-------------------- BEGINNING OF PAGE #1 -------------------
SECURITIES AND EXCHANGE COMMISSION
(Release Nos. 33-7101; 34-34831; 35-26141; 39-2324; IC-20613)
File No. S7-29-94
Safe Harbor For Forward-Looking Statements
AGENCY: Securities and Exchange Commission
ACTION: Concept Release and Notice of Hearing
SUMMARY: The Securities and Exchange Commission ("Commission")
is soliciting comment on current practices relating to disclosure
of forward-looking information. In particular, the Commission
seeks comment on whether the safe harbor provisions for forward-
looking statements (set forth in Rule 175 under the Securities
Act of 1933 ("Securities Act"), Rule 3b-6 under the Securities
Exchange Act of 1934 ("Exchange Act"), Rule 103A under the Public
Utility Holding Company Act of 1935 and Rule 0-11 under the Trust
Indenture Act of 1939) are effective in encouraging disclosure of
voluntary forward-looking information and protecting investors
or, if not, should be revised and if revised, how. The
Commission also seeks comment on various changes to the existing
safe harbor provisions that have been suggested by certain
commentators. Finally, the Commission is announcing that public
hearings will be held beginning February 13, 1995, to consider
these issues.
DATES: Comments should be received on or before January 11,
1995. Public hearings will begin at 10:00 a.m. on February 13,
1995. Those who wish to testify at the hearings must notify the
Commission in writing of their intention to appear on or before
December 31, 1994. The written notification should include a
brief summary of the proposed testimony. Those who do not wish
to appear at the hearings may submit written testimony on or
before January 11, 1995 for inclusion in the hearing record. The
schedule of appearances, date for submission of final written
testimony by persons who will appear, and an agenda for the
hearings will be announced by the Commission shortly before the
hearings commence.
ADDRESSES: Persons wishing to submit notice of an intent to
appear at the hearings, written comments or testimony should file
three copies thereof with Jonathan G. Katz, Secretary, Securities
and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C.
20549. All written notice, comments and testimony should refer
to File No. S7-29-94. All written material will be available for
public inspection and copying in the Commission's Public
Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549.
FOR FURTHER INFORMATION CONTACT: Kevin C. Bruce or Andrew A.
Gerber, Attorney-Advisers in the Division of Corporation Finance
or Amy Bowerman Freed, Deputy Chief Counsel, Division of
Corporation Finance at (202) 942-2900.
SUPPLEMENTARY INFORMATION:
I. Introduction.
Forward-looking information-[1]- occupies a vital role in
-[1]- The term "forward-looking statement" is defined in
current Rule 175 as limited to the following:
(1) A statement containing a projection of revenues,
income (loss), earnings (loss) per share, capital
(continued...)
-------------------- BEGINNING OF PAGE #2 -------------------
the United States securities markets. Investors typically
consider management's forward-looking information important and
useful in evaluating a company's economic prospects and
consequently in making their investment decisions.-[2]- Analysts
and other market participants report that they view consideration
of management's own performance projections, i.e., earnings and
revenues, to be critical to their own forecasts of a company's
future performance. As such, forward-looking information is
often considered a critical component of investment
recommendations made by broker-dealers, investment advisers and
other securities professionals.-[3]-
A. Development of Safe Harbor.
1. Wheat Commission.
Until the early 1970s, the Commission prohibited disclosure
of forward-looking information.-[4]- This policy was based
primarily on the Commission's perception that such information
was inherently unreliable, and that unsophisticated investors
would place undue emphasis on the information in making
investment decisions.-[5]-
Acting on the recommendation of a number of securities
analysts,-[6]- the Commission formed a Disclosure Policy Group
(the "Wheat Commission") to study a variety of disclosure issues,
including whether projections should be permitted or mandated in
Commission filings.
While the Wheat Commission's Report to the Commission,
published in 1969, recognized that most investment decisions are
-[1]-(...continued)
expenditures, dividends, capital structure or other
financial items;
(2) A statement of management's plans and objectives
for future operations;
(3) A statement of future economic performance
contained in management's discussion and analysis of
financial condition and results of operations included
pursuant to Item 303 of Regulation S-K or Item 9 of
Form 20-F; or
(4) Disclosed statements of the assumptions underlying
or relating to any of the statements described in
(1),(2), or (3) above.
17 CFR 230.175.
-[2]- Advisory Committee on Corporate Disclosure to the
Securities and Exchange Commission, Report to the House
Committee on Interstate and Foreign Commerce, 95th
Cong., 1st Session, (Committee Print 1977)
[hereinafter the "Advisory Committee Report"];
Securities Act Release No. 6084 (Jun. 25, 1979); see
also H. Pitt and K. Groskaufmanis, Securities Law, Nat.
L. J. (Aug. 22, 1994) at B4.
-[3]- Advisory Committee Report, supra note 2, at 351.
-[4]- Securities Act Release No. 5362 (Feb. 2, 1973).
-[5]- Disclosure to Investors: A Reappraisal of
Administrative Policies Under the 1933 and 1934 Acts
(1969) at 94 [hereinafter the "Wheat Report"].
-[6]- Security analysts had suggested that the Commission
permit "controlled" projections of sales and earnings
in prospectuses and other documents filed with the
Commission. Wheat Report, supra note 5, at 95-96.
-------------------- BEGINNING OF PAGE #3 -------------------
based essentially on estimates of future earnings, the Commission
determined that the detriments to investors associated with
permitting forward-looking disclosure weighed against lifting the
ban on disclosure of such information. In the Wheat Commission's
view, the heightened litigation exposure, updating requirements
and risk of undue investor reliance on this information
outweighed any countervailing benefits.-[7]-
2. Rulemaking Initiatives.
The Commission continued to consider these issues and
conducted hearings in 1972 to determine whether to lift the ban
and, instead, either mandate or permit disclosure of forward-
looking information. The 1972 hearings involved fifty-three
witnesses and resulted in the submission of over 200 letters of
comment. A significant number of those letters were from issuers
objecting to any suggestion that they be required to file
forward-looking statements with the Commission. Following those
hearings, the Commission elected in 1973 not to require
disclosure of forward-looking information, but announced in a
policy statement its intention to promulgate rules to permit
voluntary disclosure of projections and to protect those
projections from civil antifraud liability.-[8]-
In 1975, the Commission issued a series of proposals
designed to implement the 1973 policy statement.-[9]-
Specifically, the proposals would have:
1. required the filing of a Form 8-K by any registrant
that (a) had furnished a projection to any person, (b)
had reason to believe that its public projections no
-[7]- The Wheat Report stated these findings as follows:
From a management standpoint, projections may
change rapidly during a given year as changes
occur in the factors on which they are based.
Inclusion of such changing projections in a
prospectus, which might be used long after it
became effective would give rise to significant
problems. It has been the Commission's long-
standing policy not to permit projections and
predictions in prospectuses and reports filed with
the Commission. Such documents are designed to
elicit material facts. Their factual character is
widely recognized. Investors and their advisers
are at liberty to make their own projections based
on the disclosures resulting from the Commission's
requirements. A real danger exists, in the
Study's judgment, that projections appearing in
prospectuses and other documents filed under
securities laws and reviewed by the Commission
would be accorded a greater measure of validity by
the unsophisticated than they would deserve.
Wheat Report, supra note 5, at 95-96.
-[8]- Securities Act Release No. 5362 (Feb. 2, 1973)("[t]he
Commission has never required a company to publicly
disclose its projections and does not intend to do so
now"). The Commission stated that its decision not to
mandate disclosure of forward-looking statements was
based on its desire not to deviate too far from its
historical position of prohibiting such disclosure.
Id.
-[9]- See Securities Act Release No. 5581 (April 28, 1975).
-------------------- BEGINNING OF PAGE #4 -------------------
longer had a reasonable basis, (c) had determined to
cease issuing projections, or (d) wished to
disassociate itself from a third person's projections;
2. amended Form 10-K to (a) require inclusion therein of
all prior projections, together with actual and
historical results; (b) require inclusion of
projections for future periods that had been previously
filed with the Commission; and (c) limit the filing of
projections to those issuers with Exchange Act
reporting histories and budgeting experience and to
those projections that satisfied the requirements of
proposed safe harbor Rules 132 (a proposed predecessor
of Rule 175) and 3b-6;
3. created new Rules 132 and 3b-6, providing a safe harbor
"by defining circumstances under which a projection
would be deemed not to be an untrue or misleading
statement of a material fact or a manipulative,
deceptive, or fraudulent device, contrivance, act or
practice as those terms are used in the various
liability provisions of the federal securities laws";
and
4. required that all projection information contained in
the text of Form 10-K (but not exhibits) be included in
the registrant's annual report to shareholders.-[10]-
In 1976, these proposed rules were withdrawn by the Commission
in response to opposition from commenters.-[11]- In withdrawing
the proposals, the Commission stated its hope that forward-
looking information and the need for a safe harbor would be among
those issues considered by the newly formed Advisory Committee on
Corporate Disclosure.-[12]-
3. Advisory Committee Report.
The Advisory Committee on Corporate Disclosure was formed in
1976 to evaluate certain of the Division of Corporation Finance's
disclosure policies - among them the Division's policy on
disclosure of forward-looking information.-[13]- On November 3,
1977, the Advisory Committee submitted its report to the
-[10]- See id.
-[11]- See Securities Act Release No. 5699 (Apr. 23, 1976).
-[12]- See id. At the same time, the Commission expressed
initial approval of new Division of Corporation Finance
guides designed to encourage the inclusion of
projections in Commission filings. These guides called
for: (1) a good faith assessment of the reliability of
the projection; (2) a reasonable basis for that
assessment; (3) outside review of the projections; (4)
the use of reasonable ranges; (5) the use of a
reasonable period of projection; (6) the inclusion of
assumptions on which the projection is based; (7) the
inclusion of cautionary language; and (8) disclosure of
the accuracy of the issuer's prior projections. The
Commission authorized issuance of substantially similar
final guides in Securities Act Release No. 5992 (Nov.
7, 1978).
-[13]- See Exchange Act Release No. 12454 (May 18, 1976).
-------------------- BEGINNING OF PAGE #5 -------------------
Commission.-[14]-
In the course of its deliberations, the Advisory Committee
had sought input from all interested persons on the costs and
benefits of forward-looking information.-[15]- The Advisory
Committee recommended in its report that the Commission act to
encourage forward-looking disclosures, and made several specific
recommendations regarding the form and substance of proposed
Commission action.
