New York State Bar Association
One Elk Street
Albany, NY 12207
Business Law Section
Committee on Securities Regulation
June 24, 2002
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
E-mail address: firstname.lastname@example.org<
Attention: Jonathan G. Katz, Secretary
Re: File No. S7-09-02
Form 8-K Disclosure of Certain Management
Transactions, Release Nos. 33-8090; 34-45742
Ladies and Gentlemen:
The Securities Regulation Committee of the Business Law Section of the New York State Bar Association appreciates the invitation in Release 33-8090 (the "Release") to comment on the subject of a revised Item to be included in Form 8-K dealing principally with transactions by insiders in issuers' shares.
The Committee on Securities Regulation (the "Committee") is composed of members of the New York Bar, a principal part of whose practice is in securities regulation. The Committee includes lawyers in private practice and in corporation law departments. A draft of this letter was circulated for comment among members of the committee, and the views expressed in this letter are generally consistent with those of the majority of members who reviewed and commented on the letter in draft form. The views set forth in this letter, however, are those of the Committee and do not necessarily reflect the views of the organizations with which its members are associated, the New York State Bar Association, or its Business Law Section.
A. Addition of New Form 8-K Item
Generally speaking, the Committee opposes the proposed amendments for Form 8-K disclosure for the following reasons:
- A comprehensive, well-developed, and generally well-understood system already exists for the reporting of ownership and transactions in company securities by directors and executive officers under Section 16 of the 1934 Act. The complexities of reporting in practice are not well understood by members of the public, but professionals who practice in this area uniformly believe that the current system works well for the purposes for which it was established. The Section 16 reporting system has evolved over many years, with an extensive body of no-action letter interpretation and other support resources (National Association of Stock Plan Professionals, Romeo and Dye guides, etc.). If improvements are needed, they should be effected through reform of the existing Section 16 system, not by creation of a second, overlapping regime.
- Nothing relating to Enron requires the establishment of a new regime in which transactions are reported within two business days. In Enron, certain transactions which reduced management's ownership of company stock were not reported on a current basis, because they were not required to be reported under Section 16 until 45 days after the end of the fiscal year on Form 5. This problem could be readily solved simply by eliminating Form 5, or reducing the types of transactions eligible for deferred reporting on Form 5, and requiring current reporting of those transactions on Form 4. Many issuers already report most transactions voluntarily on Forms 4 to reduce the likelihood that transactions will be forgotten by the time the Form 5 is due.
- The arguments that have been made to justify reporting of transactions within two business days are unconvincing. Most people do not understand the difficulties that are involved in trying to collect accurate information to be reported on a monthly basis under the present requirements of Section 16, but in any event much of this information could not be gathered on a routine basis in time to enable accurate Edgarized reports to be filed within two business days. For example, limit orders left with brokers can be executed over a period of several days at varying prices, and the particular prices of each group of transactions will not be known by the reporting person until after confirmations are received. The process of Edgarizing documents usually takes a full business day for many reporting issuers. On the other side, it has not been demonstrated that the information that would be reported within two business days would be so much more meaningful to interested members of the public as compared with information reported on a monthly basis as to justify the kind of effort and expense that would be required to implement the proposed new regime. At the least, additional time is needed to prepare and file the reports. Meeting the Form 8-K filing deadlines will be difficult. It is often difficult to meet the current Form 4 filing deadlines while ensuring that all information is accurate, due to the travel schedules of executives, the need to verify information, contact family members, etc. The Form 8-K deadlines, which are dramatically shorter, will make a large number of errors almost certain.
- In any event, no purpose would be served by two overlapping reporting systems, not counting the third layer of reporting under Rule 144. If a Form 8-K reporting system by issuers must be implemented, these reports should be deemed to satisfy any Section 16 reporting obligations by insiders. The personal nature of Section 16 liability is critical to maintaining the proper compliance mind set on the part of the insider. The Section 16 rules are already perilously complex. However closely the Form 8-K reporting rules parallel the Section 16 rules (at least initially), it is inevitable that the existence of two separate reporting systems will more than double the existing complexity of compliance. Differences in the systems and the interpretations thereunder will lead to inconsistencies and increase mistakes and misunderstandings.
