One HealthSouth Parkway
Birmingham, Alabama 35243
William W. Horton
Executive Vice President & Corporate Counsel
Direct Dial: (205) 969-4977
Facsimile: (205) 969-4730
May 2, 2002
Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Acceleration of Periodic Report Filing Dates and Disclosure
Concerning Website Access to Reports
Commission File No. S7-08-02
Dear Mr. Katz:
As the senior legal officer of HEALTHSOUTH Corporation, I write on behalf of HEALTHSOUTH to provide our comments on the Commission's proposed rules concerning the acceleration of periodic report filing dates and certain other matters set forth in Release No. 33-8089; 34-45741 (the "Proposing Release"). We appreciate the opportunity to comment on the matters discussed in the Proposing Release.
By way of background, HEALTHSOUTH is one of the nation's largest providers of healthcare services, operating approximately 1,900 patient care locations in all 50 states and overseas. HEALTHSOUTH's common stock has been publicly traded since 1986 and listed on the New York Stock Exchange (under the symbol HRC) since 1989. We are and have been for several years included in the S&P 500 and the Fortune 500. Thus, we are squarely within the class of issuers that would be affected by the changes contemplated in the Proposing Release.
We strongly support the Commission's goals of improved disclosure to the investment community. As a frequent participant in both the debt and equity capital markets, we recognize the importance of timely, complete, transparent and practically useful disclosure, and we share the Commission's concern that the disclosure regime under the federal securities laws be modified as appropriate to take into account the many changes in information technology and the dynamics of the securities markets that have occurred over the last several years.
However, we respectfully suggest that certain of the rule amendments set forth in the Proposing Release will impose onerous burdens on issuers, even large seasoned issuers such as HEALTHSOUTH, without commensurate improvements in the quality and utility of information provided to investors. Indeed, the accelerated filing schedule that would be required under such rule amendments could well result in a diminution in the accuracy, completeness and comprehensiveness of disclosure, with resultant adverse effects on investors and on the stability and efficiency of the capital markets. Accordingly, we urge the Commission to withdraw its proposal to accelerate filing deadlines for Exchange Act reports and to make certain modifications to its proposal concerning disclosures about Website access to information. Our detailed comments are set forth below.
A. Acceleration of Filing Dates for Periodic Reports
Under the rule amendments set forth in the Proposing Release, reporting issuers with a public float of at least $75 million which meet certain other requirements would be required to file 10-Qs within 30 days after the end of their fiscal quarters and 10-Ks within 60 days after the end of their fiscal year, an acceleration of 15 days for 10-Qs and 30 days for 10-Ks. The Commission believes that such "accelerated filers" will be able to meet these shortened deadlines without sacrificing accuracy or completeness, and that acceleration of the filing deadlines will materially improve the flow of information to investors and the markets. We respectfully suggest that these beliefs are not accurate, and that they fail to take into account both the increased substantive and procedural requirements associated with Exchange Act periodic reporting and the significant difficulties that the accelerated deadlines will impose on large issuers with diversified, geographically widespread operations, such as HEALTHSOUTH.
In the following sections, we set forth both our analysis of the relevant general policy considerations and specific issues that would cause the proposed rule amendments, if adopted, to pose substantial burdens on HEALTHSOUTH and other issuers in the healthcare services industry.
1. The Proposed Acceleration of Filing Deadlines Would Impose Undue Burdens on Issuers without Improving the Quality of Disclosure
As noted in the Proposing Release, the Commission requested comment in its 1998 "Aircraft Carrier" release1 as to whether it would be appropriate to accelerate the filing dates of 10-Qs and 10-Ks in the same manner as currently proposed.2 In the Proposing Release, the Commission acknowledged that, while some commenters on the Aircraft Carrier release supported or did not object to the acceleration of filing dates, a larger number thought that they would be overly burdensome and could result in less accurate filings.3 Included in this latter group were professional and trade associations such as the Committee on Federal Regulation of Securities of the Business Law Section of the American Bar Association, the Committee on Securities Regulation of the Association of the Bar of the City of New York, the Corporate and Securities Law Committee of the American Corporate Counsel Association, the Business Roundtable and the New York State Society of Certified Public Accountants; investment bankers and broker-dealers such as J. P. Morgan & Co., Goldman, Sachs & Co., Merrill Lynch & Co. and Charles Schwab & Co.; leading law firms such as Sullivan & Cromwell and Cleary, Gottlieb, Steen & Hamilton (the former firm of the current Director of the Division of Corporation Finance and the current General Counsel of the Commission), as well as seven leading Silicon Valley firms that commented jointly with Professor Joseph A. Grundfest of Stanford Law School, a former member of the Commission; and numerous individual issuers and other market participants.4
Many of these commenters have been deeply, continuously and publicly committed to the modernization and improvement of the current disclosure system and the efficiency of the financial markets, and, indeed, many of them endorsed other reforms proposed in the Aircraft Carrier release or suggested different approaches intended to improve the current disclosure system. Yet, in response to the Commission's request for comment on shortening the filing deadlines for periodic reports, these commenters uniformly, and with great clarity and consistency, indicated both that the burdens imposed on issuers would be substantial and that the risk of an actual decline in the quality and accuracy of disclosure would be great. This concern was expressed very clearly and concisely in the Cleary, Gottlieb comment letter:
We . . . believe that accelerating the timing of filing of Forms 10-Q and 10-K will impose significant burdens on reporting companies, with insufficient incremental benefit to investors to justify that change. Forms 10-Q and 10-K already require an increasing amount of detailed disclosure regarding, among other things, market and other risk and business segment reporting. Shortened time frames for filing these reports could very well result in less careful and considered disclosure or the failure to meet the reporting deadline[.]