First, in recognition that the Commission needed experience
with projections disclosure in order to evaluate the wisdom of
establishing a regulatory framework for such disclosure, the
Committee stated that its recommendations were intended to
encourage projections on an experimental basis. Such voluntary
disclosure would enable the Commission to assess both the
usefulness of the information to investors, and the costs to
issuers of providing that information.-[16]- If forward-looking
information disclosures ultimately were found to be beneficial to
investors, the Committee believed that market forces, rather than
a Commission mandate, would operate effectively to compel issuers
to make such disclosures.-[17]-
Second, the Committee recommended that the Commission adopt
a safe harbor that would protect forward-looking statements made
in good faith and with a reasonable basis, regardless of whether
those statements were included in documents filed with the
Commission. The Committee recommended that the burden be placed
on the person seeking to establish antifraud liability for the
forward-looking statement to show a lack of good faith or
reasonable basis.-[18]-
Third, the Committee opined that a safe harbor should be
available to all registrants, regardless of size and reporting
history. It also recommended that companies be required to
publish cautionary language along with the projection, to
indicate clearly the nature of the projection and caution
investors against ascribing undue weight thereto.-[19]- The
Committee believed that disclosure of assumptions should be
encouraged, but not required.-[20]- Further, the Committee
concluded that companies should be encouraged, but not required,
-[14]- Advisory Committee Report, supra note 2.
-[15]- Id.; see also Exchange Act Release No. 12454 (May 18,
1976)(noting public meetings held by the Advisory
Committee and case studies to be conducted by the
Advisory Committee of thirty public companies,
financial analysts and investment decision makers).
-[16]- Advisory Committee Report, supra note 2, at 353.
-[17]- Id. at 354.
-[18]- Id. at 344.
-[19]- See id.
-[20]- Although the Committee recognized the value of
assumptions, it opted against requiring disclosure of
assumptions for two reasons: (a) because of the
experimental nature of the program, the Committee
apparently concluded that fewer mandatory disclosure
items were appropriate; and (b) in order to encourage
as many issuers to use the safe harbor rule as
possible, the Committee wanted to keep the rule simple
and thus facilitate compliance. Id.
-------------------- BEGINNING OF PAGE #6 -------------------
to compare actual results with earlier projections and to explain
any significant variance.
While the Committee recommended that companies be reminded
of their obligations to keep a published projection from becoming
misleading in light of subsequent events, it urged that no formal
requirement to update projections be imposed. In the Committee's
view, companies should be permitted either to discontinue making
projections or to resume such projections after discontinuation,
but should not do so without a reasonable basis.
The Committee had a different view of mandatory disclosure
and updating in connection with forward-looking information
disseminated during the Securities Act registration process.
Specifically, the Committee expressed its opinion that "the
Commission should require companies to include such current
projections covering the current period in their registration
statements (updated as necessary) filed under the Securities
Act."-[21]-
With respect to the type of information that should be
disclosed, the Committee believed that companies should have the
flexibility to choose which items to disclose, but should not be
permitted to disclose only "favorable" items. Finally, the
Committee recommended that the Commission permit third-party
review of projections, provided that the third-party reviewer's
credentials, extent of review, and relationship with the issuer
were disclosed.-[22]-
4. Adoption of Safe Harbor Provision.
In response to the Advisory Committee Report, the Commission
announced in early 1978 that the Committee's recommended safe
harbor rule would receive formal Commission consideration, along
with any alternatives the Commission deemed appropriate.-[23]-
Later that year, the Commission issued for public comment two
versions of a safe harbor rule for forward-looking information:
the Advisory Committee version, in the same form as the Committee
had proposed, and another version formulated by the
Commission.-[24]-
As set forth in the Commission's proposing release, the
differences between the two proposals, as well as the questions
asked and comments requested, reflected the Commission's
reservations with respect to certain aspects of the Advisory
Committee proposal. First, the Commission was particularly
concerned that the burden of proving a lack of reasonable basis,
which the Committee recommended be imposed on the plaintiff,
"could be insurmountable."-[25]- The Commission therefore
proposed an alternative rule that would have placed the burden on
the defendant to prove that a challenged projection was made in
good faith and with a reasonable basis.
There were several other substantive differences between the
two proposals. Unlike the Advisory Committee's proposal, the
Commission's alternative extended to third-party projections,
while concomitantly restricting safe harbor protection to
financial projections and similar statements, limiting safe
-[21]- Id. at 361.
-[22]- The Committee believed that any such reviewer should be
deemed an expert and should file an appropriate consent
with the registration statement. Id.
-[23]- Securities Act Release No. 5906 (Feb. 15, 1978).
-[24]- See Securities Act Release No. 5993 (Nov. 7, 1978).
-[25]- Id.
-------------------- BEGINNING OF PAGE #7 -------------------
harbor protection to statements made about reporting companies,
and excluding statements about investment companies.
Significantly, both proposed safe harbor rules covered all oral
and written forward-looking information, not just when contained
in Commission filings. Neither proposal specifically required
inclusion of current projections in registration statements filed
under the Securities Act, and no mention was made in the release
of the reasons for this omission.
In response to the proposals, the Commission received
approximately 90 letters of comment. A majority of commenters
expressed a belief that a rule incorporating aspects of both
proposals would provide the best incentive for projection
disclosure.-[26]- Although a few commenters expressed continuing
reservations about the Commission's proposed shift in policy from
prohibiting to encouraging projection disclosure, virtually all
agreed that a safe harbor rule was desirable and necessary.-[27]-
Most commenters agreed that the safe harbor should be extended to
statements made on behalf of the issuer (i.e., by third party
reviewers).
Several commenters criticized other aspects of the
Commission's alternative proposal, arguing that the burden of
proof for establishing that a projection did not have a
reasonable basis or was not made in good faith should be imposed
on the plaintiff,-[28]- and that the rule's coverage should be
extended beyond revenues, earnings, and "other financial items"
to encompass management's plans and objectives.-[29]- Commenters
argued that the rule's protections should not be limited to
companies with a reporting history.-[30]- Commenters concurred
in the proposal to forego conditioning the rule's availability on
inclusion of the information in Commission filings on the ground
that such a condition could result in a loss of the safe harbor's
protections based on a technical or inadvertent filing
delinquency. Comments on the propriety of projections by
investment companies were mixed.-[31]-
In 1979, the Commission adopted a safe harbor provision that
-[26]- Securities Act Release No. 6084 (Jun. 25, 1979).
-[27]- Id.
-[28]- Id. Placing the burden on corporate defendants to
prove that a projection was prepared with a reasonable
basis and disclosed in good faith was viewed as
undermining the Commission's goal of encouraging
projection disclosure, and possibly worse than no rule
at all.
-[29]- Id.
-[30]- Id. According to the release, commenters argued that
"forecast information may be most valuable regarding
companies that do not have a history of public
information." Id.
-[31]- Id. As the Commission observed, "some commenters did
not perceive a basis for distinguishing between
investment companies and other issuers.... Other
commenters believed that the type of information
generated by investment companies would be more
difficult to forecast with reliability and is dependent
upon market factors and responses to market events that
are inherently unpredictable."
-------------------- BEGINNING OF PAGE #8 -------------------
generally combined aspects of both proposals.-[32]- Virtually
identical safe harbor provisions were codified in Rule 175 under
the Securities Act and Rule 3b-6 under the Exchange Act.-[33]-
These provisions offered safe harbor protection for specified
forward-looking statements but only where made, reaffirmed, or
later published, in documents filed with the Commission. On this
point, the Commission stated that this "filing" requirement would
provide investors with better access to the information and a
more reliable framework within which to evaluate the forward-
looking statement, and would enable the Commission to maintain
oversight of the accuracy and completeness of the disclosure.
Second, the final rule incorporated the Advisory Committee's
recommendation of placing the burden of proof on the plaintiff to
show that the forward-looking information lacked a reasonable
basis and was made otherwise than in good faith. The Commission
reasoned that the liberal discovery procedures available in the
federal courts had permitted plaintiffs to elicit the evidence
necessary to sustain this burden. The Commission stated that it
would monitor the operation of the safe harbor rule to assure
that it was not inconsistent with the pre-eminent statutory goal
of investor protection.-[34]-
The safe harbor provision, as adopted, did not require the
publication of assumptions underlying forward-looking statements
covered by the rule. In describing the basis for this decision,
the Commission "re-emphasize[d] its position on the significance
of assumption disclosures," explaining that:
Under certain circumstances the disclosure of
underlying assumptions may be material to an
understanding of the projected results. The Commission
also believes that the key assumptions underlying a
forward-looking statement are of such significance that
their disclosure may be necessary in order for such
statements to meet the reasonable basis and good faith
standards embodied in the rule. Because of the
potential importance of assumptions to investor
understanding and in order to encourage their
disclosure, the rule as adopted indicates specifically
that disclosed assumptions are also within its
scope.-[35]-
The Commission made explicit the availability of the safe
harbor to third-party reviewers, both those retained by the
company and those making projections on behalf of management.
Also, while not adding any requirement to update projections, the
Commission reiterated its earlier position that projections
protected by the safe harbor must be corrected when subsequent
events or discoveries render them false or misleading.
Finally, the Commission elected not to extend coverage of
the rule to investment companies registered under the Investment
Company Act of 1940. While not rejecting the possibility that
projections could be valuable to shareholders of registered
investment companies, the Commission stated that "the nature of
information reported by investment companies is sufficiently
-[32]- See Securities Act Release No. 6084 (Jun. 25, 1979).
-[33]- 17 CFR 230.175 (1994), 17 CFR 240.3b-6 (1994).
-[34]- Id.
-[35]- Id.
-------------------- BEGINNING OF PAGE #9 -------------------
distinct to warrant separate consideration."-[36]-
The safe harbor provision has retained its essential
elements, although the Commission has made several technical
modifications since its adoption.-[37]-
B. Management's Discussion and Analysis Interpretative
Release.
Since 1979, the Commission has further refined its position
on disclosure of forward-looking information, particularly in the
context of developing and interpreting the management's
discussion and analysis ("MD&A") requirements applicable to the
Form 10-K and other required filings, as codified in Regulation
S-K Item 303.-[38]- These contain a number of provisions that
call for disclosure of prospective information.-[39]- An
instruction to Item 303(a) states that the MD&A "shall focus
specifically on material events and uncertainties known to
management that would cause reported financial information not to
be necessarily indicative of [the] future... ."-[40]- In
contrast to this required disclosure of "presently known data
which will impact upon future operating results," registrants are
expressly encouraged, but not required, to supply forward-looking
information.-[41]- The Commission clarified the distinction
between "voluntary" and "mandatory" forward-looking disclosure in
a 1989 interpretative release relating to MD&A:
Both required disclosure regarding the future impact of
presently known trends, events or uncertainties and
optional forward-looking information may involve some
-[36]- Id. The Commission decided not to require that
investment companies provide forward-looking disclosure
under the recently-adopted "management's discussion of
performance" requirement for registered open-end
investment companies. Securities Act Release No. 6988
(Apr. 6, 1993).
