Stephen A. Wakefield
Senior Vice President and General Counsel
June 29, 1999
Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-6009
Re: File No. S7-30-98; Release No. 33-7606A Proposal to Amend The Regulation of Securities Offerings
Dear Secretary Katz:
The Southern Company is pleased to have this opportunity to comment on the proposal to amend the regulation of securities offerings (Release No. 33-7606A; File No. S7-30-98). We enthusiastically support the Commission's efforts to improve the registration system and to encourage better communications with investors.
Southern Company (NYSE: SO) is an international energy company with $35 billion in assets through regional utilities and operations around the world. We are the largest producer of electricity in the United States and one of the world’s largest independent power producers. Southern is the parent firm of Alabama Power, Georgia Power, Gulf Power, Mississippi Power and Savannah Electric. Through our Southern Energy, Inc. subsidiary, we supply electricity in 10 countries on four continents. We also provide energy-related marketing, trading and technical services and Southern LINC ® wireless telecommunications.
Southern has approximately 690 million shares of common stock outstanding that are owned by over 180 thousand record stockholders. Companies of the Southern system have publicly-traded preferred stock and trust preferred securities outstanding. As our business is capital intensive, we frequently access the capital markets to raise equity and debt. Our filings under the Securities Act of 1933 and the Securities Exchange Act of 1934 average one a week.
In our comments, the same numbering format of the release is used. We focused on the issues most important to us, and the lack of comments on other aspects of the proposals should not infer our concurrence. We would welcome the opportunity to comment further before any of the proposals is adopted.
Part V. Proposals Altering the Securities Act Registration Process
We generally support the proposed transformation from an "exclusive" prospectus to an "inclusive" prospectus approach for seasoned issuers. However, the proposed Form B registration statement affords little added benefit to issuers and investors over the current shelf registration system while imposing substantial new burdens upon issuers.
Part V. A. 1. a. Registration Statement Contents
The items required under either proposal encompass virtually all of the requirements of the current Form S-3. This proposal falls short of your stated objective of providing issuers more flexibility in crafting documents shaped by a particular offering to reduce boilerplate and omit non-material disclosure.
Part V. A. 1. b. Free Writing Materials
We support the proposal to allow free writing materials during the offering period and we agree that such materials should be freely available to all investors. However, we note that the requirement to file certain free writing materials, thus subjecting them to Section 12(a)(2) liability, will act to limit and restrict the amount of information that may otherwise be available absent such additional liability. We would appreciate clarification that an issuer would have no responsibility for free writing materials developed and distributed independently by third parties.
Part V. A. 1. e. Delayed Shelf Offering and Form B
The advantages of the proposed registration process over delayed shelf registration on Form S-3 are negligible for larger seasoned issuers who access the market frequently. The ability to "pay-as-you-go" or defer filing fees until take-down is a relatively small factor compared to market fluctuations, and the feature could easily be applied to the current delayed shelf registration system. We also believe that any market overhang effect on stock price is negligible.
We agree that investors should have access to adequate information about issuers when making investment decisions. Offerings by larger seasoned issuers need only be preceded by material and applicable items of transaction disclosure.
The current universal shelf registration system presumes that adequate information about the issuer is publicly available. Transactional disclosure of offering information may be filed within two business days after the earlier of pricing of the securities or first use of the supplemental prospectus. Requiring this disclosure to be made prior to first sale would unnecessarily delay medium-term notes and fully sold transactions.
Form B used for a universal shelf would necessarily include detailed descriptions of various possible securities currently contained in prospectus supplements filed with each takedown. This could greatly increase the transactional disclosure in the registration statement. The alternative would be to file amendments to the Form B to include transactional disclosure applicable to each takedown.
Additionally, an issuer who receives comments from the Staff on disclosure documents included by reference to a Form B registration statement would not be able to continue the current offering. Currently, an issuer who receives comments from the Staff on a Rule 424 prospectus supplement could continue offering the remaining securities from a prior takedown.
We believe that there would be a continued need for a delayed shelf registration system.