Similarly, in the comment letter submitted on behalf of the Committee on Securities Regulation of the Association of the Bar of the City of New York:
Financial reporting in accordance with GAAP is becoming increasingly more complex, particularly with respect to financial statements, accounting for business segments and accounting principles requiring estimates of future cash flows and fair values. The Commission is placing more pressure on auditors to avoid even negligent audit failures and on companies to avoid managing their earnings. In addition, many companies with international businesses must gather information from far flung operations overseas. These companies may also have difficulty preparing reports by the proposed due dates. To expect that many companies, including those which have problems filing within the current 45 and 90 day due dates for Exchange Act quarterly and annual reports, would not have problems with earlier due dates in light of these new and existing disclosure requirements and with more to come, appears to us to be unsupported.
We respectfully suggest that these (and numerous similar) comments provided in response to the Aircraft Carrier release both were well-taken at the time and have become even more valid today. In the recent past, issuers have been faced with demands for increasingly detailed substantive disclosure and increasing "procedural" review requirements, both of which increase the time involved in preparing and finalizing periodic reports under the Exchange Act. Many of the commenters on the Aircraft Carrier release offered as an example the then-new requirements for extensive MD&A disclosures concerning exposures to market risk. Since that time, numerous other new rules and interpretations have imposed significant additional disclosure requirements on issuers and introduced new, time-intensive analyses into the disclosure process. Further, issuers have continued to be pressed to respond to new disclosure initiatives from the Commission and to deal with the increasing complexity of accounting standards. For example:
Further, the Commission has taken action since the Proposing Release that, if promulgated as final rules, will add still more complexity and time to the preparation of financial disclosures. At its April 30 meeting, the Commission voted to propose new MD&A disclosure requirements concerning "critical accounting estimates" and the initial adoption of material accounting policies.10 As described in the Commission's press release, these new requirements would require extensive qualitative and quantitative MD&A disclosures that, by their nature, will require both the expertise of an issuer's senior financial personnel and significant time for internal and external review of these new disclosures. Additionally, because the disclosures would seem to contemplate fairly specific discussions of the effects of making alternative financial estimates - the sorts of disclosures that seem likely to provide grist for the mills of plaintiffs' class action lawyers in the event of later declines in the issuer's stock price - these new disclosures will likely require considerable input from internal and external securities counsel as well as financial personnel, adding to the time and expense associated with preparation and review of these disclosures.
The result of developments such as these is that the amount of information contained in financial statements and MD&A has increased dramatically, as has the amount of time required to produce that information completely, accurately and in a clear and understandable format. As a concrete example, HEALTHSOUTH's MD&A for the year ended December 31, 1988 consumed 3-1/2 typeset pages. Our audited financial statements for that period took 16 typeset pages. For the year ended December 31, 2001, our MD&A required over nine typeset pages, while our financial statements required 28 typeset pages. While our business has grown much larger and more complex over the intervening years, much of the increase in that scope of information relates directly to changes in and additions to Commission and FASB requirements and to new, expansive interpretations of previously existing requirements by the Commission and the Staff. The new requirements being proposed by the Commission since the Proposing Release will, if finally adopted, only continue these trends.
It appears that many issuers have difficulty meeting the existing filing deadlines, in part due to the increased information required in recent years and the associated increased demands on the time and resources of issuer personnel and outside counsel and auditors. In commenting on the Aircraft Carrier release, one commenter noted that over 800 notices of late filing on Form 12b-25 were filed with respect to 10-Ks for the year ended December 31, 1998.11 Based on a recent computer search, it appears that the number of issuers filing notices on Form 12b-25 with respect to 10-Ks for the year ended December 31, 2001 had increased to around 1,500. While there are doubtless many reasons for this, and while this group includes some issuers who would not be "accelerated filers" under the proposed rule amendments, these data certainly suggest that the number of late filers would likely increase still more dramatically if the filing deadlines were accelerated. Further, there does not appear to be any basis to assume that the quality of disclosure provided under these accelerated timetables would remain at current levels, much less improve, and we suggest that the risk that it would actually decline as a result of increased demands on time and resources for preparation and review of financial disclosures is substantial.12
2. The Commission's Assumption that Larger Issuers Will Be Better Able To Meet the Proposed Accelerated Deadlines Is Mistaken
In the Proposing Release, the Commission indicates its preliminary belief that issuers meeting its proposed public float and reporting history requirements would be able to meet the accelerated deadlines for filing without sacrificing accuracy or completeness, but requests comment on the validity of that belief. Other than a suggestion (the logic of which is somewhat unclear) that it is appropriate to link eligibility to register primary offerings for cash on Form S-3 and use shelf registration with "accelerated filer" status,13 the Proposing Release does not articulate any logically or empirically supported basis for this assumption, and we respectfully suggest that it is incorrect.
Several commenters on the Aircraft Carrier release noted that larger issuers faced challenges just as daunting as those affecting smaller issuers, if not moreso:14
Once again, we believe that these and similar comments made in connection with the Aircraft Carrier release were valid then, and we suggest that the additional disclosure requirements and audit procedures added since that time make them even more valid currently. While large issuers may have more resources, and in some cases more technologically efficient systems, to gather data and compile financial statements and related disclosures than do smaller issuers, they likewise tend to have more complex and geographically widespread operations, making both the preparation of financial statements and related disclosures and the audit process more time-consuming and complex as well.
