June 24, 2002
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Re: File No. S7-09-02
Dear Mr. Katz:
Mellon Financial Corporation appreciates the opportunity to offer its comments on the proposal to require Form 8-K disclosure of certain transactions by directors and executive officers.1 Mellon is supportive of the Commission's objective of accelerated disclosure of material information concerning transactions by insiders of public companies. As evidence of this support, we enclose for your information a copy of our press release dated June 13, 2002, announcing that Mellon is implementing voluntary weekly Form 8-K reporting of Item 10(a) transactions by its executive officers and directors. The purpose of our comments is to suggest changes to the Commission's proposal to achieve what we believe is a more appropriate balance between the costs and benefits of accelerated disclosure.
As discussed in greater detail below, the following summarizes our recommendations for the staff's consideration:
We also believe that the cost estimates reflected in the Release underestimate the amount of registrants' staff time which would be required for compliance with the proposed reporting requirements and fail to take account of the costs of making filings via EDGAR.
We support the determinations of the Commission not to sanction registrants for reporting delinquencies that occur despite reasonable procedures and not to make Rule 144 and short-form registration statements unavailable if delinquencies occur.
Adjust Reporting Deadlines to Permit Weekly Scheduling of Reports
As proposed, Form 8-K Item 10 permits reports of management transactions aggregating less than $100,0002 to be filed on a weekly basis, whereas reports of transactions aggregating $100,000 or more must be filed within two business days.
For 2001, Mellon officers and directors filed 38 reports on Form 4 and 11 reports on Form 5. Approximately 93% of the 81 reported transactions (excluding grants and gifts) involved $100,000 or more.
We believe that the requirement for two-business-day reporting of transactions aggregating $100,000 or more significantly increases the burden on registrants in a manner not justified by the value of such accelerated reporting. Weekly reporting, like the current reporting scheme under Section 16(a), permits registrants to adopt procedures and schedule staff time to comply with reporting requirements on a regular basis with minimum disruption to the other responsibilities of those engaged in the reporting process. Weekly reporting also reduces the staff time and EDGAR filing costs required for compliance by permitting all weekly transactions to be combined on a single report.
In contrast, the requirement for two-business-day reporting of transactions aggregating $100,000 or more disrupts the ability of registrants to schedule staff resources because of the requirement for constant monitoring of the aggregate value of transactions and because at any time staff may need to be drawn away from other duties to determine the need for, to obtain the information required for, and to prepare and file reports on an irregular basis.
Because of the disruption to the scheduling of staff resources, we believe that the costs of the two-business-day reporting requirement are much higher than would be indicated by simply multiplying the estimated cost per report by the estimated increase in the number of required reports.
We also do not believe that these increased costs are justified by the benefits of such increased acceleration of reporting of transactions aggregating $100,000 or more. We believe weekly filing represents an appropriate balance.
Given the questionable increased value to investors of two-business-day versus weekly filing and the significant reduction in the burden on registrants which we believe would result from allowing reports to be filed on a weekly basis, we propose that the requirement for two-business-day reporting of transactions be eliminated from the proposal in its entirety. If the requirement is to be retained, then we would suggest that it be limited to purchase and sale transactions with a value in excess of $1 million.
Provide a Limited Extension for Filings on Due Dates of Form 10-K or Form 10-Q
Like many registrants, Mellon uses the services of a commercial vendor to both convert its filings to the EDGAR format and make the actual EDGAR filing of its reports. Although Mellon's Form 10-K and Form 10-Q filings are customarily made in advance of the current filing deadlines for these reports, we understand from discussions with commercial vendors that the filing of Form 10-K and Form 10-Q reports on or near the deadline dates for registrants reporting on a calendar year basis already puts pressure on their EDGAR filing resources. We anticipate that if the filing deadlines for Forms 10-K and 10-Q are accelerated as the Commission has proposed,3 the number of registrants filing their Forms 10-K and 10-Q on the filing deadlines will increase dramatically.
We are concerned that if the due date for a report under proposed Item 10 of Form 8-K were to fall on one of these Form 10-K or Form 10-Q deadline dates, either the filing of the Item 10 report might be delayed or the fees charged for the filing might be significantly greater than the costs for the same filing on another date. Given the relative insignificance of Form 8-K Item 10 disclosures, as compared to filings on Forms 10-K and 10-Q, we believe that it will best serve the interests of disclosure if the potential log-jam in the EDGAR filing machinery is alleviated by extending the Form 8-K Item 10 filing deadline by one business day in any case where it would otherwise fall on the deadline date for Form 10-K or 10-Q filings by calendar year issuers.
