Merrill Lynch & Co., Inc.
4 World Financial Center
New York, New York 10080
May 23, 2002
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Attn: Mr. Jonathan G. Katz
Re: Acceleration of Periodic Report Filing Dates and Disclosure Concerning Website Access to Reports (File No. S7-08-02)
Ladies and Gentlemen:
On behalf of Merrill Lynch & Co., Inc. ("ML&Co." and, together with its subsidiaries and affiliates, "Merrill Lynch"), we are pleased to submit this letter in response to the Commission's request for comments on Acceleration of Periodic Report Filing Dates and Disclosure Concerning Website Access to Reports, Release Nos. 33-8089, 34-45741 (April 12, 2002). ML&Co. is a holding company that, through its subsidiaries and affiliates, provides investment, financing, advisory, insurance, banking and related products and services on a global basis. Merrill Lynch is one of the world's leading financial management and advisory companies, with offices in 38 countries and total client assets of approximately $1.4 trillion.
ML&Co., as a large public company, is a major issuer of securities. In light of the capital-intensive nature of our businesses, we raise billions of dollars each year through securities offerings in U.S. and foreign markets to satisfy our funding requirements. We are not only a leading underwriter of securities for our investment banking clients, but also maintain a leading position in secondary equity and debt trading and invest for clients in publicly traded companies through our asset management and retail businesses. We are, therefore, keenly aware that prompt and accurate disclosure of material information is essential to market liquidity and investor confidence, and we support initiatives that will improve the timeliness, availability and quality of information in both the primary and secondary markets.
In furtherance of this goal, ML&Co. regularly announces its annual and quarterly earnings through the issuance of press releases and the filing of current reports on Form 8-K as soon as the information is available - a significant period of time prior to the filing of its reports on Form 10-K and Form 10-Q. In addition, we have generally released our balance sheet information before our 10-K and 10-Q reports are due. To ensure widespread and prompt access to all of ML&Co.'s reports on Forms 10-K, 10-Q and 8-K, as well as our Schedule 14A proxy filings, we have contracted with an outside vendor to provide prompt "real-time" access to these filings on our public website at www.ml.com.
At the outset, we would like to note that Merrill Lynch fully supports the Commission's initiatives in exploring ways of ensuring that the markets have access to information that is clear, accurate and timely. We look forward to working with the Commission on this project and developing a system that reflects the realities of the information age while appropriately balancing the goals of timely disclosure with the ability to report comprehensive, accurate and meaningful company information within a framework of responsible corporate governance.
Acceleration of Periodic Report Filing Dates
After careful consideration of the Commission's proposals, and consistent with our comments submitted in 1999 in response to the "Aircraft Carrier" release (Release No. 33-7606A), we do not believe that annual reports on Form 10-K and quarterly reports on Form 10-Q can be prepared in the time frames proposed by the Commission without risk of sacrificing (1) accuracy and completeness of information which comes from a multi-tiered internal review of the reports, (2) meaningful involvement of corporate audit committees and boards of directors and (3) responsiveness to enhanced accounting and disclosure requirements.
As we noted in our June 30, 1999 comment letter, not all data collection is automated; and review, testing and analysis of the collected data even if automated is a time-consuming process conducted by professionals - not computers. Although technological advances unquestionably have created efficiencies in gathering, transmitting and analyzing information, our experience indicates that these efficiencies are offset by increased complexities resulting from enhanced reporting requirements and the vast expansion of the scope and global reach of our businesses. Moreover, advances in technology can never replace the analysis by senior personnel, both inside and outside Merrill Lynch, that will always be an integral part of accurate and meaningful reporting. In addition, in our experience, the work of ML&Co.'s independent auditors has not been completed at the time ML&Co. announces its quarterly and annual earnings. Audit work is not complete on year-end financials until the audit sign-off date and the auditor's review of the quarterly numbers is not complete until the Form 10-Q is finalized. As a result, we clearly label all financial information included in earnings announcements as "preliminary unaudited."
The Commission has proposed shortening the deadline for filing an annual report on Form 10-K from 90 to 60 days. We believe 60 days will be a difficult deadline for many companies to meet and therefore suggest initially shortening this deadline to 75 days to allow companies the opportunity to review and refine their internal processes. We also suggest that the Commission (1) analyze the quality of 10-K disclosure received under the abbreviated time frame and (2) solicit further comment from "accelerated filers" before shortening the deadline further. We believe this incremental approach will serve two purposes: (1) it will allow companies an interim step to adjust to a shorter filing deadline and (2) it will allow companies to gain experience by going through the process of shortening their schedules to meet the interim 75 day deadline so that any unforeseen problems can be relayed to the Commission during the additional comment period.