For example, as noted above, HEALTHSOUTH operates approximately 1,900 patient care locations in all 50 states and overseas.15 In the ordinary course, it requires about three weeks after the end of a month for us to assemble financial information from these facilities and prepare an initial consolidated income statement for that month. The preparation of quarter-end financial statements requires additional time in order to refine and analyze data from the months and adjust estimated information from the first two months of the quarter. The quarter-end statements are then subject to internal review and to SAS 71 review by our independent auditors and review by the Audit Committee of our Board of Directors.
At year-end, the process requires still more time. After going through the processes described above to close out the fourth quarter, we must then undertake a more thorough analysis, including normal year-end GAAP adjustments and finalization of amounts for which estimates must be made during the interim periods. Thus, it is normally the end of January or the early part of February before we are able to provide complete financial statements to our independent auditors for their audit. Because of the complexity of our operations, the heavily regulated environment in which we operate and the geographic dispersion of our facilities, such auditing procedures as confirmation requests and attorney inquiries then require significant time to complete, and we believe that it is highly unlikely that the audit process could be completed within 60 days after the end of our fiscal year, without regard to the necessity of completing financial statement footnotes, preparing MD&A (especially with the expanded qualitative disclosure the Commission and the investment community now seek in MD&A) and coordinating related disclosures in the non-financial items of Form 10-K to information in the financial disclosures. In addition, we must allow adequate time for review of the financial statements by the Audit Committee and the Board of Directors, and we must allow time for EDGARization of the 10-K (which, allowing for production, proofreading and review time, typically takes a minimum of three days from the time all information in the 10-K is finalized and formatted). The entire process, under existing filing deadlines, requires substantial overtime from our internal accounting, legal, finance and other management personnel and from our independent auditors, and it is rare that we are able to complete it earlier than two or three days before the filing deadline (if then), even with extraordinary effort.
In order to expedite this process, we believe that it would be necessary for our auditors to begin doing audit work not on December 31 numbers, but on October or November numbers. This would then necessitate a roll-forward audit as of December 31. As a result of that process, (a) our independent auditors would have to begin doing audit work on incomplete numbers involving preliminary estimates that have not been subject to normal year-end adjustments, (b) this work would then be duplicated on final year-end numbers, in a manner wasteful of management and independent auditor resources, and (c) our accounting and finance personnel involved in closing out the year-end numbers would simultaneously be involved in responding to audit work on the October/November numbers, causing a significant strain on existing staff and increasing the likelihood of errors and omissions.
Were we to attempt to go that route, we believe that we would have to increase our internal accounting staff by 10% - 15 % to accommodate the increased workload involved in producing financial statements on an accelerated schedule and respond to an expedited audit. We believe that the total additional internal cost would be between $200,000 and $300,000 per year, primarily in additional personnel costs (including additional overtime and the need to hire additional employees to take over the job duties of staff who would have to devote much more of their time to audit-related activities). We further estimate that, unless we were able to develop significantly enhanced capacity to deal with the sorts of interim audits described above, our independent auditors would have to increase their staff assigned to our audit by as much as 30%, increasing the external cost of our audit by $100,000 to $150,000 per year. In both areas, we fear that the quality of the work would suffer, at least in the near term, because the incremental staff would likely be less experienced, knowledgeable and productive than current staff. Further, we believe that the associated increased expense would be permanent and recurring. It is impracticable, either for us or for our independent auditors, to add additional accountants solely to work on quarter-end and year-end procedures. Thus, not only would our audit costs (both outside audit fees and internal costs) increase significantly, we would be overstaffed between period ends.
We acknowledge that there may be issuers of comparable size that, by reason of better technological systems, higher staffing levels or nature of operations, may have a less difficult time adapting to the Commission's proposed accelerated filing levels, if adopted. However, we do not believe that our situation is an unusual one for large issuers with diversified operations and with business units located in many different locations, a conclusion that is bolstered by the comments already received by the Commission on this issue in response to the Aircraft Carrier Release. We respectfully suggest that the Commission's preliminary belief that the class of issuers included in its proposed group of "accelerated filers" would be able to adapt to the proposed accelerated filing deadlines without undue burden or loss of accuracy and completeness in disclosure is both unsupported and inconsistent with the facts.
3. The Acceleration of Filing Deadlines Would Present a Significant Problem for Healthcare Services Provider Issuers such as HEALTHSOUTH
Issuers in the healthcare services business, such as HEALTHSOUTH, would have a special difficulty in providing complete and accurate financial disclosures under the proposed rule amendments. As applied to healthcare providers, GAAP requires that revenues be presented net of such contractual allowances and discounts. Because of the complexity and multiplicity of governmental and third-party reimbursement systems for healthcare services, however, this presentation is much more complicated than, for example, estimating returns or discounts in a consumer sales business.
Healthcare services providers derive the vast majority of their revenues from governmental payors (e.g., Medicare, Medicaid and CHAMPUS) and private third-party payors (e.g., insurers, managed care organizations, workers' compensation carriers and self-insured employers). In general, none of these payors pays the healthcare services provider its billed charges. Instead, the actual payment received by the provider will be based on a wide variety of mechanisms, ranging from simple contractual discounts to statutory "fee screen rates" to capitation payments to Medicare cost report settlements done on an annual basis. Further, payments under these mechanisms are frequently subject to retroactive adjustments, audits and settlements months, and sometimes years, after the underlying services were rendered. The result is that actual payments to the provider are substantially less than billed charges (the amount that would correspond to "sales" for a retail or manufacturing issuer), but that result is reached through the application of complex government program regulations and the terms of many individual private contractual arrangements entered into on local, regional and national levels.