-[37]- See Securities Act Release No. 6949 (Jul. 30, 1992);
Securities Act Release No. 6353 (Mar. 3, 1982);
Securities Act Release No. 6304 (Mar. 27, 1981);
Securities Act Release No. 6291 (Feb. 17, 1981); and
Securities Act Release No. 6288 (Feb. 9, 1981).
-[38]- Regulation S-K Item 303, 17 CFR 238.303 (1994).
-[39]- With respect to liquidity, disclosure is required of
"any known trends or any known demands, commitments,
events or uncertainties that will result in or that are
reasonably likely to result in..." material changes.
See Regulation S-K Item 303(a)(1), 17 CFR 229.303(a)(1)
(1994). With respect to capital resources, the
disclosure calls for "any known material trends,
favorable or unfavorable..." Regulation S-K Item
303(a)(2)(ii), 17 CFR 229.303(a)(2)(ii) (1994). With
respect to sales, revenue or income, the Item calls for
"any known trends or uncertainties that have had or
that the registrant reasonably expects will have a
material favorable or unfavorable impact..." Regulation
S-K Item 303(a)(3)(ii), 17 CFR 229.303(a)(3)(ii).
-[40]- See Regulation S-K Item 303, Instruction 3, 17 CFR
229.303 (1994).
-[41]- See Regulation S-K, Item 303, Instruction 7, 17 CFR
229.303 (1994).
-------------------- BEGINNING OF PAGE #10 -------------------
prediction or projection. The distinction between the
two rests with the nature of the prediction required.
Required disclosure is based on currently known trends,
events, and uncertainties that are reasonably expected
to have material effects, such as: a reduction in the
registrant's product prices; erosion in the
registrant's market share; changes in insurance
coverage; or the likely non-renewal of a material
contract. In contrast, optional forward-looking
disclosure involves anticipating a future trend or
event or anticipating a less predictable impact of a
known event, trend or uncertainty.-[42]-
Thus, the Commission has distinguished between mandatory and
voluntary forward-looking statements for disclosure purposes.
Moreover, in the context of transactions involving an issuer's or
affiliate's purchase of the issuer's shares, or a business
combination, forward-looking information (including projections)
may be required pursuant to Rule 10b-5.-[43]-
C. Qualitative Performance.
There appears to be increasing interest, on the part of
both registrants and users of their financial reports in the
investor and analyst communities, in enhanced disclosure of
information that may affect corporate performance but is not
readily susceptible of measurement in traditional, quantitative
terms. -[44]- Among such qualitative informational items are
workforce training and development, product and process quality
and customer satisfaction. A large registrant considers one such
item -- product quality -- to be so important to its
profitability that it has chosen to make it a key determinant of
executive compensation.-[45]- Other companies are beginning to
experiment with voluntary disclosure of the utilization of an
intangible asset termed "intellectual capital," or employee
knowledge.-[46]- In this connection, another federal agency has
urged more corporate disclosure of the use of measures of "high
performance work practices and other nontraditional measures" of
corporate performance.-[47]-
-[42]- Securities Act Release No. 6835 (May 18, 1989).
-[43]- Projections might also be contained in documents
required to be filed and discussed pursuant to specific
line item requirements. See Item 4(b) of Form S-4; 17
CFR 239.25; Item 9 of Schedule 13E-3; 17 CFR
240.13e.100
-[44]- See R. Eccles and S. Mavrinac, Improving the Corporate
Disclosure Process (Harvard Business School Working
Paper 94-061 (1994)(hereinafter "Eccles & Mavrinac");
Stewart, Your Company's Most Valuable Asset:
Intellectual Capital, Fortune, October 3, 1994 at 68
(hereinafter "Stewart").
-[45]- See Chrysler Corporation, 1994 Proxy Statement, filed
March 16, 1994.
-[46]- See Stewart, supra note 44; (citing Skandia AFS' 1994
Annual Report to Shareholders). See also 1994 Annual
Reports to Shareholders submitted to the Commission by
Dow Chemical Corporation and National Steel Company.
-[47]- Letter from Secretary Robert B. Reich to Chairman
Arthur Levitt (Oct. 3, 1994).
-------------------- BEGINNING OF PAGE #11 -------------------
With respect to the interest of users in this type of
"soft," or nonquantitative, corporate information, a large public
pension fund factors labor-management relations and other aspects
of human resource management into analyses of portfolio company
performance in connection with the fund's investment and voting
decisions, based on research indicating that workplace practices
can be linked to corporate performance. -[48]- Private pension
fund fiduciaries are likely to follow this example, given the
Department of Labor's recent issuance of an interpretive bulletin
urging such fiduciaries to monitor more closely portfolio
companies' investment in training and otherwise developing their
workforce. -[49]-
Notwithstanding this growing market interest in access to
qualitative performance information, registrants have expressed
significant concern that disclosure of such information may
expose them to greater litigation risk.-[50]- To the extent that
this type of "soft" information does not fall within the current
safe harbor definition of "forward-looking statements," however,
it would not receive the protection of Rule 175 or 3b-6.
II. Judicial Approaches Toward Liability for Forward-looking
Statements.
Contemporaneously with the evolution of the Commission's
policy on disclosure of forward-looking information, the federal
courts have adopted a variety of approaches toward private
-[48]- See IRRC Corporate Governance Highlights, (July/August
1994) at 15-16 (reporting that the California Public
Employees' Retirement System, the nation's largest
public pension fund, announced that it will consider
workplace practices along with financial performance
criteria in connection with the fund's annual corporate
governance review of portfolio companies, based on the
positive correlation found by economist Lilli A. Gordon
between "high-performance workplace practices" and
enhanced productivity and long-term financial
performance of such companies).
-[49]- Department of Labor Interpretive Bulletin 94-2; 59 FR
38860 (July 29, 1994).
-[50]- See, e.g., Letter from Frank J. Borelli, Treasurer,
Financial Executives Institute to Edmund L. Jenkins,
Chairman, AICPA Special Committee on Financial
Reporting, dated Aug. 8, 1994 (objecting to Jenkins
Committee proposals for expanded disclosure of
additional forward-looking and qualitative performance
information due in part to litigation exposure). See
also Eccles & Mavrinac, supra note 44; Stewart, supra
note 44. The Conference Board has established a working
group headed by Dr. Carolyn Brancato and comprised of
U.S and foreign companies, institutional investors,
analysts, and U.S. regulators. Charged with developing
a systemic approach to disclosure of corporate
performance, both on a financial and non-financial
basis, by the spring of 1995, the Group is exploring
ways of: (a) encouraging companies to report their use
of qualitative performance criteria despite the
perceived litigation risk; and (b) educating
institutional investors, analysts and others as to the
utility of such information and its relationship to
such quantitatively measured indicia of corporate
performance as earnings.
-------------------- BEGINNING OF PAGE #12 -------------------
antifraud claims arising from such disclosures.-[51]-
A. Untrue Statement of Fact.
The courts first addressed the question of whether
predictions or statements of opinion could ever be considered to
be "facts" which could be said to be false or misleading for
purposes of liability under the securities laws. In Marx v.
Computer Sciences Corporation,-[52]- the court found that while
predictions could properly be characterized as facts, the failure
of a prediction to prove true was not in itself actionable.
Instead, the court looked at the factual representations which it
found were impliedly made in connection with the prediction;
namely that, at the time the prediction was made, it was believed
by its proponent and it had a valid basis.-[53]- If a prediction
-[51]- The safe harbor provided by Rules 175 and 3b-6 has been
implicated in only a small portion of cases involving
forward-looking statements. See Arazi v. Mullane, 2
F.3d 1456 (7th Cir. 1993); Krim v. BancTexas Group,
Inc., 989 F.2d 1435 (5th Cir. 1993); Roots Partnership
v. Lands' End, Inc., 965 F.2d 1411 (7th Cir. 1992);
Wielgos v. Commonwealth Edison Co., 892 F.2d 509 (7th
Cir. 1989).
-[52]- 507 F.2d 485 (9th Cir. 1974).
-[53]- Id. at 489-90 ("[T]he forecast may be regarded as a
representation that . . . [the issuer's] informed and
reasonable belief was that at the end of the coming
period, earnings would be approximately $1.00. . . .
In addition, because such a statement implies a
reasonable method of preparation and a valid basis, we
believe also that it would be `untrue' absent such
preparation or basis."). Many courts have adopted
similar formulations. See In re Apple Computer
Securities Litigation, 886 F.2d 1109, 1113 (9th Cir.
1989) ("A projection or statement of belief contains at
least three implicit factual assertions: (1) that the
statement is genuinely believed, (2) that there is a
reasonable basis for that belief, and (3) that the
speaker is not aware of any undisclosed facts tending
to seriously undermine the accuracy of the statement.
A projection or statement of belief may be actionable
to the extent that one of these implied factual
assertions is inaccurate." (citing Marx)); Isquith v.
Middle South Utilities, Inc., 847 F.2d 186, 203-04 (5th
Cir. 1988) ("Most often, whether liability is imposed
depends on whether the predictive statement was `false'
when it was made. The answer to this inquiry, however,
does not turn on whether the prediction in fact proved
to be wrong; instead, falsity is determined by
examining the nature of the prediction -- with the
emphasis on whether the prediction suggested
reliability, bespoke caution, was made in good faith,
or had a sound factual or historical basis." (footnote
omitted)); Kirby v. Cullinet Software, Inc., 721
F.Supp. 1444, 1450 (D.Mass. 1989) ("At a minimum, a
prediction must be made in good faith and with a sound
historical or factual basis.").
Rule 175 and Rule 3b-6 follow a similar path by
providing that a covered statement shall not be deemed to
be, inter alia, an untrue statement of a material fact,
(continued...)
-------------------- BEGINNING OF PAGE #13 -------------------
was not believed when made or did not have a valid basis, it
would constitute an untrue statement of fact which could then be
analyzed in accordance with the other necessary elements of the
action:-[54]- i.e., materiality, reliance, scienter, and
causation.
