in turn, assessing the value of an enterprise. Thus, the AIMR Committees strongly support the inclusion of risk factors into Form 10-K and that any material changes in these factors will be reported quarterly in Form 10-Q. Additionally, the issuer should use plain English (as defined by the SEC) to explain the specific risk factors that could have significant affect on its financial position and operations.
The AIMR Committees believe that the Proposal needs to provide better guidance regarding materiality and the risk factors that should be included in the periodic reports and registration statements. This guidance should be codified into the Exchange Act. The AIMR Committees believe that the SOP 94-67 prepared by the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants provides such guidance in disclosing certain significant risks and uncertainties. Some risk factors8 that should be disclosed include:
The SEC proposes to expand the material events that must be disclosed on Form 8-K. The following events are proposed: 1) material modification to the rights of security holders; 2) material defaults on senior securities; 3) certain auditor modifications; 4) departure of the CEO, CFO, COO, President or other key personnel; and 5) change in the company’s name. Investors need timely and relevant information that has a significant or potentially significant effect on an enterprise’s operations and financial position. Moreover, investors use such information to properly assess and value the issuer’s offering and any current investments in the issuer.
The AIMR Committees strongly support the expansion of material events that must be reported on Form 8-K. Regarding the proposed reporting of material defaults on senior securities, the AIMR Committees believe that all defaults are significant enough to require disclosure on Form 8-K and that defaults on all securities, not just senior securities, should be required.
In addition to the proposed material events, the AIMR Committees suggest that the following events should require disclosure on Form 8-K:
Furthermore, the AIMR Committees believe that there should be better guidance and definition for determining material events that should be reported so there is consistent application as well as adequate transparency in the market.
Although the Proposal requires that more timely financial statements be provided by foreign private issuers when registering with the SEC, these issuers are still permitted to make offerings based on information that may be extremely outdated. Given the increasingly rapid changes in today’s business world, investors need timely financial statements to assess an enterprise’s financial condition and make appropriate investment decisions.
If foreign issuers want access to particular capital markets, the AIMR Committees believe that these issuers must provide similar information to what is required of other market participants (i.e., domestic issuers). The U.S. market has consistently shown that it wants transparent, comparable, and timely financial information. Therefore, the AIMR Committees strongly recommend that the SEC require the same filing deadline and reporting requirements for foreign private issuers as for domestic issuers. This implicitly enhances domestic firm competitiveness through consistent disclosure and regulatory compliance.
Over the past several years the AIMR Committees have observed several situations where the financial position of foreign enterprises has deteriorated significantly over short-time periods. If investors are forced to rely on information that is 12 to 15 months old, they must base their investment decisions on outdated and irrelevant data and therefore, are likely to misjudge both the viability of the issuer and the value of its securities. As a result, inappropriate investment decisions are frequently made.
The Proposal will subject financial information required in Part 1 of the quarterly reports, Form 10-Q and Form 10-QSB, to the liability of Section 18 of the Exchange Act. Section 18 provides a remedy for those relying on false or misleading statements made in any application, report, document, or registration statement filed with the SEC under the Exchange Act. The AIMR Committees support the proposal since investors will be expected to place more reliance on the periodic reports filed by an issuer under the proposed registration system, which provides more flexibility.
The SEC has proposed expanding the number of signatures required on Exchange Act reports to improve the quality of disclosures to investors. It has proposed that the principal executive officers and a majority of the board of directors must sign annual and quarterly as well as Securities Act registration statements. The AIMR Committees support the certification of periodic reports by the company’s management and board of directors. As previously mentioned, investors need reliable information and assurance that the company’s management and board of directors have reviewed the information provided to the public.
As part of its Aircraft Carrier Proposal, the SEC is proposing to relax certain of the existing restrictions on communications around the time of a public offering, in the attempt to provide investors and market participants with greater access to more timely and meaningful information. The AIMR Committees strongly support initiatives to disseminate more meaningful information to investors earlier in the investing process. They also strongly support measures to reduce the occurrence of selective disclosure in the investment community. However, the Committees question the basis for several of the distinctions drawn by the Proposal regarding these communications. In addition, the Committees urge the SEC to clarify certain aspects of the Proposal to ensure uniformity by issuers seeking to comply.
1. Form of Communications
Under the Proposal, all restrictions would be lifted on communications by Form B issuers, regardless of whether they are oral or written. In addition, all companies would be able to engage in free writing if they comply with certain conditions, including that they file the free writing materials with the SEC. In all cases, the materials would not have to conform to the informational requirements of Section 10 of the Securities Act.
