Eli Lilly and Company
Lilly Corporate Center
Indianapolis, Indiana 46285
June 24, 2002
Mr. Jonathan G. Katz
Secretary, Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
File No. S7-09-02 - Form 8-K Disclosure of Certain Management Transactions
Dear Mr. Katz:
Eli Lilly and Company appreciates the opportunity to comment on the above proposal. We strongly support the Commission's purpose to require that public companies provide investors with prompt disclosure of management transactions. We believe that, overall, the proposed regulation will fill gaps in the current regulatory scheme and will benefit investors by providing them prompt, useful information about management transactions. We find, however, that the proposal as drafted is overly broad and complex in certain details.
We are offering below some simplifying suggestions that we believe would substantially reduce the compliance burden to companies while providing equal or even greater benefit to investors by focusing the disclosures on the transactions that are most important to them.
As to company stock transactions, the rule should cover only those transactions that, in the words of the proposing release:
· "reflect [an executive's] view of the company's prospects", or
· "sever the link between executive compensation and company equity securities performance."
We suggest excluding the following transactions because they meet neither of the above tests:
· Grants and awards under employee benefit plans or outside director plans. These are routine, often formula-driven transactions as to which the executive or director exercises no control. Therefore, they do not inform investors as to the executive's view of the stock. Further, as acquisitions, they strengthen rather than sever the executive's link to stock performance.
· Periodic acquisitions of company stock under deferred compensation plans. Like grants and awards, these routine plan transactions do not enlighten investors as to the plan participant's view of the company. Once the individual has elected to participate, the amount and timing of the acquisitions are out of the individual's control.
We support reporting of the individual's investment decision to begin participating in the plan or to terminate or materially change his or her level of participation.
Further, because of the close ties (familial or other) between the donor and donee and the normally relatively modest size of gifts, we do not believe that gifts should be viewed as severing the link between the executive and stock performance. In our experience, even fairly substantial stock gifts by executives have not raised investor concerns.
Finally, in our experience executives often delegate the precise details of gifting programs to financial advisors, making it more difficult for the company to obtain immediate, accurate information.
Therefore, including gifts in the new reporting regime will substantially increase administrative burdens and risk of error with little resulting benefit to investors.
We suggest limiting the rule to executive officers as defined in Exchange Act Rule 3b-7. Based on our own experience and public commentary, we believe that investors are much more interested in the transactions of executive officers than those of outside directors. Further, it is much more difficult to obtain immediate information from busy outside directors, who are often located in other cities or countries. Eliminating reporting for outside directors would greatly ease the compliance burden.
Although we appreciate the intent behind the proposal's stratified approach to reporting deadlines, we believe it injects a level of complexity into the rule that outweighs any benefit. We support instead a single deadline for all reportable transactions - the third business day of the week following the week of the transaction. This single deadline has several benefits:
Elimination of Duplicative Filings
Duplicative filings are harmful for two reasons:
We suggest that no additional filing be necessary if, prior to the deadline, the executive reports the transaction on a Form 4 or Form 144 filed electronically.
Responses to Other Commission Questions
We support the view expressed by others that the forms be designated as something other than a Form 8-K. A new form name would help investors distinguish between transaction reports and significant company news. As a corollary benefit, this would also eliminate unnecessary and lengthy listings of transaction reports in Part IV, Item 14 of Form 10-K and Part II, Item 6 of Form 10-Q.
Web-based Filing System
We strongly support the Commission's efforts to develop a web-based filing site for all Section 16 reports, Form 144s and insider transaction reports under this proposed rule. Such a system would greatly ease the administrative burden under all three rules and would also be a real convenience to investors by putting all relevant information about these transactions in one place.
Thank you for the opportunity to comment on this proposal.
Very truly yours,
James B. Lootens
Assistant Secretary and Assistant General Counsel
Eli Lilly and Company