B. Materiality and Reliance.
Some courts have disposed of cases involving forward-looking
statements without reaching the issue of these implied factual
assertions by examining another element of the claim --
materiality or, as described in some cases, reliance. Most of
these cases have been decided on the basis of the "bespeaks
caution" doctrine,-[55]- which has been described as follows:
The essence of the doctrine is that where an offering
statement, such as a prospectus, accompanies statements of
-[53]-(...continued)
unless it is shown that such statement was made or
reaffirmed without a reasonable basis or was disclosed other
than in good faith. Although the Rules use the term
"fraudulent statement" to refer to such an untrue statement
of a material fact, a separate determination must be made as
to whether the statement, though untrue, is fraudulent or
otherwise actionable under the securities laws. In Wielgos
v. Commonwealth Edison Co., supra at 513, the court
considered the use of the term "fraudulent statement" in the
Rules, but easily determined that Rule 175 applies to
actions under 11 of the Securities Act even though
liability under that section does not depend on "fraud."
-[54]- Id. at 490. In the recent case of Rubinstein v.
Collins, 20 F.3d 160, 169 (5th Cir. 1994), the court
stated this point succinctly:
Simply alleging that the predictive statements at issue
here did not have a reasonable basis -- that is, that
they were negligently made -- would hardly suffice to
state a claim under Rule 10b-5. As we have
consistently held, scienter is an element of such a
claim. * * * Plaintiffs have satisfied the pleading
requirements for scienter. They have claimed that the
defendants either knew -- or were recklessly
indifferent to -- the fact that the predictive
statements did not have a reasonable basis. (Footnotes
omitted.)
-[55]- Seven circuit courts have applied the bespeaks caution
doctrine in analyzing forward-looking statements
(although the Sixth Circuit, after applying the
doctrine in one case, stepped back somewhat in a
subsequent decision). See In re Worlds of Wonder Sec.
Litig., -- F.3d --, 1994 WL 501261 (9th Cir. 1994);
Rubinstein v. Collins, 20 F.3d 160 (5th Cir. 1994); In
re Donald J. Trump Casino Sec. litig., 7 F.3d 357 (3d
Cir. 1993); Luce v. Edelstein, 802 F.2d 49 (2d Cir.
1986); Romani v. Shearson Lehman Hutton, 929 F.2d 875
(1st Cir. 1991); Moorhead v. Merrill Lynch, Pierce,
Fenner & Smith, Inc., 949 F.2d 243 (8th Cir. 1991).
The Sixth Circuit adopted the doctrine in Sinay v.
Lamson & Sessions Co., 948 F.2d 1037 (6th Cir. 1991),
but revised its application of the doctrine in Mayer v.
Mylod, 988 F.2d 635 (6th Cir. 1993). See generally
Donald C. Langevoort, Disclosures that "Bespeak
Caution," 49 Bus. Law. 481 (February 1994).
-------------------- BEGINNING OF PAGE #14 -------------------
its future forecasts, projections and expectations with
adequate cautionary language, those statements are not
actionable as securities fraud.-[56]-
Under the bespeaks caution doctrine, cautionary language, as
a part of the "total mix" of information, may render a predictive
statement immaterial as a matter of law,-[57]- or make it
unreasonable for an investor to rely upon a predictive
statement.-[58]- Recently, some courts have warned, however,
that cautionary language, in and of itself, is not necessarily
sufficient.-[59]- "To suffice, the cautionary statements must be
substantive and tailored to the specific future projections,
estimates or opinions in the prospectus which the plaintiffs
challenge."-[60]-
Some courts have taken a more extreme position, determining
that, even without cautionary language, some predictions are not
material. For example, referring to "soft," "puffing"
statements, upon which no reasonable investor would rely, the
Court of Appeals for the Fourth Circuit stated that, "projections
of future performance not worded as guarantees are generally not
actionable under the federal securities laws."-[61]-
III. Criticisms of the Commission's Safe Harbor.
Some have suggested that companies that make voluntary
disclosure of forward-looking information subject themselves to a
significantly increased risk of securities antifraud class
actions.-[62]- Recent surveys suggest that this threat of mass
-[56]- In re Donald J. Trump Casino Sec. Litig., 793 F.Supp.
543, 549 (D.N.J. 1992), aff'd, 7 F.3d 357 (3d Cir.
1993).
-[57]- See In re Donald J. Trump Sec. Litig., supra at 371
("[C]autionary language, if sufficient, renders the
alleged omissions or misrepresentations immaterial as a
matter of law."); In re Worlds of Wonder Sec. Litig.,
supra; Rubinstein v. Collins, supra.
-[58]- Rubinstein v. Collins, supra at 167 (cautionary
language affects "the reasonableness of the reliance on
and the materiality of [the] projections." (footnotes
omitted)).
-[59]- See Rubinstein v. Collins, supra at 167-68; In re
Donald J. Trump Casino Sec. Litig., supra at 371-72.
-[60]- In re Donald J. Trump Casino Sec. Litig., supra at 371-
72.
-[61]- Raab v. General Physics Corp., 4 F.3d 286, 290 (4th
Cir. 1993) (quoting Krim v. BancTexas Group, Inc., 989
F.2d 1435, 1446 (5th Cir. 1993)). In Malone v.
Microdyne Corp., 26 F.3d 471, 479-80 (4th Cir. 1994),
the Court of Appeals relied on Raab in finding that a
forward-looking statement was not actionable because
the "statement obviously did not constitute a guarantee
and was certainly not specific enough to perpetrate a
fraud on the market."
-[62]- U. Gupta & B. Bowers, Small Fast-Growth Firms Feel
Chill of Shareholder Suits, Wall St. J., April 5, 1994
at B2. See generally Staff Sen. Subcommittee on
Securities of the Committee on Banking, Housing and
Urban Affairs, Report on Private Securities Litigation,
(1994) ("Senate Staff Report").
-------------------- BEGINNING OF PAGE #15 -------------------
shareholder litigation, whether real or perceived, has had a
chilling effect on disclosure of forward-looking
information.-[63]-
Contrary to the Commission's original intent, the safe
harbor is currently invoked on a very limited basis in a
litigation context.-[64]- Some critics of the current safe
harbor provisions cite, among other things, the following as
weaknesses of the safe harbor:
- the protections of the safe harbor are too narrow
because they are limited to filed documents, resulting
in selective disclosure made outside Commission
documents;-[65]-
- the provisions of the safe harbor are not applied by
the courts in a manner that results in quick and
inexpensive dismissals of frivolous lawsuits;-[66]-
- there is a great deal of confusion over the nature and
scope of any duty to correct or update projections once
they are made; -[67]- and
- the safe harbor language is silent as to when a company
may be liable for statements made by third parties.
A. Suggested Underinclusiveness of Current Safe Harbor.
Some critics argue that the current safe harbor is
ineffective largely because it is too narrow, in that it only
covers statements made in documents filed with the
-[63]- National Venture Capital Association, The Impact of
Securities Fraud Suits on Entrepreneurial Companies
(Jan. 1994); National Investors Relations Institute,
Corporate Survey on Shareholder Litigation Effects
(Feb. 1994); American Stock Exchange CEO Survey,
Securities Litigation and Stock Option Accounting 1
(Apr. 1994).
-[64]- See Louis Loss and Joel Seligman, Securities
Regulation, 622-39 (1992); Barondes, The Bespeaks
Caution Doctrine: Revisiting the Application of Federal
Securities Law to Opinions and Estimates, J.Corp. L.
243, 247 (1994).
-[65]- See American Stock Exchange Survey, CEOs Would Release
More Financial Information If Litigation Albatross Were
Removed (1994); See generally S. Marino and R. Marino,
An Empirical Study of Recent Securities Class Action
Settlements Involving Accountants, Attorneys, or
Underwriters, Sec. Reg. L. J. (1994) at 115; V.
O'Brien and R. Hodges, A Study of Class Action
Securities Fraud Cases 1988-1993 (working draft 1994);
J. Macey and G. Miller, The Plaintiffs' Attorney's Role
in Class Action and Derivative Litigation: Economic
Analysis and Recommendations for Reform, 58 U. Chicago
L. Rev. 1 (1991).
-[66]- Senate Staff Report, supra note 62.
-[67]- Manns, Duty to Correct: A Suggested Framework, 46 Md.
L. Rev. 1250 (1987).
-------------------- BEGINNING OF PAGE #16 -------------------
Commission.-[68]- They contend that, due to this
underinclusiveness, the safe harbor provides no comfort in most
situations involving disclosure of forward-looking information.
While acknowledging concern that the problem of selective
disclosure prompted the Commission to adopt such a limitation in
1979,-[69]- these critics contend that this very limitation has
created the unintended by-product of fostering such selective
disclosure.
Many public companies complain that they face increasing
analyst and institutional demands for immediate access to
predictive information. Some issuers argue that, solely to gain
the benefits of the safe harbor through reaffirmation of oral
responses to recurring marketplace inquiries in Commission
documents, they would be put to the impossible task of
memorializing every analyst discussion. Given the informal and
often unpredictable nature of communications between issuers and
analysts, the provision in the safe harbor requiring Commission
filing of forward-looking information is viewed as both
counterproductive and highly impractical.
B. Judicial Application.
Another complaint commonly raised is that the provisions of
the existing safe harbor do not influence the standards that
courts apply in securities fraud cases. The safe harbor is
infrequently raised by defendants, perhaps because it compels
judicial examination of reasonableness and good faith, which
raise factual issues that often preclude early, prediscovery
dismissal. Thus, critics state that the safe harbor is
ineffective in ensuring the quick and inexpensive dismissal of
frivolous private lawsuits. These critics argue that, unless the
courts vigorously apply a higher pleading threshold sufficient to
sustain a motion to dismiss based on the allegations of a class-
action complaint, the mere threat of litigation will continue
both to discourage management from making forward-looking
disclosure and cause those companies that nonetheless provide
such disclosure to incur significant costs in defense of
nonmeritorious litigation. Those urging reform thus maintain
that, in order for a safe harbor effectively to encourage
forward-looking disclosure, it must add protection over and above
those afforded by judicial doctrines developed under what are
characterized as the "housekeeping" provisions of the Federal
Rules of Civil Procedure -- Rules 9(b) and 12(b)(6).-[70]-
-[68]- See, e.g., M. Seeley, In I.P.O.'s, the More Data the
Better, New York Times Forum, April 26, 1992. The
majority of litigated cases appear to arise out of non-
filed forward-looking statements further undercutting
the utility of the safe harbor.
-[69]- See Advisory Committee Report, supra note 2.
-[70]- In deciding motions under Rule 12(b)(6) of the Federal
Rules of Civil Procedure, at least one commentator has
noted that courts apply different standards of
materiality. See Sullivan, Materiality of Predictive
Information After Basic: A Proposed Two-Part Test of
Materiality, 1990 U. Ill. L. Rev. 207 (1990). For
motions decided under Rule 9(b) of the Federal Rules of
Civil Procedure, some courts have imposed a high burden
on plaintiffs, requiring them to allege specific facts
that give rise to an inference of fraudulent intent.