The AIMR Committees strongly support initiatives to provide more and better information to investors and market participants during the offering process. To that end, the Committees favor the lessening of restrictions that would allow issuers to leave behind materials used during "road shows," even though these written materials would have to be filed.
The AIMR Committees are aware of arguments that the proposed filing requirements for free writing materials will result in the elimination of the use of written materials in road shows. The AIMR Committees do not believe this argument should be afforded much weight. First, the Committees believe that parties who want to use written materials during road shows should not be allowed to evade the filing requirements applicable to other written materials. Second, materials in road show presentations are used by issuers to promote their offerings. Thus, given the substantial benefit derived by issuers from the use of road show materials, the AIMR Committees question the argument that filing the materials will impose such a burden as to result in the elimination of their use.
Moreover, in the unlikely event that issuers should choose not to use road show materials, one could argue that the result may be a more level playing field, in terms of information provided investors. Given that road show materials primarily are for the use of institutional investors, the use of them, particularly without the proposed filing requirements, would result in a system where the retail investor is not privy to the same information on a same-time basis. Given the speed with which today's investment decisions are made, such an approach would result in a tiered information flow -- contrary to the Proposal's express purpose to provide all investors more meaningful information on an equal basis.
In furthering the goal of providing meaningful information to investors, the AIMR Committees also recommend that the SEC require disclosure of the relationship among the issuer, the author, and the distributor of the free writing materials. While the relationship may be obvious to some in the offering process, it may not be known to the smaller institutional or retail investor. Thus, in the spirit of full disclosure, the Committees urge the providing of relevant information that would allow all investors to assess the content of certain promotional materials.
The AIMR Committees also question the distinction being drawn between oral and written materials for purposes of the proposed filing requirements, regardless of the materiality of the communication. Apart from written materials, the impact of oral communications may also have a significant impact on market conditions, the value of the stock in question and an investor’s investment decisions, particularly in an environment anticipated by the Aircraft Carrier Proposal where transactions may occur quickly. The AIMR Committees therefore urge the SEC to consider mandating the same materiality standard for oral communications as applicable to forward looking statements or, at a minimum, to require updates of oral communications found to be erroneous or in need of additional information.
The AIMR Committees believe that this greater focus is particularly needed to address practices currently resulting in selective disclosure. For example, certain conference call discussions which are not open to the public may raise issues and impart information that would be significant to potential investors, and to the market, in general. The Committees believe that this information should be made available to all investors, either through posting either a key-points summary of the call or the transcript on the issuer’s website; this posting should occur within 24 hours after the call. In fact, some companies already make replays of conference calls available to the public as a matter of course. The Committees believe this is one of the most direct and efficient ways of imparting information to the public on an impartial and timely basis.
2. Accessibility of Communications
The AIMR Committees generally support the efforts to streamline the requirements on issuers, provided that investor protections remain intact. Along those lines, the Committees support the overall goal to reduce the amount and types of documents involved in the public offering process by allowing issuers to incorporate by reference information contained in other documents.
In essence, the Aircraft Carrier Proposal seems to contemplate a continuous disclosure system, where a range of updated information is continually provided. It follows that to truly create a "level playing field" among market participants and ensure that all investors can obtain the same information on which to base their investment decisions, it is important that all information relating to an issuer and its offering be readily accessible and transparent.
While the information that can be incorporated by reference under the Proposal will exist in other publicly available documents, accessing the particular documents may be relatively time-consuming, particularly for the smaller investor.
Thus, the AIMR Committees urge the SEC to require issuers to employ the mechanisms that will allow investors to immediately access important information. In particular, issuers should provide electronic hyperlinks to documents containing the information that is being incorporated by reference so that investors can immediately access the referenced information. In addition, requiring issuers to provide their web site and e-mail addresses offer additional mechanisms for helping investors obtain relevant information on a timely basis. The AIMR Committees also recommend that free writing materials be filed in a format that will allow investors to access them electronically.
3. Clarification of Communications
The AIMR Committees suggest that the SEC provide clarifications in two areas relating to issuer communications. First, under the Proposal, an issuer must file communications deemed to be part of a prospectus. The Committees believe a more-detailed discussion on the communications that will be subject to this requirement is needed. Second, the Proposal requires the filing of free-writing materials. The AIMR Committees suggest that the SEC clarify that for these purposes, free-writing materials include any materials used as a selling document, including research by the underwriter.
As proposed, issuers registering offerings other than on Form B would be subject to restrictions on communications during the 30-day period prior to filing a registration statement. However, communications constituting factual business communications and regularly released forward-looking information would be exempt from the restrictions.