Exclude Intra-Family Gifts from Item 10(a) reporting
The arguments cited in the Release as supporting proposed Item 10(a)'s accelerated disclosure requirements for changes in directors' and executive officers' holdings of company equity securities are that changes in such holdings might in some cases (1) reveal shifts in the alignment between management's and shareholders' economic interests, (2) disclose transactions that might be construed as severing the link between executive compensation and company equity securities performance and (3) provide investors potentially useful information as to management's views of the performance or prospects of the company.
We believe that a gift between members of an insider's family does not result in a sufficient change in the insider's economic incentives to implicate any of the arguments made in support of the value of accelerated reporting. On the other hand, eliminating the requirement to track these transactions on a daily basis would significantly lessen the burdens of accelerated reporting on registrants and insiders. We therefore request that the proposal be revised to exclude from accelerated reporting bona fide gifts among an insider and his or her "family members," as defined in General Instruction A.1(a)(5) to Form S-8.4
Eliminate Unnecessary Duplicative Reporting of Transactions
As proposed, the reporting of a transaction pursuant to Item 10(a) of Form 8-K would not relieve an officer or director from the obligation pursuant to Section 16(a) of the Act to report the same information concerning the same transaction on Form 4 or Form 5.5
To us, this duplicative reporting requirement makes no sense. Clearly, the Commission has the authority under Section 36(a)(1) of the Act to exempt from reporting under Section 16(a) a transaction that has previously been reported in Form 8-K Item 10. We believe the proposal should be revised by including an amendment to the rules under Section 16(a) to create such an exemption. If a transaction has previously been reported pursuant to Item 10(a) of Form 8-K, we see no purpose being served by requiring the same information to be reported again on a Form 4 or Form 5.
The Release suggests that the burden of this duplicative reporting might be alleviated by allowing an officer or director to attach a Form 4 to the company's 8-K or allowing the company to adopt a director's or officer's Form 4 as its 8-K filing. We fail to see how permitting the simultaneous filing of the duplicative reports lessens the burden of the unnecessary filing. If the concern is that the Form 8-K is filed by the company and is not the report of the director or officer having the reporting obligation under Section 16, we would suggest that a simpler solution would be to permit the Section 16 reporting person to file a power of attorney authorizing the company to report transactions on his or her behalf.6
The Release suggests as a justification for the duplicative reporting of transactions under Form 8-K Item 10 and Section 16(a) that the information required by the two reports is not the same.7 Except for the requirement to provide month-end totals for each category of beneficial ownership, it appears to us that the information required to be included in reporting a transaction under proposed Form 8-K Item 10(a) includes all of the information which would be required in a report of the same transaction on Form 4.8
We absolutely endorse the decision of the Commission that, given the rapid deadlines that would apply, registrants should not be required to reconcile and report an insider's total beneficial ownership in a Form 8-K Item 10(a) transaction report. In our experience, the requirement to provide month-end totals for all categories of an insider's beneficial ownership is the most difficult and time-consuming aspect of preparing Section 16(a) reports. While we agree with the Commission that including this requirement in Form 8-K Item 10(a) reporting would be unworkable, we do not believe that the omission of this information from the Form 8-K report justifies duplicative Section 16(a) reporting of a transaction previously reported on Form 8-K.
Because Form 4 month-end totals are not required to include transactions, such as grants and awards and gifts, which are reportable on Form 5,9 the Form 4 totals do not in any event provide a reliable picture of an insider's total beneficial ownership. Given the approximate nature of the Form 4 month-end totals, we do not see how the omission of this information from the Form 8-K Item 10(a) report can justify duplicative Form 4 reporting of a transaction previously reported on Form 8-K. If the Commission decides that a reconciliation of an insider's total beneficial ownership is necessary, we suggest that the Commission make this an annual requirement, to be reported on Form 5 only when there has been a change in such total during the year which has not been previously reported on Form 4.
Exclude Ordinary Course Loans by a Financial Institution from Item 10(c) Reporting
According to the Release, the rationale for requiring Item 10(c) accelerated reporting of loans to a director or executive officer by the company or its affiliate is that, "These financial arrangements involve the use of company assets for arrangements that are not available to the shareholders generally."10 By definition, this rationale does not apply to loans made in the ordinary course of business by a financial institution.
The current reporting requirement applicable to management indebtedness, Item 404(c) of Regulation S-K, provides in Instruction 3 that:
"3. If the lender is a bank, savings and loan association, or broker-dealer extending credit under Federal Reserve Regulation T [12 CFR Part 220] and the loans are not disclosed as nonaccrual, past due, restructured or potential problems (see Item III.C.1. and 2. of Industry Guide 3, Statistical Disclosure by Bank Holding Companies), disclosure may consist of a statement, if such is the case, that the loans to such persons (A) were made in the ordinary course of business, (B) were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and (C) did not involve more than the normal risk of collectibility or present other unfavorable features."
