June 18, 2002
Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Re: Comments on the Proposed Rule: Form 8-K Disclosure of Certain Management Transactions File No. S7-09-02
Dear Mr. Katz:
With regard to the proposed amendments to Form 8-K requiring disclosure of certain management transactions, this letter presents the comments of Frederic W. Cook & Co., Inc.
Frederic W. Cook & Co. provides consulting assistance to corporations in developing compensation plans for their executives and key employees. Formed in 1973, we have served over 1,300 clients from offices in New York, Chicago, and Los Angeles.
Our objective is to add value to our clients' compensation programs through an independent viewpoint that balances the design and competitive level of compensation with its resulting impact on shareholder-value creation. Our consultants are widely recognized as experts in the field of equity-based compensation. As such, we believe we are strongly qualified to comment on the proposed rule changes.
We are supportive of the move toward better disclosure. Arguably, investor confidence is at an all-time low given the recent events at such well-known companies as Enron, Tyco, and others. Much of this corporate malfeasance centers on management transactions with regard to corporate securities. Current reporting requirements under Section 16(a) do not place information in investors' hands fast enough for them to act on the information. Presently, gaps of one month to in excess of one year from the time of the event to its actual reporting are possible.
Revised disclosure by companies would promote fair dealing by enabling investors to ascertain more readily executive and director transactions in company equity securities (including derivatives), loan agreements and trading arrangements. With this knowledge, investors would be able to act on timely disclosure of potentially useful information as to management's views of the performance or prospects of the company.
A summary of our comments regarding the proposal is provided below:
1. On June 17, 2002, the SEC released a new proposal [Release Nos. 33-8106; 34-46084; File No. S7-22-02] adding 11 new items that would require a company to file Form 8-K under the Securities Exchange Act of 1934. In addition, the SEC proposed to move two disclosure items currently required to be included in companies' annual and quarterly reports to Form 8-K and to amend several of the existing Form 8-K disclosure items. These added items would be on top of the nine items currently requiring disclosure on Form 8-K and the newly proposed Item 10.
2. With regard to the definition of "executive officer", we believe that the broader definition as used under Section 16 should apply given the importance of such positions as principal financial officer and principal accounting officer. Most companies already include these executives but some may not and this would close the loophole.
3. Both employee and non-employee directors should be required to comply with the proposal.
- 10% beneficial owners who are not executives or directors of the company should not be required to comply with the proposal. They are not employees of the company, do not receive compensation from the company and are far enough removed from operations of the company to not warrant disclosure.
4. All transactions in company equity securities (including derivatives, hedges and collars) should have reporting periods based on the dollar threshold as proposed in the release.
5. Any agreement to enter into a loan or any agreement to forgive or foreclose on a loan, regardless of value, should be reported within two business days. Investors are extremely concerned about company loans to executives and directors and forgiveness on those loans. They should have this information as soon as possible so that they can make informed investment decisions.
6. All 10b5-1 plans should be disclosed by the end of the second business day of the following week. However, if any action is taken on the plan before the filing date, such as a sale or purchase of securities (regardless of value), then the plan must be disclosed within two business days of the sale or purchase
7. Current reporting requires companies to state whether officers, directors and 10% shareholders are in compliance with Section 16(a) of the Securities Exchange Act of 1934. If Item 10 is combined with Section 16 as discussed above, then this compliance statement would cover Item 10 transactions by management.
8. The content and format of the reports could be patterned after the Form 3, 4, 5 format. As discussed above, merging the two and altering the existing format to conform with certain Item 10 disclosures not currently required under Section 16 reporting would be most appropriate in our opinion.
9. Additional clarity from the SEC would be useful to executive compensation practitioners, specifically whether and how the following equity compensation transactions would be reported under the proposed Item 10 if the forms are not merged together as suggested above:
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In summary, we are supportive of the move toward better disclosure. We believe that the new rules will provide meaningful, timely information to investors. However, we believe that the SEC's proposal should be streamlined to provide corporations with one type of disclosure regarding this issue as opposed to repetitious filings (i.e., Form 8-K overlapping with Section 16(a) filings). We welcome the opportunity to assist in any way, and I am available for questions at your request.
Louis C. Taormina