The AIMR Committees support the proposed exemptions from restrictions on communications for factual business communications and regularly released forward-looking information that are issued during the pre-filing period. However, the Committees encourage the SEC to clarify the term "customarily released" for purposes of the exemption allowed for regularly released forward-looking information. Under the proposed safe harbor, certain forward-looking information is covered, including projections of the issuer’s revenues and other financial items; statements about plans and objectives for future operations; statements about the issuer’s future economic performance; and relevant underlying assumptions. In order to be covered, the information must have been "customarily released" by the issuer in its ordinary course of business for at least the last two fiscal years. The AIMR Committees urge the SEC to specifically add to this list, or at least make clear, that comments regarding earnings expectations will also fall within this safe harbor.
The Proposal also would merge current Securities Act Rules 135 and 135(c) into a single rule that would provide issuers a safe harbor for limited notice of their proposed offerings or business transactions. The new Rule 135 would allow an issuer to issue a statement to correct inaccurate accounts or misstatements about its offering. While the AIMR Committees generally support the proposed Rule, it takes exception with the provision that would allow an issuer to correct inaccurate information about its offering. Instead, the Committees believe that the issuer should be required to correct the information, and urge the SEC to make this mandatory.
Under the Proposal, existing exemptions would be broadened to allow the publication of research in more instances around the time of an offering. With respect to Rule 138, which allows the publication of research addressing another type of the issuer’s securities, the AIMR Committees believe further treatment is needed. While the Committees understand the rationale underlying the Rule, they believe that in market reality, certain types of research that would be allowed by the Rule may significantly affect the value of the offering. For example, the publication of research highlighting the attractiveness of a company’s debt often has a significant impact on that company’s stock prices. The AIMR Committees therefore urge the SEC to take into consideration such situations and ramifications in formulating the final Rule.
Proposed Rule 139 would delete the "reasonable regularity" provision of the current Rule, which allows the broker or dealer participating in a distribution to publish research on the issuer or any class of its securities, if the research is in a publication distributed with reasonable regularity in the normal course of business. The Committees recommend replacing the reasonable regularity provision of the current Rule with the requirement to file with the SEC research reports issued at the time of the offering.
The AIMR Committees strongly support the proposed expansion of the existing safe harbor to all issuers, regardless of size or reporting history. In particular, allowing an analyst to provide a more favorable recommendation than that provided in the past is not only a realistic response to today’s market, but will result in providing important information to investors. When coupled with the requirement that the analyst also supply the last two recommendations it published when not involved in the distribution, when it changes its recommendation to a favorable one, the proposed Rule appears to provide the appropriate safeguards to ensure investor protection.
The AIMR Committees also support the proposed amendments to Rules 138 and 139 that will allow research to be published without violating the Regulation S prohibitions or Rule 144A requirements. By lifting these restrictions, independent analysts will have access to more complete information at an earlier phase in the disclosure process.
The SEC proposes changes to the prospectus delivery requirements that would refocus the timing of information delivery so that investors would have a sufficient amount of time to consider the prospectus disclosure before making their investment decisions. The AIMR Committees strongly support providing information about issuers to investors in an amount of time that would be useful in the investment decision making process.
The SEC proposes to mandate the delivery of transactional information before the investment decision is made. Two alternative approaches are presented. The AIMR Committees support the second alternative, which requires delivery of a preliminary prospectus containing all transactional disclosure that is currently required by Forms S-3 and F-3.
The AIMR Committees believe that a prospectus continues to be a meaningful tool for delivering information to facilitate an investment decision. Requiring delivery of this information, which is contained in the final prospectus, only at the confirmation of sale does not provide investors with the information they need to make an informed investment decision. Investors will have made their investment decision by the time the sale is confirmed. Therefore, the AIMR Committees supports mandating the delivery of this information before the investment decision is made.
The AIMR Committees do not support the first alternative, which would require the delivery of a Term Sheet, because the Term Sheet would not provide investors with adequate information.9 The AIMR Committees believe that the minimal amount of information required in the Term Sheet would be sanitized and, therefore of little use to investors in the investment decision making process. The AIMR Committees support the second alternative because it mandates the disclosure of an amount of information that investors need in order to make an informed investment decision. Should the SEC choose to adopt the first alternative, then the AIMR Committees suggest that the SEC require the Term Sheet to be hyperlinked from the issuer’s Web site.
The SEC proposes that the preliminary prospectus be delivered to investors within a certain number of days. The AIMR Committees believe that the number of days should be changed from calendar days to business days to ensure that investors have an adequate amount of time to review the information.