Romani v. Shearson Lehman Hutton, 929 F.2d 875 (1st
Cir. 1991); see also DiLeo v. Ernst & Young, 901 F.2d
(continued...)
-------------------- BEGINNING OF PAGE #17 -------------------
A related criticism is that courts are inconsistent in
applying the safe harbor when it is implicated in the litigation.
The courts do not always refer to the safe harbor when it is
implicated.-[71]- One court refused to permit the use of the
safe harbor because the earnings forecast in question had been
presented "as a fact certain rather than as a 'projection' or
'forward-looking statement.'"-[72]- In this regard, commenters
assert that the Commission should provide greater guidance to the
judiciary with respect to the appropriate application of the safe
harbor.
C. Duty to Correct or Update.
A further criticism of the Commission's existing safe harbor
is that the rule has created confusion over whether and when
there is a duty to correct or update projections once they are
made. A recent article suggests that issuers are often advised
by their counsel to refrain from making forward-looking
statements in Commission filings, or even from speaking to
analysts, because they fear that by doing so they will "assume" a
duty to update their forward-looking statements as and when the
facts and circumstances surrounding their original statements
change.-[73]- Furthermore, the paucity of caselaw in this area
has left issuers without comfort or certainty as to when and if
there is any duty to update or correct.-[74]- Commentators have
questioned how long a forward-looking statement will be
considered current and how far in the future, if at all, an
-[70]-(...continued)
624 (7th Cir. 1990). Other courts appear to have been
more lenient. In re Glenfed, 11 F.3d 849 (9th Cir.
1993) ("plaintiff must allege facts that would give
rise to an inference that the defendant did not believe
the statements or knew of their falsity").
-[71]- The courts seldom refer to the safe harbor unless it is
raised by the defendant. Examples of cases in which
the safe harbor was implicated but not referenced
include Mayer v. Mylod, 988 F.2d 635 (6th Cir. 1993),
Romani v. Shearson Lehman Hutton, 929 F.2d 875 (1st
Cir. 1991), and In re Control Data Corp., 933 F.2d 616
(8th Cir. 1991).
-[72]- Allyn Corp. v. Hartford National Corp., 1982 WL 1301
(D.Conn. 1982).
-[73]- See H. Pitt and K. Groskaufmanis, Selective Disclosure
can be Perilous, Nat'l. L. J. (Apr. 18, 1994) at B4.
-[74]- The First Circuit has stated that the duty to update is
triggered if a statement having a forward intent or
implication, upon which investors are expected to rely,
has been made. Backman v. Polaroid, 910 F.2d 17 (1st
Cir. 1990) (en banc). The Ninth Circuit stated that an
accurate announcement of past events did not carry with
it the duty to disclose whether past trends would
continue. In re Convergent Technologies Securities
Litigation, 948 F.2d 507 (9th Cir. 1991). See
generally Schneider, Update on the Duty to Update: Did
Polaroid Produce the Instant Movie After All?, 23 Rev.
of Sec. & Commodities Reg. 83 (May 9, 1990).
-------------------- BEGINNING OF PAGE #18 -------------------
issuer must continue to update.-[75]-
D. Entanglement and Endorsement.
Another concern voiced by companies is whether to make
forward-looking disclosures to securities analysts and
institutional investors, whether in the context of initial public
offering "roadshows" or otherwise, and the corresponding
liability for any forward-looking statements included in the
analysts' reports or statements. Companies complain that a
better balance must be struck between the incentives and
disincentives of disclosure to analysts.-[76]- The New York
Stock Exchange, the American Stock Exchange, and the National
Association of Securities Dealers encourage listed or quoted
corporations to seek out formal and informal contact with
analysts to facilitate the accurate pricing of their
securities.-[77]- The Commission also encourages such
communications as a complement to disclosure under the Exchange
Act.-[78]-
The foregoing regulatory incentives must be viewed in light
of potential issuer liabilities. While courts appear generally
to impose no duty on a corporation to review or comment on
analysts' reports, a corporation may become sufficiently
entangled with the analysts' statements, by reviewing or
correcting drafts of reports or otherwise, so as to assume a duty
to correct or update the analyst's statements.-[79]- Another
risk arises from selective disclosures that may be characterized
as tipping.-[80]- As a result of these risks, frequently
perceived to outweigh the benefits, some corporations have gone
so far as to announce that they will not speak to analysts about
-[75]- See generally, C. Schneider, Soft Disclosure: Thrust
and Parries When Bad News Follows Optimistic
Statements, 26 Rev. Sec. & Comm. Reg. 5 (1993); R.
Rosenblum, An Issuer's Duty Under Rule 10b-5 To Correct
and Update Materially Misleading Statements, 40 Cath.
Univ. L. Rev. 289 (1991).
-[76]- See generally A. Berkeley & M. Smith, Corporate
Disclosure: Potential Pitfalls, Securities &
Commodities Regulation (June 26, 1991).
-[77]- See New York Stock Exchange Manual, 202.02; American
Stock Exchange Guide 402; and National Association of
Securities Dealers Investor Relations Guide,
Cultivating the Investment Community, at 18.
-[78]- Securities Act Release No. 6504 (Jan. 13, 1984).
-[79]- Elkind v. Liggett & Myers, 635 F.2d 156, 163 (2d Cir.
1980). Commentators have suggested that even a
management response that an analyst's estimates are
"too high," "too low" or "in the ballpark" can give
rise to liability by suggesting that management bore
some type of responsibility for the estimate; see
generally Potential Pitfalls, supra note 76.
-[80]- See Securities and Exchange Commission v. Stevens, Lit.
Rel. No. 12813 (March 19, 1991); Elkind, supra. See
generally M. Goldman, K. Schuelke, J. Danforth and S.
Thau, Disclosures to Financial Analysts (PLI September-
October 1993).
-------------------- BEGINNING OF PAGE #19 -------------------
future earnings projections.-[81]-
IV. Alternatives to Current Safe Harbor Provision.
The Commission generally is examining the current
effectiveness of its safe harbors as codified in Rules 175 and
3b-6. Some commentators and groups have submitted proposals to
amend the safe harbor. The Commission is considering these
proposals and the issues that each proposal raises, as well as
its own experience in interpreting and administering the safe
harbor. Where specific proposed regulatory text has been
provided by these commentators or groups, that text is attached
in the appendix to this release.-[82]-
A. "Seasoned Issuer" Proposal.
The "Seasoned Issuer" Proposal, suggested by the Association
of Publicly Traded Companies ("APTC"), would provide a safe
harbor precluding private actions for oral and written forward-
looking statements with respect to securities quoted on the
NASDAQ Stock Market or listed on a national securities exchange.
It would apply only to secondary trading transactions and would
not modify the Commission's enforcement authority. The proposed
safe harbor would be available to issuers subject to the
reporting requirements of sections 13 or 15(d) of the Exchange
Act that have timely filed all reports required to be filed
within the six months prior to the making of the statement. The
proposed safe harbor would not be available to penny stock
issuers. It also excludes issuers that had been convicted of
securities law violations or issuers that had been the subject of
any securities related injunction within the previous five years.
The term "forward-looking statement" is defined in the
proposed safe harbor to include any economic projection,
statement of management's plans and objectives for future
operations, statement of future performance and assumptions
underlying the foregoing.
B. Business Judgment Rule Proposal.
Commissioner Beese has proposed a safe harbor provision
patterned after the state-law "business judgment rule."-[83]- In
the pattern of that rule, the safe harbor would establish a
principle of judicial non-intervention. As such, the safe
harbor would protect directors and officers from judicial review
of shareholder antifraud claims when forward-looking statements
are made unless a plaintiff can establish a conflict, a lack of
good faith, or a failure of honest and reasonable belief.
The safe harbor would cover oral or written forward-looking
information, whether or not made or reaffirmed in Commission
filings. Liability still could be imposed on directors or
officers who make fraudulent statements, intentionally misstate
facts, or fail to disclose material information when required.
To ensure that an officer or director was meeting his duties
under the business judgment rule, a company would be encouraged
to keep a projection binder reflecting the data underlying the
projections. In the event that a private lawsuit was filed, the
company would proffer the binder to the court. The burden then
would shift to the plaintiffs to show why the projections lacked
-[81]- See, e.g., J. Coffee, Disclosures to Analysts are
Risky, Nat'l L.J. (Feb. 1, 1993).
-[82]- The transmittal letters pursuant to which some of these
proposals were submitted to the Commission are included
in the public file (S7-29-94).
-[83]- See, e.g., Paramount Communications Inc. v. QVC
Network, Inc., 637 A.2d 34, 46 n.17 (1994); Cede & Co.
v. Technicolor, Inc., 634 A.2d 345 (1993).
-------------------- BEGINNING OF PAGE #20 -------------------
a proper factual basis at the time they were made. If unable to
meet this burden, the case would be dismissed without any
discovery.-[84]-
C. "Heightened Definition" Proposal.
The "Heightened Definition" Proposal, put forth jointly by
the Business Roundtable and the National Association of
Manufacturers, would apply to all forward-looking statements and
reaffirmations thereof, by or on behalf of a registrant or an
outside reviewer retained by the registrant, whether or not filed
with the Commission. The proposed safe harbor would apply to the
same information as is protected by the current safe harbor but
would expressly extend to both qualitative and quantitative
statements of management's plans and objectives for future
operations, including plans for the development and delivery of
new products or services.
The provision would apply to all statements of reporting
issuers that have timely filed their most recent annual report.
As provided under the existing rule, non-reporting issuers also
could rely on the safe harbor, but only if the forward-looking
statement were made in a solicitation of interest document
submitted under Securities Act Rule 254, in a registration
statement or Regulation A Offering Circular filed under the
Securities Act, or in a registration statement filed under the
Exchange Act.
Liability would be imposed only if a misstatement or
omission is material, made or omitted with scienter, and, for
private plaintiffs, relied upon. Materiality would be defined as
information that would significantly alter the total mix of
information available. Scienter would be defined as actual
knowledge or intentional omission to state a material fact.
Reliance would be defined as actual knowledge of and actual
reliance on the forward-looking statement in connection with the
purchase or sale of a security. Under the proposal, there would
be no attribution to the issuer of statements made by third
parties unless the issuer expressly endorsed or approved of the
statement. Finally, an issuer would not have a duty to update a
forward-looking statement unless it expressly undertook to do so
at the time the statement was made.