For these reasons, healthcare services provider issuers must rely more heavily than most issuers on making estimates in order to arrive at the basic "Revenues" line on the income statement. Those estimates require analysis of voluminous governmental regulations (both federal and state) and the terms of a large number of unique payor contracts with highly individualized terms, as well as a review of historical experience and a projection of the outcome of final settlements and payor audits and adjustments.
As part of our year-end closing activities, we review and revise estimates of contractual allowances and discounts made on an interim basis during the year, as well as preparing estimates for accounts outstanding at the end of the year. It is impracticable to begin audit processes for contractual allowances and other valuation accounts until the year is closed out. Because of the significance of such accounts to the GAAP reporting of our revenues, these processes are a major focus of our audit work. Attempting to accelerate this process would undoubtedly result both in still more extensive reliance on estimates and in greater imprecision in making such estimates. Thus, we believe that there is a real likelihood that the accuracy and completeness of our financial disclosures, and those of other healthcare services provider issuers, would suffer under the proposed accelerated filing deadlines.
4. The Commission's Belief that the Bulk of Financial Statement Preparation and Audit Work Is Complete at the Time Earnings Are Released Is Erroneous
In the Proposing Release, the Commission indicated its belief that quarterly reviews and annual audits were complete or substantially complete by the time an issuer publishes its earnings announcement, but requested comment on the accuracy of that belief. We respectfully suggest that such belief is erroneous.
There is increasing pressure from the investment community for issuers to report earnings at the earliest practicable date, as well as increasing pressure from both the Commission and the investment community to include more detail and, in some cases, more qualitative disclosure, in earnings releases. Thus, we believe that most issuers are undertaking ever more extensive review and analytical procedures, including audit committee review, in connection with their earnings releases.
However, we respectfully submit that engaging in such review and analytical procedures is still a far cry from having all audit (or interim review) work completed, much less having complete and finalized financial statements (including notes) and related MD&A. An excellent description of the dynamics involved in producing final and complete financial statements was set forth in the comments of Merrill Lynch & Co. on the Aircraft Carrier release:16
Not all data collection is automated, and review, testing and analysis of the collected data is a time-consuming process conducted by professionals - not computers. These professionals are already under a great deal of pressure to produce accurate and meaningful reports within the existing filing requirements. The process of collection, review, testing and analysis necessarily must be completed before the written reports and financials are distributed for review to management. Furthermore, the process generally involves a sequential series of reviews by increasing more senior members of management, until, in the case of the 10-K, the Board of Directors reviews and signs the report, or senior management approves the filing of the 10-Q. These reviews must allow time for evaluation and comment, as well as the time to address such comments. The entire process cannot be completed in the proposed time without reducing the depth of disclosure or requiring companies to significantly increase the staff dedicated to the Exchange Act reporting effort.
In the case of HEALTHSOUTH, we do not release earnings until all audit procedures that we believe could have an impact on the information contained in our earnings release are complete. However, many audit or review procedures affecting other aspects of our financial statements, particularly including those relating to balance sheet transactions, are typically not completed until after the date of our earnings release. Further, given the increasing scope of disclosure required or suggested for financial statement notes and MD&A, it would be highly impracticable to have those items complete or even substantially complete at the time of the earnings release, unless we delayed announcing earnings until almost the current due date for 10-Qs and 10-Ks. We suggest that such a result is inconsistent both with the Commission's stated desire for "current disclosure" and with the demands of the investment community for timely earnings information.17
5. The Proposing Release Overstates the Significance of Periodic Reports to the Investment Community in the Context of Current Market Dynamics and Increased Investor Access to Information
Much of the impetus for the Commission's proposal to accelerate filing deadlines for periodic reports appears to be based on a belief that, we suggest, places undue weight on the degree to which investors rely on information contained in periodic reports in making investment decisions and demonstrates undue concern with the possibility that the information becomes "stale" under the current filing deadlines. While we do not question the importance of complete, accurate and detailed disclosure in Exchange Act reports, we believe that the significance of such reports to investment decisions in the current market environment is typically small, and that any benefit perceived from having those reports available in two-thirds of the time currently allowed is illusory. While we have not conducted empirical research among other issuers, we reach this conclusion based upon the fact that we have never seen any material movement in our stock price or trading volume coinciding with the filing of our periodic reports. We have no reason to believe that this phenomenon (or non-phenomenon) is not typical, at least for large, seasoned issuers of the type that would be included in the proposed group of "accelerated filers" described in the Proposing Release.
We believe this is true for a variety of reasons. Chief among these is the wide variety of information available to the investment community today. Analyst reports and estimates, once issued and updated sporadically and sent by mail only to customers of a particular brokerage, are now widely disseminated and publicized, both over the Internet and in the print and broadcast media. Numerous services, many of them free, compile and summarize this sort of information and make it available to investors. Issuer press releases are available from an almost limitless variety of Internet services, greatly reducing the concern that investors will not have access to public statements by even small issuers which attract limited news coverage. Many issuers, including HEALTHSOUTH, provide links on their corporate Websites to a wide variety of investor information, including filings with the Commission, press releases, independent research and analytical services and other investor resources.