If the SEC changes the requirement to business days, then the AIMR Committees believe that requiring delivery of the preliminary prospectus at least three days before pricing is adequate. The market is already well informed about seasoned issuers; therefore, the AIMR Committees do not believe that additional time is necessary. However, the AIMR Committees believe that requiring only 24 hours notice before pricing of material changes is insufficient. The AIMR Committees suggest requiring issuers to disseminate to investors material changes to the transaction or to company information in a manner designed to arrive at least three days before pricing, which would provide a sufficient amount of time for investors to absorb information that would affect their investment decision.
The SEC proposes to consider whether an issuer has complied with its prospectus delivery obligations when evaluating a request for acceleration of the effectiveness of a registration statement. The AIMR Committees agree that an issuer should be made accountable for delivery of information to investors. However, the AIMR Committees believe that the SEC should further clarify the factors it would consider in granting a request for acceleration. The SEC is also encouraged to indicate how issuers would demonstrate that they had met their delivery obligations. The AIMR Committees do not believe that effectiveness should be delayed when the issuer has met its regulatory requirement for prospectus delivery. The AIMR Committees suggest that the SEC require from issuers a statement of compliance as sufficient evidence that the issuer has met its prospectus delivery obligation.
The AIMR Committees support initiatives of the Aircraft Carrier Proposal that will improve the quality and timeliness of the information made available to market participants. However, the Committees strongly believe that the increased flexibility contemplated by the Proposal must be carefully balanced against important investor protections, and urge the SEC to consider the Committees’ recommendations addressed above in reaching that balance.
The AIMR Committees greatly appreciate the opportunity to comment on this important Proposal. If we can provide additional information or answer questions related to the positions taken in this letter, please do not hesitate to contact us.
Lee N. Price, CFA Linda L. Rittenhouse
/S/ Lee N. Price, CFA /S/ Linda L. Rittenhouse
Chair Vice President
AIMR Advocacy Advocacy, Legislative and Advisory Committee Regulatory Affairs
Philip Barton, CFA
/S/ Philip Barton, CFA
cc: Advocacy Distribution
\\NT1\OGC$\Advocacy\Committee\A A C\Aircraft Carrier Proposal\Aircraft Carrier Comment2 (version 1).doc
Lee N. Price, CFA Linda L. Rittenhouse
/S/ Lee N. Price, CFA /S/ Linda L. Rittenhouse
Chair Vice President
AIMR Advocacy Advocacy, Legislative and Advisory Committee Regulatory Affairs
Philip Barton, CFA
/S/ Philip Barton, CFA
cc: Advocacy Distribution
\\NT1\OGC$\Advocacy\Committee\A A C\Aircraft Carrier Proposal\Aircraft Carrier Comment2 (version 1).doc
07/06/99 1:20 PM by Linda Rittenhouse
-- The Association for Investment Management and Research is a global, nonprofit organization of more than 34,000 investment professionals from 70 countries worldwide. Through its headquarters in Charlottesville, Virginia, and more than 80 affiliated societies and chapters throughout the world, AIMR provides global leadership in investment education, professional standards, and advocacy programs. -- Drawing from AIMR's Advocacy Advisory Committee and other industry leaders, the Aircraft Carrier Subcommittee was formed specifically to address the SEC's proposal on behalf of the AIMR membership. -- The Advocacy Advisory Committee coordinates the priorities of AIMR's Advocacy committees and reviews major new regulatory, legislative, and other developments affecting AIMR's global membership. -- AIMR letters to Jonathan G. Katz dated September 8, 1995; September 27, 1995; and October 29, 1996. -- Form C, which would be used for business combinations and exchange offers, is the subject of a separate release, File No. S7-28-98, on which AIMR has already filed comments. (See letter of June 8, 1999 to Jonathan G. Katz from Philip Barton, CFA and Linda L. Rittenhouse). -- In addition to large companies, Form B could also be used for offerings to more sophisticated or informed investors by a smaller company, to qualified institutional buyers, to existing security holders, or with respect to non-convertible investment grade securities. -- Accounting Standards Executive Committee; American Institute of Certified Public Accountants; Disclosure of Certain Significant Risks and Uncertainties; Statement of Position 94-6; December 30, 1994. -- Id.; pp. 3-9. -- AIMR supported use of a Term Sheet when it was first proposed by the Wallman Commission, but modifies its opinion in this letter because the currently proposed registration structure is more complicated than the initial 1995 proposal and therefore requires additional disclosures not contained in the Term Sheet.