D. "Bespeaks Caution" Proposal.
Professor John Coffee suggests a safe harbor that would
codify a variant of the "Bespeaks Caution" doctrine - articulated
in terms of an investor's inability to rely in an action for
fraud upon statements protected by the safe harbor. Under this
proposed safe harbor, which would be available to reporting
companies (except penny-stock issuers), a forward-looking
statement would be protected so long as it were properly
qualified and accompanied by "clear and specific" cautionary
language that explains in detail sufficient to inform a
reasonable person of both the approximate level of risk
associated with that statement and the basis therefor. Forward-
looking statements made, either orally or in writing, outside the
four corners of a Commission filing would be covered only if
reaffirmed in a filed document or annual report made publicly
available within a reasonable period after the statement is first
disseminated. The suggested safe harbor would not require that
the forward-looking statement have a "reasonable basis" (as under
existing Rules 175 and 3b-6) because, according to Professor
-[84]- The Association for Investment Management and Research
("AIMR") has expressed support for Commissioner Beese's
proposal. See Letter from Michael S. Caccesse, Senior
Vice President and General Counsel, AIMR, to Catherine
Dixon dated October 7, 1994.
-------------------- BEGINNING OF PAGE #21 -------------------
Coffee, this requirement often raises factual issues that cannot
easily be resolved at the pre-trial stage.
Professor Coffee's approach also contemplates amendments to
the incorporation-by-reference provisions of the Securities Act
registration forms-[85]- that would exempt qualifying forward-
looking statements made in Exchange Act filings from automatic
incorporation by reference in Securities Act filings, and
therefore from potential liability under the antifraud provisions
of the Securities Act. Existing Rule 175 would remain available
where registrants affirmatively seek inclusion of Exchange Act
filings in Securities Act registration statements.
E. "Fraudulent Intent" Proposal.
Under the "Fraudulent Intent" proposal, submitted by Mr.
William Freeman, a forward-looking statement would be protected
by the safe harbor unless it is shown that the statement was made
recklessly or with an actual intent to deceive. In order to
demonstrate that a statement was made recklessly, a plaintiff
would be required to demonstrate that at the time the statement
was made, the issuer was aware of facts that made it highly
unlikely that the projection could be achieved.
F. "Disimplication" Theory.
Professor Joseph A. Grundfest has suggested that, just as
the courts have implied the existence of a private right of
action under Rule 10b-5, the Commission may disimply such a right
of action by redefining the element of a private Rule 10b-5
claim.-[86]- For example, Professor Grundfest has suggested that
if the Commission should decide that if "projections deserve
greater protection than is now afforded by Rule 175, then Rule
10b-5 can be amended to require a showing of 'knowing securities
fraud,' demonstrating 'actual knowledge that the [projection] is
false,' as a precondition for private recovery in a Rule 10b-5
action complaining of a falsely optimistic projection."-[87]-
G. Reasonable Basis In Fact Proposal.
The "Reasonable Basis In Fact" proposal, suggested by
Jonathan Cuneo on behalf of the National Association of
Securities and Commercial Attorneys ("NASCAT") protects forward-
looking statements, whether written or oral and whether or not
filed with the Commission, unless it can be shown that the
statement was made without a reasonable basis in fact, was
seriously undermined by existing facts, was not genuinely
believed or was made other than in good faith.
The term "forward-looking statement" is defined to include
any statement concerning future revenues, income, earnings,
capital expenditures, dividends, products, services or lines of
business, capital structure or other financial items, as well as
management's plans or objectives for the future or the future
economic performance of the corporation. The term also includes
statements or assumptions underlying or relating to the
foregoing.
H. "Opt-In" Proposal.
-[85]- See, e.g., Item 12 of Forms S-2 and S-3 (17 CFR 239.12-
13 (1994)); Items 11-13 of Form S-4 (17 CFR 239.25
(1994)); Item 12 of Forms F-2 and F-3, (17 CFR 239.32-
33 (1994)); Items 11-14 of Form F-4 (17 CFR
239.36)(1994)).
-[86]- Grundfest, Disimplying Private Rights of Action Under
the Federal Securities Laws: The Commission's
Authority, 107 Harv. L. Rev. 961 (1994).
-[87]- Id. at 1012 (footnotes omitted).
-------------------- BEGINNING OF PAGE #22 -------------------
The "Opt-In" proposal, suggested by Harvey Pitt, Karl
Groskaufmanis and Gilbey Strub, would require issuers to make a
formal election to "opt in[to]" a specified safe harbor
disclosure regime.-[88]- Issuers opting in would be required to
make forward-looking disclosure for a minimum of four quarters.
Before a company may "opt out" of the safe harbor disclosure
regime, it must provide notice 30 days before its next periodic
report. The notice must detail the reasons for opting out, and
statements therein would not be protected by the safe harbor.
The company would be prohibited from opting back into the safe
harbor disclosure regime for another year.
In order to be protected, the statements must have an
adequate basis in fact, be issued in good faith and be consistent
with any similar forward-looking information used
contemporaneously by the issuer. For an issuer that has "opted
in" to the safe harbor disclosure regime, only the Commission
would be permitted to bring suit for projections that are made in
bad faith or without a reasonable basis.
V. Solicitation of Public Comment.
The Commission seeks comment on a number of issues.
Commenters should discuss both the continuing effectiveness of
the current safe harbors in accomplishing the primary goal of
encouraging broader dissemination of forward-looking information
to the investing public, and whether the Commission should
consider any change to the current safe harbor. Would one or
more of the proposals outlined above, any combination thereof, or
any other proposal commenters may wish to identify fulfill this
goal more effectively without compromising investor protection?
Do the concerns outlined in Part III above, either individually
or in the aggregate, warrant revisiting and/or revising the
existing safe harbor? Commenters should explain in detail all
bases for their conclusion.
A. Types of Information Covered by a Safe Harbor.
Assuming a safe harbor continues to be necessary or
appropriate in the interests of the investing public, commenters
should discuss what types of information should be eligible for
safe harbor coverage.
Commenters supporting safe harbor coverage for forward-
looking information should address the reasons justifying a
distinction between forward-looking and historical information
(either purely retrospective or based on estimate or opinion)
with respect to the level of protection afforded to each. Does
the fact that the person making the statements has unique
knowledge concerning the basis for forward-looking statements
support or undercut this distinction? Commenters may wish to
specify whether qualitative information, including but not
limited to the type described above in Part I, is relevant to
investors such that its disclosure should be encouraged. If so,
should such information be included in the safe harbor? Should
forward-looking information that is currently part of required
audited financial information (such as loan-loss reserves,
pension liabilities or contingent environmental liabilities) be
included?-[89]- Are there certain types of forward-looking
information that should be per se excluded from the safe harbor
(e.g., such as required audited information, or the "known trends
and uncertainties" disclosure required by the MD&A)?
-[88]- H. Pitt, K. Groskaufmanis and G. Strub, Securities Law,
Nat. L. J., August 22, 1994, at B4.
-[89]- See Regulation S-K Item 101(c)(xii), 17 CFR
229.101(c)(xii); Industry Guide 3, Summary of Loan Loss
Experience, 17 CFR 229.801 (1994).
-------------------- BEGINNING OF PAGE #23 -------------------
Should the safe harbor distinguish between oral and written
statements, between statements filed with the Commission and non-
filed statements, or between Securities Act required statements
and others? Should the Commission require that any oral
statement for which safe harbor coverage is sought be reduced to
writing and filed with the Commission at or around the time that
statement is first disseminated? If not, commenters should
describe the legal and/or practical impediments, if any, to a
contemporaneous filing requirement. Are there certain
situations, i.e., an initial public offering, in which safe
harbor protection should be limited to statements made in
Commission filings? Are commenters' views on these questions
affected by the type of forward-looking information under
consideration? For example, do different types of forward-
looking information imply different degrees of reliability, e.g.,
numerical financial projections as opposed to general statements
of management's outlook? If so, should a broader safe harbor
provide protection for a narrower category of information than
does Rule 175 currently, or would differing safe harbors be
warranted?
B. Voluntary Disclosure.
Should the Commission continue its current general policy of
voluntary disclosure of forward-looking information or should
some or all of such information, given its significance, be
mandated? If left voluntary, should any such information used in
the offer or sale of securities by the issuer be required to be
included in the prospectus? Would this be an appropriate
solution to the issue of selective disclosure of key soft
information during road shows? If not, commenters should explain
this conclusion and discuss alternative approaches.
C. Scope of the Safe Harbor.
Should the safe harbor be procedurally based or
substantively based or both? For example, should the safe harbor
be available only if the forward-looking information is reviewed
by the board Audit Committee, or some other board level
committee or committee of top management or an outside reviewer,
or should the standard be a substantive one dependent on the
reasonableness or other criteria of the information itself,
regardless of the review process, or both?
D. Eligibility for and Conditions to Use of Safe Harbor.
Should all issuers be eligible for the safe harbor or only
certain issuers that satisfy specified conditions, such as
sufficient reporting history and/or public float to ensure a
market following? What other conditions might be appropriate?
Should issuers be required to opt-in or opt-out of a safe harbor
alone or in combination with the foregoing? If so, what should
the opt-in/opt-out conditions be? Should an issuer be required
to specify that it is seeking the protection of the safe harbor
by making a public filing, or by stating with regard to each safe
harbor-eligible statement (where the issuer chooses the safe
harbor's protection), that the statement is being made subject to
the safe harbor, or by otherwise providing a "bespeaks caution"
or other cautionary language? How could this condition be met
(or policed) for oral statements or written statements made
outside of Commission filings? Should the burden of proof be
shifted from the plaintiff to the defendant corporation,
generally or with respect to certain types of disclosures, i.e.,
written statements outside Commission filings, oral statements,
etc.? Should shareholders be permitted, or required to vote on
the availability of any safe harbor? If so, should shareholders
be permitted to approve or authorize more extensive safe harbors
than those that would otherwise be available at the election of
the issuer?
Should the safe harbor require disclosure of key assumptions
-------------------- BEGINNING OF PAGE #24 -------------------
because that information is uniquely within the control of the
issuer? If assumptions were required to be disclosed along with
the forward-looking information, how would this affect the
judicial treatment of forward-looking cases? For example, if
assumptions were required to be disclosed, would it make it
easier for courts to evaluate motions to dismiss cases on a
procedural motion and/or impose sanctions for the bringing of
frivolous suits? Would this requirement be more or less
effective coupled with any proposed litigation reforms?