- Form 8-K filings have generally been limited to highly significant events - significant business combinations, sudden onset catastrophic events and the like. Use of the Form 8-K for insider transaction reporting will flood the system with dozens of additional filings per year and will tend to obscure the truly significant events that the form is now used to report.
- Although many issuers go to great lengths to assist insiders in fulfilling their Section 16 obligations, issuers are still dependent upon them for information. Many sources of information - brokerage accounts, family accounts - are not even available to issuers for independent verification. Compliance with the new requirements will be costly and burdensome. For many issuers, Section 16 compliance and reporting already requires the equivalent of one full time staff position, in addition to numerous hours of legal support and time from the insiders themselves, their staffs, brokers, etc. Addition of the Form 8-K reporting scheme would require addition of at least another full time staff position (in part, to ensure coverage during absence of illness due to the short deadlines for the Form 8-K filings), as well as significant additional time from all other parties involved in the current Section 16 compliance process.
B. Outside Directors Should be Excluded
- Reporting on non-executive directors' transactions raises a host of additional issues, and we suggest that outside directors should be excluded from the proposed reporting requirements. The non-executive directors may or may not be independent from management, and may be willing or unwilling to cooperate in reporting of their personal transactions. For example, a director that is, or that represents, a large shareholder may have been elected over management's opposition, or may become dissatisfied with management, and may also be quite sensitive about sharing information relating to transactions in company stock with management. What does the issuer do if the director doesn't cooperate? Introducing this new Form 8-K requirement, which would force the issuer to try to interact with the director in an additional way, may have governance implications that are difficult to speculate about. The Commission considered many of these points in deciding to exclude ten percent stockholders from this reporting scheme. Many of these considerations also apply to outside, non-executive directors, and we suggest that they should report their transactions on their own, without involvement by the issuer.
C. Application to Exchange Act Rule 10b5-1 Arrangements
- No good purpose is served by the requirement to report 10b5-1 plans - including limit orders - under the proposed Form 8-K scheme, especially since (appropriately) there is no requirement to disclose the price terms. This will only generate a large volume of unspecific and therefore non-useful data leading to gratuitous speculation, or it will simply discourage the use of such plans. (Note also that Rule 144 already requires disclosure regarding limit orders placed with a broker.)
D. Single Filing Deadline
- If the proposed rule is adopted, notwithstanding the objections contained in this letter, we urge the Commission to provide for a single filing deadline for reporting all transactions, and that the deadline be the close of business on the second business day of the following week. That would eliminate unnecessary complexity of having to initially determine what the filing deadline is. Selecting the later deadline could provide some relief from the time pressure of the proposed Form 8-K two day filing deadline.
E. Existing Company Loans
- Similarly, the Committee believes that the current disclosure regime under Form 10-Q and Form 10-K with respect to loans or guarantees given by issuers or their affiliates to executive officers or directors is adequate. Although the Committee recognizes that information about loans and guarantees can be useful to investors in understanding the compensation paid to officers and directors, there is no logical reason why they should not be reported in the same way that other elements of director and officer compensation are reported. If the purpose of the new requirements is to provide investors with current information relating to important events happening at reporting companies, it is hard to understand why a company's decision to make or guarantee a $100,000 loan to an executive is significant while a decision to increase an executive's current cash compensation by the same amount is not reported in the same way.
We hope the Commission finds these comments helpful. We would be happy to meet with the Staff to discuss these comments further.
COMMITTEE ON SECURITIES REGULATION
By Gerald S. Backman
GERALD S. BACKMAN
CHAIRMAN OF THE COMMITTEE
Joseph D. Hansen, Chair
Margaret A. Bancroft
Michael J. Holliday
Richard R. Howe
The Honorable Harvey L. Pitt, Chairman
The Honorable Isaac C. Hunt, Jr., Commissioner
The Honorable Cynthia A. Glassman, Commissioner
Alan L. Beller, Esq., Director of Division of Corporation Finance