Further, since the adoption of Regulation FD, many issuers have provided increasing detail in their press releases and other public statements. It has become almost universal for issuers to hold conference calls in connection with earnings releases and other significant corporate announcements, and those conference calls are increasingly open to all interested persons through dial-in numbers and Webcasts (which are frequently archived and available for some period of time). In many cases, investors who are so inclined can hear live and archived Webcasts of issuer presentations to investment conferences that were formerly closed both to the public and to the press. Investors can also avail themselves of various subscription or registration-based services, some of them free and most of them inexpensive, that will provide e-mail alerts or other notifications of issuer announcements and filings, changes in brokerage recommendations or analyst estimates, and other information about issuers, both from the issuers themselves and from third parties. In short, and particularly with respect to the larger issuers included in the proposed class of "accelerated filers", investors who are motivated to find information on a particular issuer have unprecedented access to current, real-time data.
For these reasons, we believe that it has become increasingly rare for investors to rely on periodic reports from issuers in order to make investment decisions. Thus, we believe the Commission's concern about excessive gaps between informal disclosures, such as earnings releases, and required periodic reports is based upon a mistaken impression as to what factors investors consider significant and the sources of information they use in evaluating those factors.
Coupled with that is the fact that much of the content of periodic reports is prepared either to respond to specific requirements of the report forms which frequently lack significance for investors or to avoid or mitigate claims of liability in the event of subsequent adverse events affecting the issuer's stock price. As an example of the first category, the required disclosures in Form 10-K include such things as information about historical stock prices of the issuer which is less complete and less up-to-date than that readily available from numerous sources; information about properties that, for many issuers in many industries, communicates little or no information that is useful to investors; information about quarterly financial results which is duplicative of information already contained in earnings releases and 10-Qs; and information about insurance arrangements which in most cases is simply boilerplate. Included in the second category are typically lengthy descriptions of regulatory matters, pending litigation, risk factors and other matters that are, despite issuers' efforts to respond to the Commission's initiatives to improve disclosure, necessarily complex and technical and that are much more likely to be read after the fact by lawyers in class action suits than they are by actual or potential investors making real-time investment decisions.
Finally, it is impossible to fail to note that many of the issues that have created recent disruption in the markets and that have given rise to losses for investors (and which are the acknowledged stimuli for many of the Commission's current disclosure initiatives) do not stem from issuers' failures to provide disclosure in a more timely manner. Rather, they stem from alleged failures to provide truthful and adequate disclosures at all. Many of the Commission's current initiatives may help remedy that problem, and we commend the goals behind those initiatives. We suggest, however, that the problem will not be remedied by accelerating the filing deadlines for Exchange Act reports. We further suggest that perceived problems with the current disclosure system will only be exacerbated by the risk of hurried and inaccurate disclosures, the excessive demands on the resources of management and auditors, and the compression of time for necessary audit and review procedures that are the inevitable outcomes of the filing deadline amendments set forth in the Proposing Release.
6. Conclusion: The Commission's Proposal on Accelerated Filing Deadlines for Periodic Resorts Is Flawed in its Premises, and, If Adopted, Would Have a Detrimental Impact on Issuers, Investors and the Capital Markets; Accordingly, It Should Be Withdrawn
The Commission initially requested comment on the acceleration of Exchange Act filing deadlines that it now proposes in the Aircraft Carrier release, issued over three years ago. The response to that request for comments from issuers, from the securities bar, from accountants, from financial printers, from investment bankers and broker-dealers - in short, from those persons and entities most familiar with and directly involved in the process of preparing and filing Exchange Act reports, and from major users of such reports - was overwhelmingly negative, as reflected in the numerous excerpts from those comments quoted or referred to in this letter.
In its comments on that release, the Securities Law Committee of the American Society of Corporate Secretaries effectively summarized the processes involved in preparing complete and accurate Exchange Act reports and the likely negative impact - both on issuers and on the investment community - that would result from accelerating the due dates of such reports:
While the Society certainly agrees that more timely disclosure always stands to benefit investors, we believe that acceleration of the current due dates will strain the capabilities of many issuers and increase the possibility of inaccurate filings to the detriment of the investing public. We submit that the goal of accuracy and completeness should always supersede the desire for speed.
Preparation of Exchange Act reports involves several processes that must primarily occur in sequential steps, not concurrent steps. First, the financial data must be collected. For large global issuers, this process presents a significant challenge and implicates a number of considerations, such as foreign currency translation. For any issuers that will be reporting extraordinary items, substantial effort is involved in evaluating the scope of such items and preparing appropriate substantiation. For issuers subject to segment reporting, further complications apply. Then consolidation must be done. In the case of the annual audit, the audit must be completed and the audit committee process completed.
After that, the financial results must be analyzed and tested against the requirements of Item 303, Management's Discussion and Analysis of Financial Condition and Results of Operations. Once that is done, the text of the Exchange Act report must then be written in accordance with the applicable disclosure standards. We note in this regard the scope of such disclosure standards keeps expanding, not contracting. Once drafted, such reports then undergo an extensive review process internally and often externally in order to ensure accuracy and completeness. Several drafts are circulated before an issuer deems a report in final form for filing.
Although for some issuers technology has enabled acceleration of the data gathering process on the front end, the entire process is quite labor intensive. That is the case for both large and small issuers. While it is true that issuers on a voluntary basis have sometimes accelerated the process in the context of filing a registration statement, such an effort has typically involved substantial additional cost and substantial supplemental staffing through external assistance.