The Commission has also solicited comments on its proposal to shorten the deadline for filing quarterly reports on Form 10-Q from 45 to 30 days. We believe that the current 45-day deadline should be retained. In our view, the 45-day deadline achieves the appropriate balance between a meaningful information gathering and review process and prompt reporting. However, if the Commission after a full and thoughtful review of comments submitted in response to its proposal decides to modify this deadline, in addition to a significant transition period, we further suggest that the phase-in period be staggered over a period of time to allow companies with expansive global operations to revamp current data gathering systems and to allow professionals who analyze this information sufficient time to adjust to any modified procedures, including the hiring of any additional professionals determined to be required.
As an alternative to shortening these filing dates, we would be supportive of the Commission requiring the filing of earnings and balance sheet information on Form 8-Ks before the Form 10-K and 10-Q deadlines. On average, Merrill Lynch files its earnings release (including segment data and full income statement) approximately 26 days and 19 days after fiscal year-end and quarter-end, respectively, and a complete balance sheet within 60 days and 33 days of such fiscal year-end and quarter-end.
To assist the Commission with analyzing whether the proposed accelerated due dates would provide "accelerated filers" with enough time to prepare these reports, we thought it would be helpful to provide a chronology of activities undertaken to produce our annual and quarterly 10-K/10-Q filings.
Annual Report on Form 10-K
In the past five years, we have filed our Form 10-K between 69 and 77 days after fiscal year-end. In the past two years, we filed our Form 10-K 76 (2002) and 77 (2001) days after fiscal year-end.
Internal drafting of the Management's Discussion and Analysis (MD&A), Notes and Financial Statements portions of the Form 10-K is initiated by our Finance personnel after fiscal year-end. Finance administration in our New York headquarters reaches out to Finance personnel across all of the company's business units and geographic regions to solicit firm-wide information. Once the information is gathered, first drafts of these sections are prepared internally within the Corporate Reporting Group. This process is started at the same time that earnings and balance sheet releases are also being prepared by the Corporate Reporting Group. Generally, ML&Co. has announced preliminary unaudited year-end earnings for the fourth quarter and full fiscal year approximately 26 days after fiscal year-end. Approximately 30 days after fiscal year-end, drafts of the MD&A and Financial Statement Notes sections are distributed to a working group consisting of internal personnel from Finance and Legal and our independent auditors and outside legal counsel. Legal personnel independently draft and review the Business Description, Properties and Legal Proceedings sections and other required disclosures during this time. During the period of 18 to 32 days after fiscal year-end, several drafts of the Business Description, Properties and Legal Proceedings sections are distributed to this working group.
During the entire time that Merrill Lynch's internal reviews are taking place, our auditors, Deloitte & Touche LLP (D&T), are also performing their audit and reviewing the drafts. D&T, as required by the auditing standards, has completed their field work by their opinion date which is approximately 60 days after fiscal year-end. Many of Merrill Lynch's U.S. regulated subsidiaries have 60-day filing requirements and accordingly during this same period subsidiary financial statements must also be drafted, reviewed and filed. Subsequent to their opinion date, D&T finalizes their review of the footnotes to the consolidated financial statements and completes their review of MD&A and the other sections of the Form 10-K.
After coordinating, integrating and verifying all of the comments from the working group, drafts of these sections are circulated to senior management globally, the Treasury Group and Corporate Risk Management approximately 40 days after fiscal year-end. Comments from senior management reflecting the most up to date information on trends and material business initiatives are incorporated into the drafts and approximately 50 days after fiscal year-end the 10-K is scheduled to be circulated to each member of our Board of Directors. The penultimate step in our review process is formal review and approval of the report by our Audit Committee and the full Board at meetings occurring approximately 60 days after fiscal year-end. At this meeting, the Board will also approve ML&Co.'s proxy statement and Annual Report. The ML&Co. Board of Directors and Audit Committee have members who reside both in and outside of the U.S. As a result, additional time must be incorporated into relevant distribution and review schedules to ensure these Board/Committee members receive board packages with this information to allow adequate time for meaningful review and comment. D&T's audit sign-off date coincides with the Audit Committee/Board of Directors sign-off date.
Final comments from the Audit Committee, Board of Directors, D&T and other personnel are then incorporated into the documents and a final review of the document is undertaken. In addition, we generally release our year-end balance sheet information by filing a Form 8-K approximately 60 days after the end of the fiscal year, which coincides with the audit sign-off date. Approximately 67 days after the fiscal year-end, the MD&A, Financial Statements and Notes (which are printed in the Annual Report to stockholders) go to press to be printed in sufficient quantity to distribute to stockholders along with our proxy statement. Once the Annual Report is printed, approximately 73 days after the end of the fiscal year, Corporate Reporting and Legal personnel then begin work on the EDGAR version of the 10-K as well as another electronic version of the MD&A, Financial Statements and the Notes that will be used in an electronic version of the Annual Report that is offered to stockholders who wish to receive proxy materials electronically. These documents are produced using outside vendors. The documents are then filed via EDGAR (along with our proxy statement) approximately 76 days after the fiscal year-end.
