June 24, 2002
Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W., Stop 6-9
Washington, D.C. 20549
Re: File No. S7-09-02-Form 8-K Disclosure of Certain Management Transactions
Dear Mr. Katz:
The U.S. Advocacy Committee (USAC) and the Financial Accounting Policy Committee (FAPC) of the Association for Investment Management and Research (AIMR)1 appreciate the opportunity to comment on proposed rule amendments that would require certain public companies to file reports providing information on transactions by directors and executive officers that either indicate their view of the company's performance and prospects, or otherwise indicate shifts in the alignment between the economic interests of company management and shareholders.
The USAC is a standing committee of AIMR charged with responding to new regulatory, legislative, and other developments in the United States affecting the investment profession, the practice of investment analysis and management, and the efficiency of financial markets. The FAPC is a standing committee of AIMR charged with both maintaining liaison with standard setters who develop financial accounting standards and regulate financial statement disclosures, and responding to new regulatory initiatives.
The USAC and FAPC strongly support the disclosure of information that will aid investors in their investment decision making. It has become clear that this information can assume various forms-some of which may not be patently obvious to investors who either lack direct access to company reports, or otherwise would not necessarily draw correlations between certain transactions entered into by executive officers and directors (collectively, management) and the message that these transactions may be sending. Thus, we believe that the proposed additions to Form 8-K, through the addition of new Item 10, is a timely and meaningful response to the breakdown in this communication, and the resultant loss of investor confidence in the markets. We offer our comments on specific aspects of the Proposal below.
Definition of Reportable Transactions
Central to the Proposal is that management be required to disclose certain transactions that indicate management's views of a company's prospects or influence the link between executive compensation and the company's equity securities performance. Disclosure required under the Proposal would address:
Each director's and executive officer's transactions in company equity securities (including the acquisition and disposition of derivative securities and the exercise, termination or settlement of derivative securities);
Directors' and executive officers' arrangements for the purchase or sale of company equity securities that are intended as a defense against insider trading allegations; and
Loans of money to directors and executive officers made or guaranteed by the company or an affiliate of the company.
It is clear in the Proposal that purchases and sales are included in the group of transactions that may be intended to satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1 (c).
However, it is not as clear that transactions unrelated to this affirmative defense include "purchases" as well as "sales" by management.
In fact, in the Proposal's discussion of its applicability to new Item 10 disclosures, it is stated that the company would have to report any transaction by management that is "the economic equivalent of a sale." While we are aware of situations in which purchases may not raise the same level of concern, we believe that inclusiveness is more in keeping with the concept of disclosure and that certain purchases would raise an issue in a reasonable investor's mind. We therefore recommend that the SEC provide a better and broader definition of "transactions" for purposes of this rule that includes purchases of equity securities by company management.
We generally agree with the approach of the Proposal to require the company to report the transactions applicable to its executive officers and directors in that it achieves an appropriate balance between the benefit provided to investors and the market, and the reporting burden to the company. We believe that in most instances, the number of individuals that will be affected is relatively small in relation to the importance of the information being provided. In limiting the scope of covered persons to executive officers and directors, we question whether this approach significantly risks excluding other individuals in similar roles-both in terms of responsibility and whose transactions with the company may be revealing. Accordingly, we encourage the SEC to consider including within the scope of the final rule comptrollers and other individuals who are not strictly defined as "financial officers," but that have discretionary decision-making authority for the company as a whole or for a division, or that have the ability to affect the amount of their own equity-based compensation (e.g., profit and loss responsibility).
While we support the approach taken with respect to 8-K reporting, we do suggest that the SEC continue to identify in other areas, and in future rulemaking, opportunities for requiring beneficial owners of more than 10 percent of any class of the company's voting securities to report the types of information now being proposed. These would include transactions in addition to those in which the parties have a pecuniary interest as defined under Exchange Act Rule 16a-1(2)(i). We believe that in some situations this information may have great significance and thus provide investors with information they need for informed investment decision-making.
Scope of Covered Companies
As global barriers are lifted and as foreign companies gain greater access to financial markets in the United States, limiting the applicability of certain rulemaking to domestic companies loses its logic. We therefore believe that the reporting requirements of this rule should extend to foreign issuers, as well as domestic reporting issuers.
The USAC and FAPC appreciate the opportunity to comment on this Proposal. We generally support the SEC's attempt, through this Proposal, to improve the quality and timeliness of information that is made available to market participants and recognize it as an important step in shoring up investor confidence in the markets.
If we can provide additional information related to positions in this letter, please do not hesitate to contact us, or Linda Rittenhouse at 434.951.5333, firstname.lastname@example.org.
|/s/ Deborah A. Lamb
Deborah A. Lamb
Chair, U.S. Advocacy
|/s/ Ashwinpaul C. Sondhi
Ashwinpaul C. Sondhi, Ph.D.
Chair, Financial Accounting Policy
cc: U.S. Advocacy Committee
Financial Accounting Policy Committee
Patricia D. Walters, Ph.D., CFA - Sr. Vice President, AIMR Professional Standards and Advocacy
Rebecca T. McEnally, Ph.D., CFA - Vice President, AIMR Advocacy
Nazir Rahemtulla, CFA - Associate, AIMR Professional Standards and Advocacy
|1||With headquarters in Charlottesville, VA, and regional offices in Hong Kong and London, the Association for Investment Management and Research® is a non-profit professional organization of 57,000 financial analysts, portfolio managers, and other investment professionals in 107 countries of which 44,800 are holders of the Chartered Financial Analyst® (CFA®) designation. AIMR's membership also includes 106 affiliated societies and chapters in 29 countries. AIMR is internationally renowned for its rigorous CFA curriculum and examination program, which had more than 100,000 candidates from 143 nations enrolled for the June 2002 exam.|