The Society consequently urges the Commission not to accelerate the due dates of these filings. The burden of accelerating the process would ultimately fall on those personnel collecting the financial data.. The practical effect of acceleration would, in some cases, enhance the likelihood of errors at the data gathering levels and thereby have the effect of degrading the quality and accuracy of the data provided.18
We believe these comments were accurate when they were made, that they were accurate with respect to both large and small issuers, and that they aptly express many of the reasons why those most directly involved in the Exchange Act reporting process opposed acceleration of filing deadlines at that time. What, then, has changed since the Commission received such comments in response to its 1998 request?
In short, essentially all of the arguments raised in comments on the Aircraft Carrier release against accelerated filing deadlines for Exchange Act reports have, if anything, become more forceful and compelling.
The Proposing Release bases, in large part, its support for accelerated due dates on the assumption that full audited (or reviewed, in the case of 10-Qs) financial statements, including notes and with supporting MD&A (not to mention the non-financial disclosures required in Exchange Act reports) are substantially complete at the time of an issuer's earnings announcement. As discussed above, this is frequently not the case, nor can it practically be the case given the increasing demands on all players involved in the process. The Proposing Release likewise bases its proposed definition of "accelerated filers" on the assumption that "large" issuers (and, as the markets have indicated in the recent past, an issuer can have a public float of $75 million without being "large" in any meaningful sense of the word) - and their auditors and counsel - have the systems and personnel in place to easily adjust to a 33% decrease in the amount of time necessary to prepare and review reports. Again, this is simply not the case, and this assumption ignores the inherent complexity involved in assembling and reviewing data from diversified, widespread operations in order to prepare complete and comprehensive financial disclosures.
In our own case, HEALTHSOUTH operates more healthcare facilities in more places than any other non-governmental healthcare provider in the United States, and we operate in an industry that, because of the nature of healthcare reimbursement and regulation, is as financially complex as any. In order to meet existing filing deadlines, our personnel and our independent auditors must work far beyond any normal work schedule, and it still ordinarily requires 30 days or more from the end of a quarter (and 60 days or more from the end of a year) just to make an earnings announcement that we are satisfied is complete and accurate. It is rare for us to be able to file our Exchange Act reports materially earlier than the existing deadlines.
In order to accelerate this schedule by the 33% that the Commission would require, we would incur substantial additional costs, perhaps in excess of $400,000 per year. We would also have to ask personnel who are already working extended schedules to do even more, diverting resources from the task of running our business in order to devote them to completing Exchange Act reports. Even so, we (and our independent auditors) would likely have to entrust work to additional, inexperienced personnel and curtail review activities, thereby increasing the likelihood of inadvertent errors in our disclosures and lowering the quality of the information we provide to investors. We do not believe that this is in the interest of the investment community.
We believe that the Commission's proposal is based on flawed premises, that it would place an unreasonable burden on even the class of large, seasoned issuers at which it is aimed, and that it fails to take into account both the substantial increase in disclosure requirements that has occurred and is continuing and the wide availability of information available to investors in addition to Exchange Act reports, and which is more often used by and useful to such investors. We further believe that the inevitable and inexorable result of adopting the proposals would be a decrease in the accuracy, completeness and quality of information available to investors. Accordingly, we strongly suggest that the proposal for accelerating Exchange Act reporting deadlines be withdrawn.20
B. Disclosure Concerning Website Access to Reports
The Commission's other proposal in the Proposing Release would require an issuer meeting the "accelerated filer" definition to add disclosure in its 10-K describing how the public may read, copy and access such issuer's filings with the Commission; advising whether the issuer makes available free of charge on its Website its Exchange Act filings as soon as reasonably practicable after (and in any event on the same day as) such material is electronically filed with or furnished to the Commission, or the reason why it does not do so; advising of one or more locations where the public can access such material electronically immediately upon filing (and any fee for such access) if the issuer does not make such material immediately available; and stating whether the issuer voluntarily will provide electronic or paper copies of its filings free of charge upon request.
As an initial matter, HEALTHSOUTH supports the Commission's implicit suggestion that an issuer's Website is an appropriate medium by which to provide material information to investors, and hopes that this proposal may mean that the Commission will reconsider its position that Website disclosure is not an adequate means of satisfying an issuer's Regulation FD obligations.21 Further, HEALTHSOUTH does and has for some time provided links to its Exchange Act filings on its Website. In addition, we have for several years included our 10-K in our proxy mailing with our summary annual report to stockholders, in order to ensure that our stockholders have the most complete access to our year-end disclosures prior to voting at our annual meeting.
However, while we support its goals, we believe the proposal regarding Website access is impracticable and unwieldy to some extent, and that it could be refined in a way that would preserve its benefits to investors without either unduly burdening issuers or creating unnecessary new disclosure boilerplate.
1. The "Same-Day" Posting Requirement May Prove Impracticable and Should Be Modified
The proposed new 10-K requirement would require issuers to disclose whether they make their Exchange Act reports available on their Websites not later than the same day on which they are filed with the Commission. While this obviously falls short of a specific requirement that such reports be so made available, the likelihood is that issuers will perceive this as such an affirmative requirement, since any disclosure that an issuer does not do so would likely be perceived as having a negative tone.
