June 24, 2002
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re:File No. S7-08-02
Dear Mr. Katz:
We submit this letter in response to the request of the Securities and Exchange Commission (the "Commission") for comments regarding the Commission's proposal (the "Proposal") contained in Release No. 33-8090; 34-45742 (the "Release") to change the reporting scheme for transactions by directors and executive officers of public companies both as to equity securities and loan transactions under the Securities Exchange Act of 1934 (the "Exchange Act"). We appreciate the opportunity to participate in this important undertaking and intend our comments to be helpful to the Commission in its efforts to protect investors by ensuring the timely disclosure of material information.
We represent registrants of various sizes, in various industries, on a regular basis. This comment letter is responsive to issues our clients have raised in the course of our representation but is not made on behalf of any client or group of clients.
The Proposal and the Commission's Objectives
The Proposal, if adopted, would effect a major change in the regimen of reporting of transactions by executive officers and directors of public companies, as to the scope, the medium and the timing of such reports. In addition, the Proposal would create potential liability under both the Securities Act and the Exchange Act for a public company as a result of errors and omissions in reporting transactions that its directors and executive officers conduct with third parties.
In the Release, the Commission states: ". . . we believe it would enable investors to make investment and voting decisions on a more timely and better informed basis, provide more timely information regarding management's view of company performance on prospects, protect investors, and promote fair dealing in company equity securities if companies were required to report additional information related to these subjects on a more current basis." We support these goals but believe the Commission should consider more targeted and simpler approaches.
We are concerned that the Commission's Proposal may create an unnecessarily cumbersome and redundant disclosure scheme. We anticipate that the Commission's Proposal will substantially increase the number of filings on Form 8-K relating to secondary market transactions. A substantially larger volume of filings could debase the significance of any particular Form 8-K and make it more difficult for investors to find material information of the type traditionally disclosed on Form 8-K.
We are also concerned that, through incorporation by reference, liability under Section 11 of the Securities Act of 1933 may be extended to disclosures regarding transactions to which the registrant is not a party, namely secondary transactions by executive officers, directors and other persons whose transactions are imputed to executive officers and directors. With additional exposure, due diligence for registered offerings will become more costly without demonstrable benefit.
We worry that shifting responsibility for reporting market transactions from individual directors and officers to registrants could undermine the goal of ensuring the disclosure of information accurately and on a timely basis. In our experience, the fact that a director or executive officer has personal responsibility for reporting his or her trading activities provides additional, substantial motivation for ensuring that transactions are properly reported. Consequently, we believe that shifting responsibility from directors and officers to registrants could reduce the quality of those reports. Moreover, making registrants responsible for those reports could unfairly penalize shareholders by exposing them to additional liability and expense that more appropriately would be focused on individual officers and directors who fail to notify the public of their trading activities.
Our final area of concern is the Commission's proposed treatment of transactions under plans adopted pursuant to Rule 10b5-1. We are concerned that disclosure of specific transactions made pursuant to Rule 10b5-1 plans may allow attentive market professionals to discern otherwise confidential trading information and thereby engage in transactions which unfairly disadvantage the insiders.
1. Disclosure of Transactions.
The Commission notes that the proposed reporting scheme would in large part duplicate the reports filed under Section 16(a) of the Exchange Act but on an accelerated basis and in electronic format. In addition, it seems that the Commission is importing a qualitative disclosure approach from Staff Accounting Bulletin 99 as to transactions by executive officers and directors (i.e., by the nature rather than the size of transactions that must be disclosed). In our view, it would be preferable for the Commission to modify or enhance the Section 16(a) reporting regime. Rather than adopting an additional disclosure regime, we believe the Commission could accomplish much the same objectives by making three simple changes to the Section 16(a) reporting regime:
We believe these changes could further the Commission's goals with a lesser burden on registrants than the Commission's proposal. By modifying the Section 16 reporting system, the Commission would avoid the creation of divergent reporting systems and the duplication of reporting by the registrant and the insider as to the same transaction. We believe that applying the Section 16 reporting changes to holders of more than 10% of a registrant's equity securities is appropriate and would avoid a more complex bifurcation of reporting of insider transactions.
2. Rule 10b5-1 Plans
We are puzzled by the Commission's treatment of plans under Rule 10b5-1, which we understood to be merely mechanisms for establishing an affirmative defense against claims of trading on the basis of material nonpublic information. We understand that many issuers have been counseled to disclose the existence of such trading plans adopted by officers and directors but to avoid any entanglement in their operation. We are concerned that any disclosure of the mechanism or pricing details of a particular plan will permit market professionals to manipulate the market (e.g., by arbitraging on any disclosed price). We believe that the Commission's objectives would be more efficiently achieved by:
3. Other Transactions.
We agree that it is appropriate to require registrants to report loans to their directors and executive officers in their Exchange Act filings. We believe that such transactions should be disclosed either on a quarterly basis as a new item on Form 10-Q or on a more current basis as a new item on Form 8-K, perhaps to be disclosed within five business days from the end of the month in which the transactions occurred. We believe that one comprehensive quarterly or monthly filing including all such transactions involving a registrant's directors and executive officers will ease reporting burdens on registrants and provide investors with better, more cogent disclosure. To this end, we suggest the addition of a new item to either Form 10-Q or Form 8-K to cover:
We believe that enforcement mechanisms without real teeth are invitations to non-compliance. Under the modified regimen outlined in this letter, registrants would have to report transactions to which they are a party. Directors and executive officers would retain responsibility for reporting transactions in their registrant's equity securities. We think that this allocation of responsibility is consistent with the statutory framework under Sections 12 and 13 of the Exchange Act, on the one hand, and Section 16 of the Exchange Act, on the other.
We do not think the Commission should attempt to shift enforcement responsibility for an individual's reporting failures to registrants. We are concerned that registrants may in some cases be unable to effectively assume this burden. For example, if a registrant sought to remove a director for non-compliance with reporting regulations, such removal might be prevented by agreements among stockholders or by state laws permitting removal of directors on a classified board only for very limited reasons, and possibly only by shareholders. Because of these constraints and a need for reasonably uniform treatment, we suggest as an alternative that the Commission use its broad enforcement powers under the Exchange Act, including Section 21(d)(1), to compel compliance.
While we applaud the Commission's stated goals in advancing the reporting of insider transactions, we believe that a direct approach will be more effective and efficient. We strongly urge that the Proposal be revised as suggested herein.
FOLEY HOAG llp