Part V. A. 2. g. Form B Disqualifications
While we appreciate the need to disqualify certain issuers from use of Form B, we are concerned about your proposal to disqualify an issuer that has failed to resolve the Commission's staff's comments on an Exchange Act report that the issuer would be incorporating by reference into its Form B. This proposal would quell legitimate disagreement with staff comments and impose tremendous pressure on the issuer to make concessions in the interest of expediency. If the "unresolved comments" provision is adopted, an issuer contesting such comments should be afforded an opportunity for demonstrating its good faith cooperation to resolve the matter before being precluded from use of Form B.
Part VI. Concurrent Exchange Act Registration
We support the proposal to permit concurrent Exchange Act Registration.
Part VII. Communications During the Offering Process
We support easing restrictions on communications during the offering process for larger seasoned issuers.
Part VII. A. 1. c. ii. (B) Regularly Released Forward-Looking Information
We support the safe harbor for regularly released forward-looking information. However, we believe that limiting the scope of the exemption to the type of information that the issuer customarily released in the ordinary course of business during the past two fiscal years may discourage issuers from expanding the scope of forward-looking information.
Part VIII. Prospectus Delivery
We gladly provide our investors free of charge copies of any publicly filed disclosure documents. An informed investor does not need a final prospectus to be delivered with confirmation of a sale.
Part IX. D. 3. a. and b. Disclosure Review by Independent Accountants and an Independent Qualified Professional
Additional scrutiny of disclosure documents by independent auditors or other professionals will not increase compliance with the regulations nor materially alter the content or quality of the disclosure. Issuers take seriously their disclosure obligations and liability.
Extending the scope of Rule 176 due diligence to include timely independent audits of quarterly reports and review of MD&A would increase issuers' costs without adding to the quality of such disclosure. We believe that having an independent professional review the annual report would also increase issuers' costs without adding to the quality of such disclosure. We also are concerned about qualification standards for independent qualified professionals and the general availability of those meeting such standards.
In both instances, the additional review and investigations would need to be performed while the issuer is gathering information and preparing the disclosure documents. The proposals appear to strive for more complete and thoughtful disclosure, in a more readable format, certified by more management and directors, and delivered to investors sooner. To also include assurances that the documents have been reviewed and audited by independent auditors, lawyers, and other qualified professionals implies to investors that they may rely upon the weight of the various "seals of approval" without having to read the document.
Part XI. Proposals Relating to Exchange Act Disclosure
We support enhancement of the quality and timeliness of periodic reports. However, proposals mandating additional requirements and adding layers of review while accelerating due dates will not necessarily improve the quality of disclosure; indeed, it could have the opposite effect.
Part XI. A. 1. Risk Factor Disclosure
We believe that risk factor disclosure should be consistent with the current standards. Any attempt to identify the most significant factors necessarily detracts from the other factors which, in hindsight, may prove to be significant. This reduces the effectiveness of the benefits to disclosure under the Securities Litigation Reform Act of 1996. The goal should be frank, clear, and understandable discussion of risks.
Part XI. A. 3. Treating Quarterly information as "Filed"
Applying Section 18 liability to financial statements and MD&A in quarterly reports would not enhance the quality or scope of disclosure.
Part XI. A. 4. Management Report to Audit Committee
Southern's Audit Committee oversees the Company's financial reporting and accounting practices. A written report of the procedures established to assure the accuracy and adequacy of disclosure documents would not necessarily improve the quality of the disclosure documents. Such report would be written to be suitable for filing as an exhibit. Any updating of the report would require the same level of scrutiny. The staff involved in the disclosure process would rely more heavily on the written procedures at the expense of the independent thought processes which enhance the preparation of disclosure documents. Thus, the report may hinder efforts to improve the thoroughness of the review process.
Part XI. B. 1. Timely Disclosure of Annual and Quarterly Reports of Domestic Companies
We support public availability of earnings releases through the EDGAR system and would much prefer a Form 8-K requirement over any acceleration of due dates for annual and quarterly reports. However, we note that earnings releases do not contain all of the data required by Item 301 of Regulation S-K. Certain selected financial data, such as total assets, are determined specifically for compliance with disclosure rules and would not otherwise be calculated on a quarterly basis. The requirement of including balance sheet data may unnecessarily delay earnings releases.
