From: Dilip Gadkar [email@example.com]
Sent: Thursday, June 20, 2002 2:55 PM
Subject: File No. S7-09-02
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Attention: Jonathan G. Katz, Secretary
Via email: firstname.lastname@example.org
Re: File No. S7-09-02
Release No. 33-8090; 34-45742
Form 8-K Disclosure of Certain Management Transactions
Ladies and Gentlemen:
This comment letter is submitted on behalf of eRestrictedStock, Inc., a software company that provides an Internet-based software platform that would allow public companies and their professional advisers to collect and automate the processing and reporting of securities transactions by public company insiders whose transactions are or may become subject to reporting requirements under the SEC rules.
We support the SEC's proposal to require prompt reporting of securities transactions, trading plans, and loan and guaranty transactions of company insiders. However, we realize that compliance personnel at many public companies are understandably concerned that the proposed 2 business day, and 2nd business day of the following week, filing deadlines might impose undue or impossible burdens under existing systems for gathering and preparing the required information.
We believe that these burdens can be reduced to a practical level if companies utilize software which allows Internet-based communication with the insiders and their brokers or other representatives to collect, store, correlate, and update required information, and generate standard forms to report the insiders' transactions.
We encourage the SEC to consider modifications to the proposal which we believe have been or will be made by other commenting persons so that the disclosures required for these matters are as uniform as possible, by using or building upon the existing standardized reporting under Forms 3, 4 and 5 pursuant to Section 16(a) of the Securities Exchange Act of 1934.
While software solutions will greatly enhance the ability of companies to provide prompt disclosure, these solutions will work best, and the cost of training and implementation will be lower, if the required information and forms to be filed are as standardized and as simple as possible. We also believe that the marketplace and investors will benefit from the reporting of this information on standardized formats so that information service providers can best collect, analyze and disseminate this information.
Manual information gathering will not work well with the proposed new deadlines.
Much of the concern about prompt reporting of insider securities transactions stems from the manual process that is currently in widespread use for the Section 16(a) reports and other information which the company files with the SEC. The current methods often involve the following:
As also has been pointed out, the process and timing are further complicated when, as is often the case, the different parties involved are in different time zones, sometimes in different countries.
We believe the proposal for 2 business day, and 2nd business day of the following week, reporting of insider transactions via Edgar on Form 8-K would be extremely difficult, if not impractical, under the typical "manual" method used by many companies for current reporting requirements.
Automated Processing and Reporting.
Most of the perceived compliance problems with the proposed deadlines stem from three critical deficiencies in the current systems for processing and reporting insider transactions:
eRestrictedStock currently provides a software solution, which we believe, would relieve much of the perceived burden of meeting the proposed new deadlines. Our software enables the real-time input of information relating to insiders' transactions, storing of this information in a system which can be easily accessed via the Internet by the authorized participants of the transactions such as designated officers, outside law firm, brokerage firm professionals acting on the insider's instructions in execution and settlement of the transactions, and automatic generation of Rule 144 forms, seller's representation letters, Section 16(a) reports and other reports based on this information. The Internet-based access and communication made feasible with this software will help alleviate the time zone, geographical and other communication difficulties inherent in the "manual" method of collecting information on management transactions.
Once the proposed Form 8-K Item 10 information (or, preferably, a new report form for presenting this information on a standardized basis) is finalized, our software will be revised to generate this new report and to file the reports via Edgar.
Finally, we believe that a key aspect of compliance with the proposed reporting deadlines will be setting up compliance systems which enable companies to obtain real-time or advance notice of insider transactions. Automated information gathering systems will work best if most insider transactions are reported either in real-time or some time in advance to the company. Even for a simple open market sale or purchase or option exercise with same day sale (assuming a size of transaction of $100,000 or more), if the information is first reported late in the day on which the transaction was executed, there will be significant risk under manual processes that the correct information will not be gathered, checked, input and filed via Edgar by the filing deadline of 5:30 p.m. Eastern time on the second business day (e.g., 2:30 p.m. California time for West Coast companies).
The practical effect of the proposed deadlines will likely cause companies to put renewed emphasis on what have been called in the past "pre-clearance" or "pre-notification" aspects of their compliance programs. However, these programs can have a perceived loss of freedom and control for the insiders, and a major drawback of such "pre-clearance" or "pre-notification" has been market risk due to the delay in such manual "pre-clearance" or "pre-notification" procedures.
We believe that automated software systems for management transactions such as ours can help companies achieve the effects of "pre-clearance" or "pre-notification" programs without exposing insiders to undue market risks or loss of freedom or control, and thus convince insiders to use such automated systems. We believe that our software would result in reducing current market risks faced by insiders, by linking information and communication among the company, the insider, the broker and any other compliance or other personnel needed to facilitate the process.
Current brokerage firm procedures require brokers to contact the company or its outside law firm to verify that the transactions requested by insiders are within the window periods or other insider trading policy requirements of the company. Such verbal verifications are subject to the two parties reaching each other by phone and can sometimes take a day or so given conflicting schedules. Our software can provide automatically this "pre-trade validation" notification to the broker, and thus may significantly reduce market risk for the insider. At the same time, the company's insider transaction information would be updated automatically in real-time. Information related to all insider transactions can be accessed, input and used on a controlled and secure basis by the insiders as well as by designated compliance personnel, without the need for faxes, multiple phone calls, and involvement of staff employees who do not need to know this information.
Our software can be accessed, for example, by the company's outside law firm as well as by the internal legal, finance and compliance departments. By setting up access permission and other measures, companies can provide their insiders with a trusted information bank which may help them gain comfort with real-time reporting of transactions. Even if all details are not known in advance, reporting of information with our software system will enable the basic reports or forms to be generated, checked, and completed or edited with the final facts of the transaction. In the case where a transaction is reported in real time or soon after the fact, the software will provide a speedy way of managing this information and enhance the companies' ability to make a timely filing.
Dilip Gadkar, Chief Executive Officer
80 Broad Street, 6th Floor
New York, NY 10004
Phone: (917) 320-6501
Fax: (917) 320-6500