Some issuers may have practical difficulties in meeting a same-day standard, however. It is, as the Commission is doubtless aware and as was pointed out by some commenters on the Aircraft Carrier release, very common for issuers to make their filings near the end of the day, in order to utilize the time available for reviewing and proofreading EDGAR copy in order to ensure that there are no errors, either in the original text or introduced in the EDGAR conversion process. If the issuer is using its own personnel to directly post the information on its Website, those personnel will not be able to start the process until the EDGAR proof is finally approved and, as a matter of prudence, would likely not find it appropriate to post the information until the issuer had received confirmation that the EDGAR filing had been accepted. Various circumstances could well make it difficult to ensure that the information was posted on the same day as the filing, even if that were the issuer's intent.
If, as appears to be the most common practice based on the Proposing Release, the issuer instead endeavors to satisfy the requirement by hyperlinking to a third-party service, the issuer is at the mercy of the efficiency of such third-party service. In this case, factors outside the issuer's control could well mean that its filings were not available through its Website on a same-day basis despite its best intentions.
Intuitively, the best solution to ensure that the filing available through the issuer's Website was the complete and accurate text of an accepted EDGAR filing would be to hyperlink to the Commission's own EDGAR database. However, as the Proposing Release expressly notes, that would not satisfy the same-day requirement because the Commission only posts such filings after a 24-hour delay.22 Thus, the procedure that would provide the greatest assurance of accuracy is not available to issuers.
In view of these facts, we would suggest that it is appropriate to modify the proposal to require that issuers disclose whether their filings are electronically available through their Websites by not later than one or two business days after they are filed with the Commission. This would serve the purpose of encouraging issuers to make their filings available through their Websites, but would allow issuers time to deal with unexpected factors beyond their control, including technological problems and failures by third-party services on which the issuers may rely. It would also afford issuers the opportunity to rely on hyperlinks to the EDGAR Website, which would appear to be the safest way for issuers to assure compliance.
2. Other Aspects of the Proposed Disclosure May Generate Boilerplate Language Without Providing Useful Information to Investors
The proposal would require disclosure concerning access to filings through the Commission's Public Reference Room and Website and whether the issuer will voluntarily provide electronic or paper copies of its filings free of charge upon request. This will require issuers to generate essentially boilerplate disclosure of the type customarily found in S-3 and S-4 registration statements. While it will not be difficult to create such disclosure, and while it should require minimal updating from year to year, there is reason to question whether such disclosure is meaningful and helpful to investors.
By definition, anyone reading this disclosure in an issuer's 10-K has already found some means of accessing the 10-K. Accordingly, it is difficult to see the utility of telling that reader of alternative means to find the same information. While the specific disclosure itself is not particularly burdensome, it is yet another item that must be added to the myriad disclosure requirements facing an issuer, and adds incremental time, however small, to the preparation and review by an issuer of its 10-K. The Commission should consider whether there will be any material benefit to investors from such new disclosure before including it as a required item.
Other aspects of the new requirement may generate still more new boilerplate. While we disclose our Website address in our 10-K, in all of our press releases, and in various other types of information, there are some issuers who may believe that it is necessary, at least if such disclosure is a required part of an Exchange Act filing, to include lengthy additional language disclaiming any incorporation of information contained on their Websites in the filing. Similarly, if the Commission were to expand the requirement to require Website access to Securities Act filings (a possibility as to which the Proposing Release requests comment), issuers might feel obliged to disclaim any intent to engage in an offering or distribution by providing such access. Again, while such disclosure would not be difficult to write, it is hard to see how this additional boilerplate language would be useful to investors. Accordingly, we suggest the Commission may wish to consider narrowing the scope of the required disclosure in order to avoid lengthening issuers' 10-Ks without providing material help to investors.
3. If the Proposal Is Adopted, There Is No Meaningful Reason To Limit Its Applicability to "Accelerated Filers"
As proposed, these new disclosure requirements would only apply to the Commission's proposed class of "accelerated filers". However, this is the class of issuers whose Exchange Act reports are most likely to be already accessible to investors through a wide variety of sources. By contrast, the utility of required information about access to such materials is likely to be greater for small issuers, whose reports are less likely to be posted on or linked to from various Internet sources, whose stockholders may be less sophisticated and knowledgeable about the availability of Commission filings, and whose resources may make it less feasible for them to provide information in a timely manner in response to investor requests. Accordingly, if the proposal is adopted, we do not believe there is any meaningful basis to exclude smaller issuers from its application, and that such exclusion would not be helpful to the investment community.
* * *
We appreciate the opportunity to comment on the proposals contained in the Proposing Release. While we support the Commission's efforts to improve the timeliness of disclosure and access to Exchange Act reports, for the reasons stated above we strongly urge the Commission to withdraw its proposal to accelerate the filing deadlines for Exchange Act reports and to modify its proposal regarding disclosure concerning Website access to such reports to make such proposal less burdensome to issuers and, we believe, more helpful to investors. We thank you for your attention in these matters.