In addition, under Regulation O of the Board of Governors of the Federal Reserve System, conditions (A), (B) and (C) must be true at the time a loan is made to an executive officer or director.
Because the rationale for Form 8-K Item 10(c) disclosure has no application to such loans, and because the requirement to report such loans under Item 10(c) would impose upon financial institutions and their affiliates a reporting burden which would be entirely out of proportion to any value the reporting of such information might have for investors, we would respectfully request that the Commission revise the proposal to exclude loans meeting these requirements from Item 10(c) reporting.
Comments on the Commission's Cost Estimates
In Part VI.B. of the Release, the Commission estimates an average burden of three hours per Form 8-K Item 10 filing.11 Based upon our own experience with Form 4 and Form 5 filings, we believe that five hours would be a more realistic estimate of the total amount of paralegal and attorney time required per filing of a report under proposed Form 8-K Item 10(a). Given the increased amount and complexity of the narrative disclosure required, we would expect that the number of burden hours involved in preparation of reports under proposed new Form 8-K Items 10(b) and 10(c) would be somewhat higher.
The Commission's cost burden estimates also fail to take account of the costs of making filings on EDGAR. Like many registrants, Mellon does not make EDGAR filings in-house but instead uses the services of a commercial vendor to convert filings to EDGAR format and to make the actual filing on the EDGAR system. Currently, Mellon pays the vendor a fee of approximately $150 to make a four-page Form 8-K filing consisting of a cover page, a signature page and a two-page press release. Using this $150 fee as the average cost of an EDGAR filing under proposed new Form 8-K Item 10, and assuming that the fee approximates the overhead, labor and other costs incurred by registrants which make their EDGAR filings internally, inclusion of the EDGAR filing costs would add another $31,850,000 to the estimated cost burden of the proposal based on the Commission's own estimates that the proposal will require an average of 21 filings per year by an estimated 10,100 filers (21 x 10,100 x $150 = $31,850,000).
Again, we appreciate the opportunity to offer these comments. As indicated at the outset, we are supportive of the Commission's objective of accelerated disclosure of material information concerning transactions by insiders of public companies. We believe, however, that the changes we have suggested will more appropriately balance the benefits and costs of accelerated disclosure of these transactions.
Very truly yours,
/s/ Carl Krasik
cc: Martin G. McGuinn
Steven G. Elliott
Michael E. Bleier
Ann M. Sawchuck
Richard M. Pearlman
|1||Release No. 34-45742, 67 Fed. Reg. 19914 (April 12, 2002).|
|2||Note that proposed Form 8-K General Instruction B.1. is ambiguous as to whether the "aggregate value of $100,000 or more" is to be computed by aggregating transactions on a per individual or per registrant basis. We have assumed in our comments that the $100,000 aggregate value is to be computed on a per individual basis in the same manner as specified in the Instruction for the $10,000 aggregate value reporting threshold.|
|3||Release No. 34-45741, 67 Fed. Reg. 19896 (April 12, 2002).|
|4||In view of the limited value of information concerning gifts, we believe that the broader definition of "family member" in General Instruction A.1(a)(5) to Form S-8 is more appropriate than the more limited definition of "immediate family" in Rule 16a-1(e).|
|5||Release at footnote 48, 67 Fed. Reg. at 19919. As noted in the footnote, reporting under proposed Item 10(a) also duplicates information that may have been previously reported on Form 144.|
|6||Note that we are not proposing that the company's obligation to file a report under Form 8-K Item 10(a) would relieve a Section 16(a) reporting person from his or her obligation to assure that a transaction was timely and accurately reported by the Section 16(a) reporting deadline. Thus, if the company failed to report a transaction under Form 8-K Item 10(a) or reported the transaction inaccurately, the proposed exemption from Section 16(a) reporting would not apply, and the insider would continue to be obligated to report the transaction on Form 4 or Form 5, as applicable.|
|7||67 Fed. Reg. at 19919 n. 48.|
|8||Although proposed Item 10(a) does not clearly require disclosure of whether the insider's beneficial ownership of the securities involved in the transaction is direct or indirect or of the nature of any indirect beneficial ownership, as would be required on a Form 4, we assume that this information is intended to be included in the unfortunately vague requirement to include "Any other material information regarding the transaction.'' In any event, the Commission could condition the proposed exemption from duplicative Section 16(a) reporting on the inclusion in the Form 8-K Item 10(a) report of all information with respect to the transaction (other than month-end totals, but including, if desired by the Commission, Form 4 transaction codes) which would be required to be included in a report of the transaction on Form 4.|
|9||Instruction 4(a)(i) to Form 4.|
|10||67 Fed. Reg. at 19921.|
|11||67 Fed. Reg. at 19924.|