Quarterly Reports on Form 10-Q
Whereas we think there may be room to shorten the filing period for the annual report by several days, we do not believe there is similar leeway in our quarterly report process without sacrificing time for senior management and audit committee review. We base this view on the nature and complexity of the disclosure ML&Co. provides on a quarterly basis, which is subject to a similar multi-tiered internal review. We also note the fact that quarterly balance sheet information has historically been filed approximately 33 days after quarter-end and the 10-Q has historically been filed on average 42 days after quarter-end.
The initial focus of our Corporate Reporting Group at the end of the quarter is on preparing the earnings release which is filed on Form 8-K. ML&Co. generally has announced earnings for each of its first three quarters approximately 19 days after quarter-end. We have found that the 19-day period between quarter-end and the earnings announcement is needed to close the quarter-end books, collect financial data from various sources around the world, verify and analyze the data, and prepare the narrative discussions of the preliminary unaudited income statements and business segment results that are included in the announcement.
Approximately 25 days after quarter-end, Corporate Reporting provides the first draft of the MD&A section to senior Finance and Legal personnel, as well as our outside auditors and outside legal counsel. Approximately 28 days after quarter-end, after incorporating comments from that group, a first draft of the full 10-Q is provided to senior management globally, Treasury and Risk Management personnel. Approximately 33 days after quarter-end the revised draft reflecting senior management's comments is provided to the Board of Directors for their review. At this time, while awaiting final comments on the report from the Board of Directors and others, Corporate Reporting personnel begin EDGARizing the document to prepare for electronic filing. Final comments are then incorporated into the document and its EDGAR version and the report is filed electronically shortly thereafter. Although our independent auditors are involved in the earnings release, they have not completed their review of the quarterly numbers until the 10-Q is finalized in EDGAR format, approximately day 42 after the quarter-end.
Website Access to Information
As stated above, ML&Co. has contracted with an outside vendor to provide "real-time" access to our quarterly and annual reports on our public website at www.ml.com. In addition, within 24 hours of filing we generally make pdf versions of the documents available on our website. Due to our reliance on an outside vendor to provide "real-time" access to filings, we request that the Commission consider a standard requiring reports to be posted on corporate websites as soon as reasonably practicable, but no later than the next business day after filing, in order to allow some leeway for those situations where a technological problem prevents "real-time" access.
We concur with the view that there should be significant transition periods in connection with the adoption of any proposed rule changes in this area. We suggest that the Commission encourage companies to voluntarily explore what efficiencies may be added to the current corporate reporting process in connection with preparation of the 2002 10-K process to accelerate the preparation and filing of these reports. We do not believe a company should be faced with the potential adverse market reaction which can result from merely seeking an extension of the filing deadline nor should it and its stockholders face the consequences that result from failure to meet this deadline.
For the reasons discussed above, we strongly urge the Commission not to modify the deadline for quarterly reports. However, if the Commission does propose to modify this deadline, in addition to a significant transition period we also suggest that the phase-in period be staggered over a period of time to allow companies with expansive global operations to revamp current data gathering systems and to allow professionals who analyze this information sufficient time to adjust to any modified procedures, including the hiring of any additional professionals determined to be required. In addition, as stated above, we would also be supportive of the Commission exploring a rule requiring that a company's earnings release and balance sheet information be filed at interim dates prior to the time that a full report on Form 10-K and Form 10-Q would be required to be filed under existing rules.
We would be glad to be part of any ongoing dialogue on this topic and to assist the Commission in whatever way we can. If you would like to further discuss any aspect of our response, please do not hesitate to contact Kathy Zrike (212-670-0180), John Fosina (212-449-8618) or Cara Londin (212-670-0434).
Very truly yours,
/s/ Katherine Hudson Zrike
Katherine Hudson Zrike
First Vice President, General Counsel
Corporate Law Group
/s/ John J. Fosina
John J. Fosina
First Vice President, Corporate Controller
Merrill Lynch & Co., Inc.
cc: The Honorable Harvey L. Pitt, Chairman
The Honorable Cynthia A. Glassman, Commissioner
The Honorable Isaac C. Hunt, Jr., Commissioner
Alan L. Beller, Esq., Director, Division of Corporation Finance
Robert K. Herdman, Chief Accountant
Giovanni P. Prezioso, Esq., General Counsel