Historically, our goal has been to file our Form 10-K on the 85th day after year-end and our Form 10-Q by the 43rd day after the end of a quarter. Generally, we meet that target, although it is more difficult for the quarterly report. We believe that we could accelerate our information gathering and disclosure review process to file Form 10-K somewhat earlier; however, adding risk factor disclosure to the Form 10-Q will make the present 45-day due date more difficult to meet.
In the past seven years, we have grown from a regional electric utility to a global energy provider with utility operations in 10 foreign countries. Consolidated reporting requires converting financial data for foreign operations into U.S. GAAP. This consolidated reporting on a timely basis is possible because of improvements in technology and communications.
Like most large issuers, we are on a calendar-year basis. Accelerated due dates for Form 10-K and Form 10-Q will increase the peak demand on independent accountants and other independent qualified professionals and the issuers' staffs at the same time that these people are being asked to provide more thorough and thoughtful review, and to include additional groups of people in the review process.
We believe that we can provide more meaningful disclosure in less time, and continually strive to do so. However, increasing the regulatory compliance burden with new requirements, new participants, and new procedures will impede our progress toward accomplishing this goal. Acceleration of due dates for annual and quarterly reports should be delayed for at least one year after the effective date of any additional reporting requirements.
Part XI. C. Signatures
We have serious concerns about the wisdom of requiring the majority of an issuer's board of directors to certify that they have read each disclosure document in its entirety. Currently, we deliver drafts of our Forms 10-Q, 10-K, and other material filings to our directors for their review and comments prior to filing.
Our 1998 Consolidated 10-K for Southern and five registrant subsidiaries was 340 pages and our most recent 10-Q was 79 pages. A total of 57 individuals, 85 percent of whom were non-employees, served as directors of these six issuers (including seven who served on more than one board). To obtain a majority of each of the boards, 39 directors would have had to certify those portions related to their companies. Boards of directors should rely on management to ensure that adequate processes are in place for compliance with accounting standards and disclosure requirements. Certification of such documents is an appropriate function of management. The proposal to require director certification would demand their active role in the ordinary business of the issuer, overshadowing their oversight role, and may reduce their independent objectivity.
Forms 8-K frequently are used for the routine filing of exhibits. Requiring delivery to directors of such routine filings could detract from the level of attention afforded to substantive filings. Certainly, discretion is needed as to the materiality of documents meriting delivery to directors.
Part XI. B. 2. Other Reporting Events
Expanded use and acceleration of 8-K would be acceptable, provided that the failure to file timely is a curable defect. Under the proposal, an issuer would be disqualified from the use of Form B for failure to file timely a current report within the past 12 months. Given the expanded reporting and accelerated filing requirements, we believe that such disqualification is overly harsh. A registrant should be disqualified from the use of Form B only until such current report is filed.
One business day is not sufficient time to prepare, review, and file an 8-K. Accelerated reporting highlights the need to change the commencement of the periods for calculating due dates of current reports from the occurrence of a triggering event to the issuer's actual notice of a triggering event.
Part XII. Staff Review Policy
We support the proposal for the Staff to notify issuers by telephone when their Exchange Act reports are selected for review and to provide an approximate date to expect comments, if any. We also support allowing voluntary pre-review of filings.
We believe that the Staff should issue "closure" letters when no comments result from such review, and that, if the issuer has received neither comments nor a closure letter within a specific period, such as 15 days, of the date provided by the Staff, the issuer be afforded a safe-harbor from disqualification. Likewise, a similar mechanism would be useful to provide closure within a reasonable time after the issuer has responded to the Staff's comments.
We support the proposal's purpose of promoting transparency by making meaningful and understandable disclosure information more readily available to all investors. We are opposed to unnecessary regulation of the process of developing that disclosure information.
We believe that while the present system works well, it could benefit from minor improvements. In order to be as effective, any new system should encourage a free flow of timely and accurate information to protect all investors without increasing the burden of compliance. The system should not dictate the level of involvement for boards of directors in ordinary business, the manner in which management gathers and prepares disclosure information, nor the standards of directors' liability.
Thank you for the opportunity to express our views.
/s/ Stephen A. Wakefield