June 21, 2002
VIA FEDERAL EXPRESS AND E-MAIL
Securities and Exchange Commission
450 Fifth Avenue, N.W.
Washington, D.C. 20549
Attn: Jonathan G. Katz, Secretary
Re: File No. S7-09-02
Dear Mr. Katz:
Legg Mason, Inc. appreciates the opportunity to comment on "Proposed Rule: Form 8-K Disclosure of Certain Management Transactions" (the "Proposed Rule"). In this letter, we provide our view on a few of the questions that the Securities and Exchange Commission (the "Commission") poses in the Proposed Rule.
Question: Do the Deadlines and Thresholds Appropriately Balance Informational
Needs and Reporting Burdens?
We believe that the thresholds contained in the Proposed Rule, particularly the deferred reporting threshold, inappropriately burden companies and clutter the information landscape for investors. The reporting thresholds in the Proposed Rule - reporting within two business days for transactions with a value over $100,000 and reporting in the following week for transactions with a value between $10,000 and $100,000 - will almost certainly result in public companies filing a large number of Item 10 Form 8-K reports. The volume of required reports will place a significant burden on companies in terms of the time and expense needed to ensure that directors and executives timely report to the companies all covered transactions and to prepare and file the reports. We believe that this burden is not justified by the additional public disclosure that will result from the Proposed Rule, because many of the transactions that will reported under the Proposed Rule will be insignificant in size relative to the company's market capitalization, the trading market in the company's securities and the securities holdings of the executives and directors who effect the transactions. In addition, we believe that the value of the additional public disclosure that will result from the Proposed Rule will be diluted by the volume of Form 8-K reports that will be filed, because investors will have to sift through reports disclosing small, insignificant transactions in order to locate the reports disclosing larger, more meaningful transactions as well as other important From 8-K reports.
We suggest that the Commission amend the Proposed Rule to only require reporting of a transaction by an executive or director within two business days of the transaction date if the aggregate value of the transaction, when added to the aggregate value of unreported transactions by that person within the prior 30 calendar days, exceeds $1,000,000 or if the transaction, when added to unreported transactions within the prior 30 calendar days, involves shares representing at least 1% of the company's outstanding shares. Transactions with a value under $1,000,000 that involve less than 1% of the company's outstanding shares would not be disclosed on a Form 8-K report. Setting the threshold at this level would eliminate the requirement that companies file Form 8-Ks reporting transactions that are not so significant that they should be brought to the immediate attention of investors. Transactions that are not disclosed on Form 8-Ks would, of course, still be disclosed on reports under Section 16 of the Securities Exchange Act of 1934 ("Section 16") and, for market sales, on Form 144s or Securities Act registration filings for registered public offerings. If the Commission is concerned that specific types of transactions are not reported in a sufficiently timely fashion under Section 16, the appropriate course of action would be to amend Section 16 to provide for more timely reporting of those transactions. An example of this would be to amend the list of transactions that may be reported following a company's fiscal year on a Form 5 report, thus requiring that additional transactions be more timely reported on a Form 4 report following the month in which they occurred.
In the event that you do not significantly increase the reporting thresholds under the Proposed Rule, we suggest that you exempt more transactions from the reporting requirements of the Proposed Rule. Transactions such as the exercise of stock options without selling the underlying shares and the deferral of compensation into phantom stock are examples that should be excluded from the Proposed Rule if the reporting thresholds are not significantly increased. We do not believe that investors would benefit from the accelerated reporting of these transactions under the Proposed Rule sufficiently to justify requiring companies to incur the burden of reporting them.
Question: Should a Delinquency in Filing an Item 10 Form 8-K Adversely Affect
The Company's Eligibility to Use Short-Form Securities Act Registration
We believe that this issue was correctly addressed in the Proposed Rule, and that failure to timely file a Form 8-K report that is required under the Proposed Rule should not affect the company's eligibility to use short-form Securities Act registration. For any public company that needs to access the public capital markets, the loss of its eligibility to use short-form registration would be very costly. Because the ability of a company to comply with the Proposed Rule will ultimately depend upon each director and executive reporting to the company his or her transactions in company securities, denying the company eligibility to use short-form registration is unreasonably punitive for a failure of one of its executives or directors.
Question: Is the Scope of Item 10 as Proposed, Including Loans and Guarantees, Too
Item 10, as proposed in the Proposed Rule, is too broad because it applies to loans made by banks, savings and loans, broker-dealers and other lenders to their directors or executives in the ordinary course of their businesses on terms offered to other customers. There is no appropriate justification for requiring reporting of these loans as required in the Proposed Rule. Indeed, the explanation in the Proposed Rule for requiring disclosure of loans from companies, that "these financial arrangements involve the use of company assets for arrangements that are not available to shareholders generally," does not apply to these types of ordinary course of business loans. Our proposal that Item 10 contain an exemption for ordinary course of business loans by banks, savings and loan associations, broker-dealers and other lenders would be consistent with the policy contained in Instruction 3 to Item 404(c) of Regulation S-K, which requires only generic disclosure of these types of loans when certain conditions are met.
Finally, we believe that the Proposed Rule inappropriately requires disclosure on Form 8-K reports of forgiveness of loans made by a company to its executives or directors. Forgiving a loan made to a director or executive officer is not effectively any different from making a bonus or other employment-related payment to the director or officer. Since Form 8-K disclosure of other employment-related payments such as bonuses is not currently required of reporting companies, we do not see any reason why Form 8-K disclosure of forgiveness of company loans should be required.
We appreciate the opportunity to express our views and would be pleased to discuss our comments or answer any questions that the staff may have. Please do not hesitate to contact the undersigned regarding our submission.
Very truly yours,
Robert F. Price
Comment Letter - Insider Trading Disclosure 2