Very truly yours,
/s/ WILLIAM W. HORTON
William W. Horton
Executive Vice President
and Corporate Counsel
cc: The Honorable Harvey L. Pitt, Chairman
The Honorable Isaac C. Hunt, Jr., Commissioner
The Honorable Cynthia A. Glassman, Commissioner
Alan L. Beller, Esq., Director, Division of Corporation Finance
|1||Release No. 33-7606A (Nov. 13, 1998).|
|2||Id. at text accompanying nn. 529 - 532.|
|3||Proposing Release at text accompanying nn. 29 - 33.|
|4||See comment letters in Commission File No. S7-30-98.|
|5||See Release No. 34-42266 (Dec. 22, 1999).|
|6||Release No. 33-8056 (Jan. 22, 2002).|
|7||Release No. 33-8040 (Dec. 12, 2001).|
|8||For example, at a program sponsored by the Practising Law Institute on March 5, 2002, involving both prominent practitioners and senior members of the Staff, it was indicated that issuers that did not set forth their critical accounting policies as a separate section of MD&A, under that caption, or did not provide tabular disclosure concerning various liquidity items in the matter illustrated in Release No. 33-8056, could expect to receive comments on those matters. While this may be sheer speculation, it is illustrative of the degree to which the issuer community has perceived the Commission's recent statements as new disclosure requirements.|
|9||See The FASB Addresses Standards Overload through New Projects, THE FASB REPORT (Feb. 28, 2002), available at http://raw.rutgers.edu/raw/fasb/project/standards_overload.html.|
|10||See Commission Proposes Disclosure Requirement and Takes Other Actions at April 30, 2002 Open Meeting (Apr. 30, 2002), available at http://www.sec.gov/news/press/2002-58.htm.|
|11||See comments of R.R. Donnelley & Sons Company and R.R. Donnelley Financial contained in File No. 27-30-98.|
|12||We point out that, while many of the comments received by the Commission on the Aircraft Carrier release were from frequent institutional and association commenters who addressed a wide range of proposals in the release, a number of other comments came from representatives of issuers who are not ordinarily involved in commenting on Commission proposals, and who apparently wrote solely to protest the additional burden that would be placed on them by any acceleration of filing deadlines for Exchange Act filings and to predict a resultant decline in the quality and accuracy of disclosure. See, e.g., letters of Richard C. Laubach, President/CEO, Security of Pennsylvania Financial Corp.; Rick B. Colberg, Sr. V.P. & CFO, First Northern Capital Corp.; T. Benjamin Marsho, VP/Comptroller, First National Bank of West Chester; Jim Salisbury, CFO, WesterFed Financial Corp.; and Don D. Jennings, Chief Financial Officer, Frankfort First Bancorp, Inc., contained in File No. S7-30-98. Other issuers who more broadly addressed various concerns raised by the Aircraft Carrier release also believed that acceleration of filing deadlines would be unworkable and counter-productive. See, e.g., letters of Texas Instruments, Inc. (endorsing comments of American Corporate Counsel Association, which opposed acceleration); Navistar International Corp.; The CIT Group, Inc.; BellSouth Corporation; Agway, Inc.; Intel Corporation; and Jacobs Engineering Group, Inc., contained in File No. S7-30-98.|
|13||Proposing Release at text accompanying nn. 56 - 57.|
|14||Excerpts from indicated comment letters contained in File No. 27-30-98.|
|15||The actual number of business units whose results it is necessary to consolidate in order to complete our consolidated financial statements is considerably larger than that, since some of these 1,900 locations comprise more than one business activity that is separately accounted for, and since we must also consolidate information from the general ledgers representing numerous corporate office-based profit and/or cost centers.|
|16||Letter contained in File No. S7-30-98.|
|17||We note that some commenters on the Aircraft Carrier release suggested that, if the Commission were concerned about the gap between earnings announcements and the filing deadlines for periodic reports, it might be acceptable and appropriate to tie the due dates of periodic reports to some period of time after an issuer released its earnings for the period. See, e.g., comments of the Committee on Federal Regulation of Securities of the Business Law Section of the American Bar Association contained in File No. S7-30-98 (indicating that the Committee would not object to requiring that 10-Qs be filed by the earlier of the existing filing deadline or 15 days after the first release of earnings information for the quarter and than 10-Ks be filed by the earlier of the existing filing deadline or 45 days after the first release of earnings information for the year). We would likewise agree that this would be a more workable change than those set forth in the Proposing Release. However, we believe it is likely that such a change would have the effect of causing issuers to delay the timing of their earnings announcements in order to have adequate time to complete work on their periodic filings within the shortened timeframes, and we question whether that would serve the interests of the investment community.|
|18||Letter contained in File No. S7-30-98.|
|19||See, e.g., Release No. 33-8090; 34-45742, Commission File No. S7-09-02, released simultaneously with the Proposing Release, which would require additional 8-K disclosure, as well as the additional disclosure that would be required by the second part of the Proposing Release (discussed below) and the Commission's recent announcement concerning proposals for additional required MD&A disclosure (discussed at text accompanying n. 10 above).|
|20||The Proposing Release also indicates that the Commission is "strongly considering" conforming revisions to the timeliness requirements in Regulation S-X, and requests comment on whether similar revisions should be made to the financial statement filing requirements in Item 7 of Form 8-K. While we believe it would likely be appropriate generally to conform the S-X timeliness requirements to any changes the Commission determines to make in connection with the Proposing Release (which changes, as noted above, we strongly oppose), we believe it would not be appropriate to accelerate the financial statement filing requirements of Item 7 of Form 8-K, relating to historical financial information of businesses acquired and pro forma financial information. Assimilating the financial statements of acquired businesses and conforming their presentation to the issuer's presentation, as is generally necessary to make the information comprehensible and as is clearly necessary to the preparation of pro forma financial information, is one of the most challenging tasks for an acquiring issuer under the current timeframes. We believe the quality of such information would clearly suffer if those schedules were accelerated.|
|21||See Release No. 33-7881 (Aug. 15, 2000) at text accompanying n. 73.|
|22||It has been our experience in some past years that the delay has in fact been greater than 24 hours, at least for 10-K filings for issuers reporting on a calendar year, and also that confirmations of acceptance may not be received on the same day for late-in-the-day filings on heavy filing days.|