From: Keijon Waters [waters@acca.com] Sent: Monday, July 01, 2002 10:11 AM To: SEC Subject: File No. S7-09-02 July 1, 2002 Jonathan G. Katz, Secretary Securities and Exchange Commission 450 Fifth Street, NW Washington, DC 20459 E-mail address: rule-comments@sec.gov Re: File No. S7-09-02 Release No. 33-8090; 34-45742 Form 8-K Disclosure of Certain Management Transactions Dear Mr. Katz: The Corporate and Securities Law Committee of the American Corporate Counsel Association (³ACCA²) is pleased to provide comments on the Securities and Exchange Commissionıs proposed rules on Form 8-K Disclosure of Certain Management Transactions as set forth in Release No. 33-8090; 34-45742 (the ³Release²). ACCA is the only global bar association exclusively serving the professional needs and interests of in-house counsel to corporations and other private sector organizations. ACCA has more than 13,000 individual members who act as in-house counsel to more than 6,000 business entities. The Corporate and Securities Law Committee is the largest of ACCAıs Committees, with over 4,000 attorney members, most of whom work in public companies subject to the Commissionıs disclosure requirements. We believe our comments provide the Commission with a perspective that is particularly important regarding the issues raised in the Release. We support more timely disclosure about insider transactions to the investment community, and we understand that under existing law, reports under the Securities Exchange Act of 1934 (the ³1934 Act²) may be the only practical way of requiring such timely disclosure. However, as discussed below, we believe that a number of changes to the proposal would make timely compliance more achievable without any diminution of the value of the reports to investors. Definition of "Executive Officer" As proposed, a company would be required to report in a new Item 10 on Form 8-K certain transactions in company securities by directors and ³executive officers,² as defined under Rule 3b-7. These individuals are the same as those who have to report their transactions under Section 16(a) of the 1934 Act, except that the 1934 Act covers chief financial officers and the principal accounting officer or controller - even if they would not be covered by the Rule 3b-7 definition. In our experience, chief financial officers are virtually always included as "Executive Officers" under Rule 3b-7 since they are in charge of a principal business function, but principal accounting officers and controllers, who often report to the chief financial officer, sometimes are not included. Although we believe that the definition of "executive officer" under Rule 3b-7 could be adequate for purposes of this proposal, we believe that the new rules should cover the same officers that are defined as officers subject to Section 16(a) reporting requirements. This will facilitate compliance with both of these reporting regimes. Exclusion of Non-Executive Directors As proposed, covered transactions by directors would have to be reported under Item 10 even if the directors were not executive officers. We do not believe that the proposed Item 10 reporting should apply to non-executive directors. Compared to executive officers, non-executive directors generally have less timely information about the company, and information on their transaction would be much harder to obtain in the required time frame. Non-executive directors are not full-time company managers. While they have a fiduciary duty to keep up with the companyıs affairs, they are not engaged on a daily basis, and instead generally meet on a periodic basis and obtain periodic reports from the companyıs officers. As a result, their view of company performance and prospects is not nearly as important as those of the executive officers, who are intimately involved with the daily operations of the company. In addition, non-executive directors are generally not on-site at the companyıs offices and do not have routine contact with company counsel and the other personnel charged with preparing documents to be filed with the Commission. They can be hard to reach, making timely reporting of their transactions difficult or impossible. Accordingly, we believe the costs of having non-executive directors comply with the proposed time frame outweighs any benefits to investors of learning about their transactions in the companyıs securities on an accelerated basis. Therefore, we recommend that non-executive directors continue to report their transactions only under the Section 16 framework. Longer Deadlines We believe that the two-business day deadline is too short and would result in significant costs for many companies. A survey of our members illustrated that information about insider transactions often takes substantial time to be delivered to company personnel. We recommend the use a deadline of Friday of the following week for reporting all transactions, regardless of size or type. This greatly reduces the burden upon companies by: - routinizing the filing date, allowing related tasks to be handled weekly instead of each business day and eliminating the need to track the number of days elapsed since a trade, - eliminating the need to continually calculate the value of transactions, and - for companies with executive officers outside the U.S., extra business days will be useful in coping with the challenges of gathering data where dates and times are not consistent. Unlike other commentators who are recommending a deadline of Wednesday of the following week, we believe that a little more time is necessary to make this a workable framework for most companies. We particularly are concerned about weeks that have Monday as a holiday, thereby making compliance more difficult in those weeks. If the event that the Commission decides to adopt its proposed two business-day filing requirement, we recommend that it be limited to purchase and sale transactions with a value in excess of a $5 million threshold. Broader Exclusion for Benefit Plan Transactions We recommend that the categories of transactions that would be exempt from disclosure under proposed Item 10 should be expanded. Specifically, we believe that the granting of a stock option or the awarding of restricted stock pursuant to an employee benefit plan do not necessarily constitute events that reflect managementıs views of the companyıs prospects and therefore should not be reportable under proposed Item 10. In the Release, the Commission states that a purpose of the proposed amendments is to provide investors with prompt disclosure of certain insider transactions so that investors are able to make investment and voting decisions on a better-informed and more timely basis. We believe that the granting of a stock option or the awarding of restricted stock does not materially add to the mix of information available to investors, and that it is the actual exercise of such option or sale of such restricted stock (i.e., the time at