PERKINS COIE LLP
1201 Third Avenue, Suite 4800, Seattle, Washington 98101-3099
Telephone: 206-583-8888 Facsimile: 206-583-8500
June 24, 2002
Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Form 8-K Disclosure of Certain Management Transactions
(File No. S7-09-02)
Dear Mr. Katz:
We appreciate this opportunity to respond to the request of the Securities and Exchange Commission (the "Commission") for comments regarding the Commission's proposal, "Form 8-K Disclosure of Certain Management Transactions," as set forth in Release Nos. 33-8090, 34-45742. The Commission proposes to require public companies to report currently on Form 8-K directors' and executive officers' transactions in the company's equity securities, arrangements by directors and executive officers for the purchase or sale of the company's equity securities and loans to directors or executive officers made or guaranteed by the company or an affiliate of the company ("Proposed Item 10").
We support the Commission's efforts to provide investors with timely material information about certain transactions by directors and executive officers. However, we believe a better balance can be attained between providing timely material information to investors and minimizing the significant compliance burden placed on companies. We believe Proposed Item 10, as drafted, will create undue administrative burdens for company staff, may discourage the use of arrangements intended to satisfy the affirmative defense conditions of the Securities Exchange Act of 1934 Rule 10b5-1(c) ("Rule 10b5-1 Plans") and will be difficult to implement within the transition deadline proposed by the Commission.
We believe, at a minimum, that the following changes are necessary:
I. All Item 10 Reports Should Be Due the First Business Day of the Second Week Following the Transaction
Proposed Items 10(a) and (c) would require companies to report directors' and executive officers' transactions in company stock, Rule 10b5-1 Plans and company loans no later than two business days following any insider transaction or loan with an aggregate value of $100,000 or more (other than a grant or award pursuant to an employee benefit plan) and no later than the second business day of the week following the week in which there was an insider employee benefit plan grant or award, a transaction or loan with an aggregate value of less than $100,000, or any Rule 10b5-1 arrangement. Companies would be allowed to defer reporting transactions and loans with an aggregate value of less than $10,000 until the aggregate cumulative value of unreported transactions and loans exceeded $10,000 with respect to the same director or executive officer.
We believe most companies will be unable to meet a two-day or even a weekly reporting requirement without significant difficulty and additional staffing. As a result, we recommend that all transactions (regardless of amount) be reported together on a single Form 8-K for all affected insiders on the first business day of the second week following the transaction.1
Meeting the two-day reporting requirement would be nearly unattainable for many companies and meeting a deadline any time during the week following the transaction would be highly impracticable (especially if the transaction were on a Thursday or Friday). First, as most trades close on a T+3 basis, directors and executive officers may not themselves have the information necessary to assist the company in complying with the proposal. In the case of a Friday trade, the insider may not have the final information until late the following Wednesday-at which point the company would have failed to meet the deadline for both reports of $100,000 and $10,000 transactions. The current proposal would put companies in the unusual position of being required by the Commission to file transaction information sooner than the regulatory deadline for brokers themselves to provide it.
Second, gathering the information from executive officers and, especially, outside directors, is impractical in a very short time period and, for many companies, will necessitate increased staffing. Proposed Item 10's two-day and weekly deadlines would require constant surveillance by compliance staff of all transactions by insiders. At least one full-time person would have to be available at any time in order to respond immediately to a large trade. In practice, a back-up person would also need to be available in case of the primary person's absence from the office, which will lead to a significant increase in compliance costs. We question whether this is a desirable use of resources. By extending the deadline to a more manageable date and eliminating confusion caused by the threshold requirements, the need for redundant staffing and constant monitoring will be lessened and it will be easier for companies to plan their staffing requirements.
We believe companies and insiders will reasonably be able to comply with our proposed deadline, while investors will still be provided trading information on a much faster basis. For example, as previously noted, trades that take place on a Friday may not close until the following Wednesday. The company would then have a two-day window in which to gather the aggregated trading information from the insider and prepare a Form 8-K to be filed on the following Monday (or first business day). We believe that this deadline balances the need for timely information with the practical realities of gathering the information. We note that this deadline would shorten the maximum disclosure period from 40 days under the current system (and then only in a paper filing) to 10 - 14 days under our proposal (in an easily accessible EDGAR filing)-a dramatic improvement in providing timely information to investors.
II. Required Disclosure Regarding Rule 10b5-1 Plans Should Be Strictly Limited
Pursuant to Proposed Item 10(b), the Commission would require companies to report each time one of their directors or executive officers enters into a Rule 10b5-1 Plan, and to provide more detailed reports when a Rule 10b5-1 Plan is modified or terminated. We believe that Proposed Item 10(b) should be carefully limited to avoid discouraging use of Rule 10b5-1 Plans, which we believe promote the type of trading by insiders that is most beneficial to the markets and investors.
