January 30, 2005
Jonathan G. Katz
Secretary, U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: File No. S7-38-04; Securities Offering Reform
Dear Mr. Katz:
Thank you for the opportunity to comment on the proposed rules published in Securities Act Release No 8501. On behalf of Intel Corporation, we offer the following comments with regard to those proposals.
As a general matter we are strongly supportive of the evolution of the offering regulations reflected in the proposals as a whole. The continued and enhanced use of Exchange Act filings to reduce time delays and unnecessary duplication in Securities Act filings and offerings is the right step to take. We are further in agreement with your rationalization and modernization of the numerous communications rules and doctrines affecting the offering process. Those proposals reflect both the positive experience to date with the integrated disclosure system and properly take into account the ubiquitous nature of Internet-based communication. We would like to comment on a small number of specific items in the Release, as follows.
III D 3. Ineligible Issuers
The definition of a “well-known seasoned issuer” (WKSI) would exclude those entities that are classified as “ineligible issuers.” As proposed, issuers who, or whose subsidiaries, have been found to have violated the federal securities laws, have entered into a settlement with any government agency involving allegations of violations of federal securities laws, or have been made the subject of a judicial or administrative decree or order prohibiting certain conduct or activities regarding the federal securities laws during the past three years would be deemed ineligible issuers. The settlements described above would include settlements in which the issuer or its relevant subsidiary neither admits nor denies that it violated the federal securities laws. WKSI status will be useful to issuers, and in the event of a prospective order or settlement, as listed, in the future it is likely that a WKSI will seek to negotiate with the Commission staff as to continued WKSI status. As WKSI status could not have been contemplated in the past, we recommend that the Commission commence the use of WKSI status by making such disqualification prospective only. In addition, you requested comment as to whether an issuer should be considered ineligible if an affiliate of an issuer were found to have violated, settled allegations of violations of, or been made the subject of a judicial or administrative order or decree for violating or alleged violations of securities laws ("violator"). We believe that this type of disqualification should not apply in the context of an acquisition of an entity that is a violator. If your proposal is adopted, a likely effect is that the incidence of acquisitions of violators by an eligible issuer would be substantially reduced; this collateral loss of WKSI status might be sufficient to rule out the transaction from the point of view of the WKSI. To reduce the possibility of evasion, you may want to consider imposing the disqualification only in instances where the violator's stockholders hold in excess of 50% of the voting equity of the surviving entity in a merger/acquisition transaction.
VI B 1. Access Equals Delivery
We strongly support the general concept of "access equals delivery" and are pleased that the Commission's proposals increasingly recognize the ease and functionality of the Internet as a default method of disclosure both to individual recipients and the market generally. We recommend that the Commission similarly move forward to extend this position to the delivery of proxy statements and other related materials. It is the case that electronic delivery, and voting, does presently exist in the proxy voting process, but for most companies it is limited to the small minority of stockholders who have proactively signed up for electronic delivery, and to employee-stockholder populations. If you used your 1933 Act proposals as an analogy, you could allow for a system where issuers could mail a proxy card and short notification sheet to other investors, along with the URL for the full proxy statement and the Annual Report; investors could also call or write in to obtain a printed proxy statement and/or Annual Report. Such a system would dramatically reduce the printing, postage and handling charges for proxy distribution while retaining the opportunity for each investor to obtain printed materials on request and without charge. This system could also be adopted for use by non-issuers soliciting proxies, as in a contested election or other proxy contest.
VII A. Risk factor disclosure
We do not believe that the "risk factors" disclosure model in Item 503 of Regulation S-K is appropriate for the Form 10-K. The history and the explicit language of 503 (c) (e.g., "your lack of operating history") make clear that this item was drafted with the IPO in mind and as part of an introduction to a company which had not previously been a 1934 Act reporting company. As you know, the resulting practice, as called for explicitly in the item, has been for an issuer to prepare a multi-page list of macro and micro risk factors. Despite admonitions as to Plain English, the list often repeats information provided elsewhere in greater detail, and/or is filled with numerous cross-references to other portions of the document.
We would be surprised if 1934 Act registrants, counsel and auditors are currently operating on the assumption that the 10-K lacks any requirement to include "risk factors". Item 101 of S-K ("description of business"), for example, refers to risk-related disclosures both generally and specifically (e.g., "material areas peculiar to the registrant's business", "availability of raw materials", "the extent to which the business is ...seasonal", "dependence" upon a few customers, "competitive conditions", etc.). The Item 303 Management's Discussion and Analysis is also very risk-oriented with its focus on trends and uncertainties, and this focus is highlighted in the Commission and staff comments and interpretations of the MD&A section. See Releases 34-26831 (May 18, 1989), 33-8056 (January 22, 2002) and 33-8350 (December 29, 2003). Other risk-related 10-K items include, e.g., 303 (a)(4) on off-balance sheet arrangements; 305 on quantitative and qualitative disclosures about market risk; and the use of forward-looking statements accompanied by "meaningful cautionary statements" in accord with the PSLRA.
The result of the current 10-K rules and the Commission's interpretative guidance is that risk factors are both called for at present, and are placed interstitially throughout the document to accompany related disclosure about the business and its past, present and expected future operations. It would be both duplicative and confusing to add the Item 503 requirement for an introductory list of "significant" risk factors. We recommend that this proposal not be adopted. As an alternative, we recommend that Item 101 and/or other items currently included in the Form 10-K be amended with specificity if the Commission believes that there are particular risk factor topics which are not receiving adequate attention in current filings.
VII B. Disclosure of Unresolved Staff Comments
We do not support the proposal that unresolved staff comments be disclosed. As noted in the Release, this is a proposal to create an "added incentive" to resolve comments in a timely manner. The staff may need some additional tool in that regard, but it is inappropriate to use the integrated disclosure system to that end. The result will be that documents may have to include random and confusing content, and not at all necessarily material. The context of the disclosure will lack comparability among issuers, since many if not most registrants will not have to include any such disclosure. Disclosure of a particular comment will appear in the Forms 10-K of an unrelated group of issuers, on the one hand, while other companies that received the same comment will not have to make (and will not make) any such disclosure. The staff has recently announced that it will routinely publish all comment-letter correspondence, http://www.sec.gov/news/press/2004-89.htm, and we suggest that this data source be relied upon as the place where all comments are disclosed.
Disclosure of unresolved comments would create an asymmetry with resolved comments, and further heighten the probability that any such disclosure would be out of place and unrelated both as to topic and importance to the other disclosure in the 10-K. The Release proposes that only "material" comments need to be disclosed, but at the same time many more, and more "material" (or at least interesting) comments will await disclosure when the comment process is finally completed. The standard of materiality itself would be hard to interpret with in this context and would further lead to disparate analysis and practice by issuers. Is the comment "material" if you analyze the potential impact by assuming that the staff's position will be imposed in its entirety? But what if the issuer reasonably believes that the comment will be the subject of further discussion with the staff, and that the final outcome may be very different from the staff's initial position?
As an alternative suggestion, we are supportive of the comment submitted by the Society of Corporate Secretaries and Governance Professionals. That comment proposes that the issuer check a box on the cover of the Form 10-K to indicate that there are 180-day unresolved staff comments on the issuer's Exchange Act reports. Such a disclosure by the issuer could result in the posting of the comment letter and any related correspondence on the Commission's website promptly following the filing of the Form 10-K (rather than waiting until 45 days after the staff has completed the filing review).
Please contact the undersigned at (408) 765-1215 or Patrice Scatena at (408) 765-9771 if you would like any additional information in connection with the above comments.
Very truly yours,
Vice President, Legal and Government Affairs and Corporate Secretary