Should the safe harbor be unavailable (or provide greater or
absolute protection) if an insider, or specified insiders, traded
(or no insider, or specified insiders, traded) within a specified
period where the insiders(s) avoided a loss or made a gain (or
failed to do so) based on the dissemination and subsequent
correction of the forward-looking statement?
E. Elements of the Safe Harbor.
Commenters should outline and discuss each element of an
effective safe harbor. In this connection, should the safe
harbor set forth a separate definition of materiality differing
from that otherwise applicable under Commission rules and case
law? Should the safe harbor impose and/or specify parameters for
a duty to update or correct? Should the safe harbor require that
a private plaintiff establish that he or she actually relied on
forward-looking statements? Should a new definition of scienter
be included in the safe harbor, e.g., by eliminating recklessness
as an element of proof? In answering this question, commenters
should discuss separately implied and express rights of action,
as well as Commission and private actions. Should a safe harbor
include judicially developed concepts such as the "business
judgment rule," "bespeaks caution" doctrine and/or any other
judicial approaches discussed in the release? What treatment
should the safe harbor give to information that the issuer does
not disclose that may be relevant to evaluating the forward-
looking statement?
F. Private Actions.
Should the safe harbor distinguish between Commission
enforcement action and private actions? Should the answer to the
foregoing question depend on whether the underlying cause of
action is express or implied? Would the Commission be able to
compensate through enhanced enforcement for any reduction in the
number of private suits in this area resulting from adoption of a
particular safe harbor? How would any limitation on private
actions, whether directly imposed or incorporated in a safe
harbor, affect the Commission's longstanding policy of promoting
private actions for fraud as a necessary supplement to Commission
enforcement?
Should private litigants be required to pursue any antifraud
claims arising from statements covered by a safe harbor in a
nonjudicial forum -- for example, through arbitration or some
other form of alternate dispute resolution? Some commentators
have suggested that a safe harbor should be adopted that would
permit private antifraud actions to proceed only if the
Commission first brings a successful enforcement action for
fraud. Commenters are invited to address the merits of this
suggestion and means of its implementation.
G. Issuer Duties Under the Safe Harbor.
Should an issuer be required to update any forward-looking
information? If so, for how long? Should the answer turn on
whether disclosure is mandated by the Commission's disclosure
requirements (i.e., MD&A) or voluntary? Should an issuer be
required to compare projections to actual results to provide
information as to the reliability of the projections? Should an
issuer be required to disclose and/or to file assumptions or the
basis for a statement, as now required for issuers that elect to
-------------------- BEGINNING OF PAGE #25 -------------------
provide option grant values calculated under the option pricing
models?-[90]-
Should the safe harbor require a registrant to correct
forward-looking information rendered false or misleading after
its initial disclosure? Should this duty extend only to
information filed with the Commission?
Should a duty be imposed on issuers to update and/or correct
forward-looking information disclosed by others? Should the safe
harbor expressly provide that there is no duty to update and/or
correct statements made by others? Should the safe harbor
include a duty to update and/or correct statements only if the
issuer becomes sufficiently "entangled" with the third party? If
so, should the safe harbor delineate those acts or omissions that
would support a finding of entanglement?
H. Registered Investment Companies.
Is the forward-looking information that might be disclosed
by registered investment companies, i.e., projections of fund
performance, inappropriate for the protection of the safe harbor
because it is contingent on the performance of the securities
markets, and therefore subject to greater uncertainty and
frequency of change? Do any other characteristics of registered
investment companies warrant separate treatment of their forward-
looking disclosure for purposes of the safe harbor or, more
generally, should such disclosure by registered investment
companies be afforded any protection under a safe harbor?
Comment also is specifically invited as to whether distinctions
should be made among different kinds of registered investment
companies (e.g., open-end and closed-end, unit investment trust
and management) for the purpose of encouraging forward-looking
disclosure and providing safe harbor protection? In light of the
fact that investment companies, unlike most other public
companies, are not currently required to file current reports
(Form 8-K) or quarterly reports (Form 10-Q), commenters should
address how projections or other forward-looking information by
investment companies would be revised or updated.
I. Multiple Safe Harbors.
Some suggest that if private actions were to be reduced or
eliminated, some issuers would be willing to make additional
filings with the Commission, either in connection with current
periodic reports or on a new disclosure form, and be subjected to
greater Commission oversight with lower thresholds for Commission
enforcement actions and greater restrictions on information that
can be provided orally. Other issuers may find these protections
unnecessary, but would benefit from a safe harbor that simply
made certain types of antifraud claims more difficult to
prosecute successfully. Would it be reasonable to provide for or
make available different types of safe harbors tailored to the
particularized needs of differently situated issuers?
Specifically, does the need for heightened protections of
statements to analysts, whether oral or written, vary with the
size and/or reporting history of the issuer? Should a different,
more rigorous, safe harbor be made available to companies
conducting an initial public offering, than that made available
to companies with reporting histories? For example, are smaller
issuers potentially affected differently than larger issuers so
that different safe harbors should be available? Should the
existing safe harbors in the Trust Indenture Act and the Public
Utility Holding Company Act also be modified and, if so, why?
J. Possible Alternatives or Supplements to a Safe Harbor.
Commenters also may wish to discuss whether there are
alternatives to a safe harbor that would accomplish the same goal
-[90]- See Item 402(c) of Regulation S-K, 17 CFR 229.402(c).
-------------------- BEGINNING OF PAGE #26 -------------------
of promoting enhanced disclosure of forward-looking information.
For example, are there reforms with regard to the content and/or
presentation of soft information -- whether within or outside of
Commission filings -- that would obviate the need for a safe
harbor or the need to change the current safe harbor? Are there
litigation reforms relating more broadly to the scope of
antifraud liability under the securities laws that would obviate
the need for the safe harbor? For example, could an issuer be
presumed to have no liability for forward-looking statements
otherwise eligible for the safe harbor unless the named plaintiff
or group of plaintiffs represents at least a minimum percentage
(say 10%) of the affected shareholder class? To the extent that
the current safe harbor is strengthened in favor of issuers,
should there be concomitant strengthening of other safeguards for
investors? In this regard, commenters may wish to discuss the
practicality of accomplishing any such reforms, and the
likelihood that any such reforms would succeed. In lieu of or in
addition to revising the existing safe harbor, should the
Commission redefine one or more elements of a private Rule 10b-5
claim (e.g., scienter, materiality and reliance)?
VI. Public Hearings.
The issues addressed in this release have attracted the
interest of investors, registrants, analysts and other market
participants, as well as lawyers, accountants, federal
legislators and academics. In view of this broad interest, as
well as the importance and complexity of these issues, the
Commission intends to authorize public hearings to be conducted
after the close of the comment period. Among other matters,
these hearings will explore the assumptions underlying the
different views expressed by these and other members of the
public. Testimony from witnesses will be elicited about the
efficacy and potential effects of different safe harbor
approaches, the costs and benefits of each approach, the design
of any safe harbor and issues that may be raised by the comment
letters. After these hearings, the Commission will determine
whether to propose amendments to the rules regarding forward-
looking information.
The hearings will begin at 10:00 a.m. on February 13, 1995
at 450 Fifth Street, N.W., Washington, D.C. 20549 room 1C30. The
agenda and format for the hearings, as well as the schedule of
witnesses will be announced in a subsequent release to be issued
shortly before the hearings commence.
Members of the public interested in testifying at the
hearing should notify the Commission in writing of their
intention to appear no later than December 31, 1994. The written
notification should include a brief summary of the individual's
intended testimony. Any person who does not wish to appear at
the hearing may submit written testimony to be included in the
hearing record. Such written testimony should be received by the
Commission no later than January 11, 1995.
All written notifications, testimony and comment letters
should be addressed in triplicate to Jonathan Katz, 450 Fifth
Street, N.W., Washington, D.C. 20549 and should refer to the
comment file number of this release [S7-29-94] All written
submissions and a transcript of the hearings will be made
available for public inspection and copying in the Commission's
Public Reference Room. The hearings will be open to the public.
By the Commission.
-------------------- BEGINNING OF PAGE #27 -------------------
Jonathan G. Katz
Secretary
October 13, 1994
APPENDIX
SEASONED ISSUER PROPOSAL - ASSOCIATION OF PUBLICLY TRADED
COMPANIES
(a) A forward-looking statement made by or on behalf of an
issuer, or an omission to state a fact necessary to make the
statement not misleading, shall not serve as the basis for a
private action for damages under the Securities Act of 1933 or
the Securities Exchange Act of 1934 if:
(1) The forward-looking statement is made in connection
with a listed equity security or Nasdaq security for which
transaction reports are required to be made on a mandatory
real-time basis pursuant to an effective transaction reporting
plan of an issuer which has been subject to the requirements of
Section 12 or 15(d) of the Act and has filed all the material
required to be filed pursuant to Sections 13, 14 or 15(d) for a
period of six months;
(2) The issuer is not an issuer of penny stock as defined in
Section 3(a)(51)(A) of the Act and Commission regulations;
(3) The issuer has not been convicted within five years
prior to the making of the statement of any felony or
misdemeanor in connection with the purchase or sale of any
security or involving the making of any false filing with the
Commission;
(4) The issuer is not subject to any order, judgement or decree
of any court of competent jurisdiction temporarily or
preliminarily restraining or enjoining, or is not subject to any
order, judgement or decree of any court of competent
jurisdiction, entered within five years prior to the making of
the statement, permanently restraining or enjoining the issuer
from engaging in or continuing any conduct or practice in
connection with the purchase or sale of any security or involving
the making of any false filing with the Commission;
(b) The term "forward-Looking statement" means:
(1) A statement containing a projection of revenues, income
(loss), earnings (loss) per share, capital expenditures,
dividends, capital structure, growth rates, order rates, margin
performance, price performance, backlog or other financial items
whether stated in quantitative or qualitative terms;
(2) A statement of management's plans and objectives for future
operations;
(3) A statement of future economic, product or business
performance; or
(4) Disclosed statements of the assumptions underlying or
relating to any of the statements described in paragraph (b)(1),
(2) or (3) above.
HEIGHTENED DEFINITION PROPOSAL - BUSINESS ROUNDTABLE AND
NATIONAL ASSOCIATION OF MANUFACTURERS.
Rule 3b-6. Liability for Certain Statements by Issuers.