We believe disclosure regarding Rule 10b5-1 Plans pursuant to Proposed Item 10(b)(1) should be limited to an insider's name and title, the date of the plan, the duration of the plan and the aggregate number of securities to be purchased or sold. The current wording of Proposed Item 10(b)(1)(iii), which also requires a "description of the contract, instruction or written plan, including its duration, the aggregate number of securities to be purchased or sold, and the name of the counterparty or agent," implies that additional information could be required beyond the specified items without providing any guidance to the reporting company.
The same issue arises in Proposed Item 10(b)(2)(iii), which uses the same broad language to require additional disclosures when a Rule 10b5-1 Plan is modified, including whether there has been an increase or decrease in price. We believe that disclosure under Proposed Item 10(b)(2)(iii) should be limited to material changes in the aggregate number of shares subject to the plan and the duration of the plan. We believe that the heightened reporting requirement for modifications is inconsistent with the reporting requirements at the time the plan is entered into, will cause confusion for reporting companies and will create incentives for plan terminations rather than modifications.
We believe that failure to strictly limit the required disclosure to the items specified above could discourage use of Rule 10b5-1 Plans out of fear of inaccurate market signaling. We are especially concerned that there should be no required disclosure of pricing. Such disclosure could lead to misinterpretation by investors as to the insider's view of a company based on a low "floor" price or a high "ceiling" price. An insider's action in setting a limit price could be misinterpreted as his or her belief that the company's share price is going to rise or fall. In addition, we believe that detailed reporting of Rule 10b5-1 Plans could create opportunities for unfair arbitrage that would have a negative impact on the trading market for the company's stock.
III. Companies Should Not Be Required to Report Trades Pursuant to a Rule 10b5-1 Plan
Trades pursuant to a previously reported Rule 10b5-1 Plan should not be reportable pursuant to Proposed Item 10(a). We believe that reporting trades pursuant to Rule 10b5-1 Plans (as opposed to reporting the plan itself) will create a heavy administrative burden for companies without providing material information to investors. Many Rule 10b5-1 Plans provide for daily or weekly sales. In such a case companies would be required to file Forms 8-K on a daily or weekly basis for the duration of the plan, which will require a significant commitment of the company's administrative resources and inundate the market with immaterial Forms 8-K.
We also fear that requiring reporting for each trade pursuant to a Rule 10b5-1 Plan will have the unfortunate and unintended consequence of discouraging directors and executive officers from entering into plans that call for daily or weekly sales. We believe frequent sales are often the most beneficial for the markets and cause the least amount of market disruption. It would be unfortunate if the new disclosure requirements pushed insiders towards arrangements that called for less frequent sales, such as sales on a monthly or quarterly basis.
In addition, we do not believe that reporting trades under Rule 10b5-1 Plans provides meaningful information to investors about the director's or executive officer's view of the company. The decision to enter into the plan will have already been disclosed pursuant to Proposed Item 10(b). The subsequent trades are not made with any additional instructions by the insider. As a result, they do not reveal timely information about the director's or officer's view of the company's performance or prospects.
IV. The Transition Period Should Be Extended to 180 Days
The Commission proposes to make Item 10 reporting mandatory 60 days after publication of the Final Rule in the Federal Register, with an additional 60 days before the two-day reporting rule became effective. The Commission has proposed radical changes in reporting requirements for insider transactions, which companies are not currently set up to handle. Proposed Item 10 will require extensive in-house training for compliance officers, as well as training for the directors and executive officers affected. In many cases, companies will need to hire additional staff who will then need to be trained in order to comply with the Final Rule. As a result, we believe making the proposal effective 180 days following publication is a more reasonable and achievable deadline.
* * *
We hope that the Commission will find these comments helpful, and we would be pleased to discuss our views with members of the Staff at their convenience. We ask that questions be directed to J. Sue Morgan in our Seattle office at (206) 583-8447.
Very truly yours,
/s/ PERKINS COIE LLP
|1||For example, any transactions taking place from Monday, June 2 to Friday, June 7 could be reported on Monday, June 17. We propose reporting transactions on a common date in lieu of using threshold amounts to determine different reporting dates. However, should the Commission maintain its position that two-day or weekly reporting is necessary, it will be essential that the thresholds be maintained as information from brokers is unlikely to be available on such an expedited basis for anything other than the largest trades for their most important clients.|
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