which the insider realizes upon his or her pecuniary interest), both of which would be reportable under proposed Item 10, that is the relevant or ³market signaling² event for an investor. (Similarly, we do not believe that the expiration or termination of a stock option or the failure of restricted stock to vest should be reportable under proposed Item 10 as they do not reflect transactions that have material ³market signal² value.) Accordingly, it is our view that the current Section 16 reporting regime continues to be sufficient for these types of transactions. Nonetheless, if the Commission believes that such transactions do merit more prompt disclosure, we suggest that it consider amending the existing Section 16 rules to require that option grants and restricted stock awards made pursuant to employee benefit plans be reported on Form 4 rather than permitting reporting persons to utilize Form 5. We believe that this would ensure the prompt disclosure of such events, while decreasing some of the duplicative reporting that will necessarily result from the adoption of Item 10. Exclusion of Gifts We believe that all bone fide gifts should be excluded from Item 10(a) reporting. Gifts by - and to -directors and executive officers are not so indicative of the insider's view of the companyıs prospects as to justify accelerated reporting. Furthermore, excluding these transactions would substantially lessen the burden on companies. In addition, charitable giving should be encouraged, and reporting such contributions as dispositions of stock might inhibit insiders from making such contributions. New Form 4-K As stated in the Release, a significant amount of the information that a company would report with respect to directorsı and executive officersı transactions in company equity securities is also currently reportable by officers and directors under Section 16(a). Given the recent proposal to expand further the Form 8-K reporting requirements, we are concerned that investors may be confused - or even delayed - in locating the relevant information if they have to search through multiple 8-K filings to find these required items, particularly if an investor is using EDGAR, which currently does not have the capability to search by specific line items on Form 8-K. To avoid such confusion and to make it easier for interested investors to locate the relevant information, we propose that the Commission create a separate form for the filing of such information. We suggest a Form 4-K, which would be closer in terminology to the related Form 4. As set forth above, Form 4-K would be required to be filed on EDGAR by the close of business on the Friday of the week immediately following the reportable event. Liability Concerns Regarding liability, the Commission proposes that the information required to be filed under this new item would be considered ³filed² for purposes of liability under Section 18 of the Exchange Act and would be incorporated by reference in Securities Act registration statements on Forms S-2, S-3, S-8 and S-4. Since this new filing will be prepared under intense time pressure and, since in most cases, the company itself cannot provide the information nor control the accuracy of such information, we do not agree that these disclosures should be considered ³filed² (and hence subject to Section 18 liability) unless the company specifically states that the information is to be considered ³filed² under the Exchange Act or the company specifically incorporates such information by reference into a filing under the Securities Act or the Exchange Act. We particularly disagree with the company being subject to Securities Act liability for such information through automatic incorporation by reference since many of these filings may contain information provided to the company by the executive officer or director. We strongly agree that neither a delinquency nor a failure to file should adversely affect either the companyıs eligibility to use short-form Securities Act registration statements or its current reporting status under Rule 144(c). Both of these results would be unduly draconian measures ­ particularly in light of the lack of control that the company may have under some circumstances to either obtain the required information or to get it in a timely and accurate manner. Finally, we strongly support the proposed changes to General Instruction B.1. to Form 8-K to make clear the circumstances under which the Commission is not likely to bring an enforcement action for violations of this filing requirement. Since there may be circumstances where it will not be possible for the company to obtain the required information, we do request clarification as to whether the Commission would impose a sanction on a company for failure to file where it was not reasonably practicable for the company to obtain the required information. Elimination of Duplicate Filings To avoid unnecessary duplication and eliminate potential confusion by investors, we agree with the Commissionıs proposal that, if substantially the same information required under this new item has been previously reported by the company, then an additional report need not be filed under this provision. We would propose expanding such proposal to also cover any filings by the officer or director under Section 16 that contain the required information and are filed electronically. Thus, for example, if an officer or director expedites the filing of a Form 4, the company should not be required to refile the same information since the market will already have received it. Alternatively, we would propose that the company be permitted to refile the same information as was previously filed by the company or its officer or director under cover of Form 4-K with the appropriate signature pages. Extended Transition Period We recommend that the Commission make any adopted rules effective no earlier than six months after adoption. Because many of our members will need to acquire software training or additional staffing, any lesser transition time would be a significant burden. We note that many of the same company personnel who will handle the additional Form 8-K filings will at the same time be phasing in the expedited filing deadlines for Forms 10-K and 10-Q, assuming that proposal is adopted. We appreciate the opportunity to comment on the Commissionıs proposals, and would be pleased to provide additional information to the Staff upon request. Very truly yours, Michael D. Cahn, Chair Broc Romanek, Co-Vice Chair Corporate & Securities Law Committee American Corporate Counsel Association Drafting Committee: Michael D. Cahn Stephen Dolmatch Broc Romanek Harold Schwartz cc: Hon. Harvey L. Pitt Chairman of the Securities and Exchange Commission Hon. Isaac C. Hunt, Jr. Commissioner Hon. Cynthia A. Glassman Commissioner Alan L. Beller Director, Division of Corporation Finance Elizabeth M. Murphy Chief, Office of Rulemaking Anne Krauskopf Special Counsel