Preliminary Note
The Commission has recognized for many years that investors
make decisions about the purchase and sale of securities with the
future in mind. The market value of securities accordingly
reflects the judgments of investors about the future economic
-------------------- BEGINNING OF PAGE #28 -------------------
performance of an issuer. Notwithstanding the inherent
uncertainty of all statements about the future, investors regard
forward-looking statements by issuers as an important source of
relevant information. Forward-looking statements therefore make
an important contribution to the efficiency of the U.S.
securities markets, and the Commission wishes to encourage
issuers to make such statements. At the same time, the Commission
recognizes that issuers have a justified concern about becoming
involved in litigation arising out of such statements. As the
Supreme Court has observed, "even a complaint which by objective
standards may have very little success at trial has a settlement
value to the plaintiff out of any proportion to its prospect of
success at trial so long as he may prevent the suit from being
resolved against him by dismissal or summary judgment. The very
pendency of the lawsuit may frustrate or delay normal business
activity of the defendant which is totally unrelated to the
lawsuit." Blue Chip Stamps v. Manor Drug Store, 421 U.S. 723, 740
(1975).
In order to encourage the release by issuers of
forward-looking information, the Commission has adopted this
"safe harbor" rule. The Commission encourages the courts to apply
the rule so as to implement the Commission's intent, i.e., to
provide issuers with reasonable assurance regarding the standards
that will govern their liability for such information while at
the same time assessing liability where an issuer's conduct falls
outside the rule and is otherwise actionable under the federal
securities laws.
(a) General Rule. A statement within the coverage of
paragraph (b) below which is made or alleged to be made by or on
behalf of an issuer or by an outside reviewer retained by the
issuer shall not serve as the basis of a violation of the Act
unless (l) it relates to a misstatement or omission that is
material within the meaning of paragraph (f), (2) it is made or
omitted with scienter within the meaning of paragraph (g) and (3)
the person challenging the statement (other than the Commission)
relied on the statement within the meaning of paragraph (h).
(b) Covered Statements. This rule applies to the following
statements:
(l) A forward-looking statement (as defined in paragraph (c)
below), provided that:
(i) At the time such statements are made or reaffirmed,
either the issuer is subject to the reporting requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and
has complied with the requirements of Rule l3a-l or l5d-l
thereunder, if applicable, to file its most recent annual report
on Form lO-K, Form lO-KSB, Form 20-F, or Form 40-F; or, if the
issuer is not subject to the reporting requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934, the
statements are made in a registration statement filed under the
Securities Act of 1933, offering statement or solicitation of
interest written document or broadcast script under Regulation A,
or pursuant to Section 12(b) or (g) of the Securities Exchange
Act of 1934, and
(ii) The statements are not made by an issuer that is an
investment company registered under the Investment Company Act of
1940; and
(2) Information which relates to (i) the effects of changing
prices on the business enterprise, presented voluntarily or
pursuant to Item 303 of Regulation S-K, or Regulation S-B, or
Item 9 of Form 20-F, "Management's discussion and analysis of
financial condition and results of operations," or Item 302 of
Regulation S-K, "Supplementary financial information," or Rule
3-20(c) of Regulation S-X, or (ii) the value of proved oil and
gas reserves (such as a standardized measure of discounted future
-------------------- BEGINNING OF PAGE #29 -------------------
net cash flows relating to proved oil and gas reserves as set
forth in paragraphs 30-34 of Statement of Financial Accounting
Standards No. 69) presented voluntarily or pursuant to Item 302
of Regulation S-K.
(c) Forward-Looking Statement. For the purpose of this
rule, the term "forward-looking statement" shall mean and shal1
be limited to:
(1) A statement containing a projection of revenues, income
(loss), earnings (loss) per share, capital expenditures,
dividends, capital structure or other financial items;
(2) A statement of management's plans and objectives for
future operations, whether qualitative or quantitative, including
plans for the development and delivery of new products or
services;
(3) A statement of future economic performance; or
(4) Disclosed statements of the assumptions underlying or
related to any of the statements described in paragraph (c)(l),
(2), or (3) above.
(d) Third-Party Statements. A forward-looking statement
shall be deemed not to have been made by or on behalf of an
issuer for the purposes of paragraph (a) if it is made by any
person other than the issuer or outside reviewer retained by the
issuer and the issuer has not expressly and substantially
contemporaneously endorsed or approved the statement. An issuer
shall not be deemed to have any obligation to correct or update
any statement made by a third party.
(e) Duty to Update. An issuer shall not be deemed to have
any obligation to update a forward-looking statement made by it
unless it has expressly and substantially contemporaneously
undertaken to update such statement.
(f) Materiality. A forward-looking statement shall be deemed
to be material only if it significantly alters the total mix of
information made available regarding an issuer or its securities.
(g) Scienter. An issuer shall be deemed not to have acted
with scienter with respect to a forward-looking statement unless
the issuer had actual knowledge that the statement was false or
knowingly and intentionally omitted to state a fact for the
purpose of rendering such statement misleading. Evidence that
(1) the issuer's officers, directors or employees traded
contemporaneously in the issuer's securities or were the
beneficiaries of compensation awards (whether or not related to
the value of the issuer's securities) or (2) information tending
to cast doubt on a statement's accuracy was in the possession of
the issuer's employees below the level at which reporting
decisions are made (or at such level but prior to the time such
information could reasonably be expected to have been taken into
account in making the statement), shall not in either case, or in
both cases, in and of itself, be sufficient to support a finding
of actual knowledge that a statement is false or misleading.
(h) Reliance. A forward-looking statement (or a statement
derived therefrom) shall not be deemed to have been relied upon
unless a person claiming such reliance had actual knowledge of
and actually relied on such statement in connection with the
purchase or sale of a security.
BESPEAKS CAUTION PROPOSAL - PROFESSOR COFFEE
Proposed Rule lOb-22. Liability for Certain Statements by
Issuers
(a) A purchaser or seller of securities shall not be entitled to
rely in any action for fraudulent statement (as defined in
paragraph (c) of this rule) upon a statement within the coverage
of paragraph (b) of this rule.
(b) This rule applies to the following statements (with the
burden being on the plaintiff to show that a statement asserted
-------------------- BEGINNING OF PAGE #30 -------------------
by an issuer or other defendant to fall within this paragraph
does not in fact so qualify):
(1) A forward-looking statement (as defined in Rule 3b-6
under the Securities Exchange Act of 1934) made in a document
filed with the Commission, or in an annual report meeting the
requirements of Rules 14a-3(b) and (c) or 14c-3(a) and (b) under
the Securities Exchange Act of 1934, a statement reaffirming such
forward-looking statement subsequent to the date the document was
filed or the annual report was made publicly available, or a
forward-looking statement made prior to the date the document was
filed or the date that the annual report was made publicly
available if such statement is reaffirmed in a filed document or
in an annual report made publicly available within a reasonable
period after the making of such forward-looking statement;
(2) Information disclosed in a document filed with the
Commission or in an annual report meeting the requirements of
Rules 14a-3(b) and (c) or 14c-3(a) and (b) in response to (A)
Item 303 of Regulation S-K or Regulation S-B with respect to
liquidity, capital resources, and results of operations to the
extent that such information identifies or describes the likely
future impact of known trends or known demands, commitments,
events or uncertainties or any expected changes with regard
thereto, or (B) Item 302 of Regulation S-K or Rule 3-20(c) of
Regulation S-X with regard to the affects of changing price
levels on the business enterprise or the value of proved oil and
gas reserves;
Provided that, in either case
(i) Such statement contains or is closely accompanied by
clear and specific cautionary language that explains in detail
sufficient to inform a reasonable person of the level of risk
associated with, or inherent in, the statement and that
identifies the specific basis for such statement and for such
level of risk;
(ii) At the time such statements are made or reaffirmed, the
issuer is subject to the reporting requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934 and has complied
with the requirements of Rule 13a-l or 15d-l thereunder, as
applicable, to file its most recent annual and quarterly reports
on [form references omitted];
(iii) the statements are not made by or on behalf of an
issuer that (A) is an investment company registered under the
Investment Company Act of 1940, (B) has outstanding a "penny
stock" (as defined in section 3(a)(50) of the Securities Exchange
Act of 1934), or (C) would then be disqualified under Rule 262(a)
from use of Regulation A under the Securities Act of 1933.
(c) For the purpose of this rule, the term fraudulent statement
shall mean . . . [same as Rule 175(d)].
FRAUDULENT INTENT PROPOSAL - WILLIAM FREEMAN, ESQUIRE
The following language would be substituted into paragraph
(a) of Rules 175 and 3b-6 (new language in boldface italics):
(a) A statement within the coverage of paragraph (b) of this
section which is made by or on behalf of an issuer or by an
outside reviewer retained by an issuer shall be deemed not to be
a fraudulent statement (as defined in paragraph (d) of this
section), unless it is shown that such statement was made or
reaffirmed recklessly or with actual intent to deceive. A
forward looking statement will not be deemed to be made or
reaffirmed recklessly unless it is shown that the issuer was, or
had to be, aware of facts that made it highly unlikely that the
projection could be achieved.
REASONABLE BASIS IN FACT - NATIONAL ASSOCIATION OF SECURITIES
AND COMMERCIAL LAW ATTORNEYS ("NASCAT")
-------------------- BEGINNING OF PAGE #31 -------------------
Liability for Certain Statements by Issuers
(a) A statement within the coverage of paragraph (b) of
this rule which is made by or on behalf of an issuer (whether
directly or by or through the means of any other person) or by an
outside reviewer retained by the issuer shall be deemed to not be
a fraudulent statement (as defined in paragraph (d) of this
rule), unless it is shown that, at the time such statement was
made or reaffirmed (i) facts seriously undermining its accuracy
existed; (ii) it was not genuinely believed; (iii) it lacked a
reasonable basis in fact; or (iv) it was issued other than in
good faith.
(b) This rule applies to any forward-looking statement (as
defined in paragraph (c) of this rule), whether written or oral.
(c) For the purpose of this rule the term "forward-looking
statement" shall mean:
(1) Any statement concerning future revenues, income
(loss), earnings (loss) per share, products, services or lines of
business, capital expenditures, dividends, capital structure or
other financial items;
(2) Any statement of management's plans or objectives for
the future;
(3) Any statement of future economic performance; or
(4) Disclosed statements of the assumptions underlying or
relating to any of the statements described in paragraphs (c)(1),
(2) or (3) above.
(d) For the purpose of this rule the term "fraudulent
statement" shall mean a statement which is an untrue statement of
a material fact, a statement false or misleading with respect to
any material fact, an omission to state a material fact necessary
to make a statement not misleading, or which constitutes the
employment of a manipulative, deceptive, or fraudulent device,
contrivance, scheme, transaction, act, practice, course of
business, or an artifice to defraud, as those terms are used in
the Securities Act of 1933, the Securities Exchange Act of 1934
or the rules or regulations promulgated thereunder.