Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Ladies and Gentlemen:
Wells Fargo & Company appreciates this opportunity to comment on the current proposal to amend Form 8-K, Rule 144 and Forms S-2, S-3 and S-8. We apologize for the lateness of this letter and hope that our comments may nevertheless be considered on these important matters. We endorse the spirit in which the proposal is being made, namely to provide useful information to investors more promptly. In some cases, however, we believe the proposal is overbroad, with the result that information of questionable utility would be made quickly available at the expense of the reporting companies with no countervailing benefit to investors.
Given the expedited filing requirement, we believe the proposed rules will strike the right balance between benefit and burden if the newly required reports are limited to transactions that truly reflect current insider views on their companies. As the proposal itself states, in the text accompanying note 24, the proposal is meant to elicit "significant information concerning transactions that may reveal directors' and executive officers' views as to company prospects." Not all stock transactions by insiders meet that test. Unless the proposed reporting is limited to information of real significance, the increased number of filings required could end up putting a burden on investors, who could have greater difficulty distinguishing significant information amid a flurry of newly required reports. Our comments on the subject matter of the proposed reports, their timing and their relation to Section 16 reporting follow.
1. Scope of Events Reportable under Proposed Item 10
a. Accrual of Phantom Stock in Deferral Plans. Under the proposed amendments, the acquisition of derivative securities from an issuer must be reported whenever previously unreported securities reach successive $10,000 thresholds. We believe this requirement is misdirected at the acquisition of these securities in the case of phantom stock acquired pursuant to an irrevocable election to defer an insider's salary or bonus. In our view, the only useful information here is the making of the irrevocable election. Instead, companies would be required to file a burdensome string of reports of no value to investors. Given the different rates at which insider deferrals would likely result in phantom stock accruals, accurate and timely reporting would require close monitoring and intra-company coordination. Instead of reports of phantom stock accruing in $10,000 increments, we think proposed Item 10 should require a one-time report of the making of an irrevocable election to defer salary or bonus into the purchase of phantom stock. The accumulation of derivative securities pursuant to the election could be reported within 45 days after the end of the year in accordance with the rules currently in effect under Section 16.
b. Expiration of Derivative Securities. Under the proposal, the expiration of a derivative security would be a separately reportable event under Item 10. We submit, however, that the expiration date of a derivative security is fixed when the security is acquired and under the proposal would be disclosable at that time. Our view would be that if the expiration date were changed during the life of the security, this would constitute the acquisition of a new security which would itself be separately reportable. Moreover, we believe that in the case of exchange-traded options and derivative securities acquired under a compensation plan, the expiration date is fixed without the influence of the insider and does not reflect his or her judgment or views of the company's prospects. In our experience, it is only in the case of insiders deferring compensation by means of phantom stock that the recipient may set the expiration date of such securities by means of a one-time irrevocable election. This information may reflect the insider's views of his or her company and therefore may be of some benefit to investors, although in this case the expiration date may be more strongly influenced by the insider's own financial planning. In any event, we believe that reporting the expiration date at the time a derivative security is acquired should be sufficient. By the time the derivative security expires, this event is old news and does not justify the intra-company effort required to keep investors up-to-the-minute on information of such marginal value.
c. Option Grants. The proposal would include option grants among the events to be reported on an expedited basis under new Item 10 of Form 8-K. As is recognized in the disclosures mandated for the proxy statement, an option grant is a form of compensation, rather than an investment decision, and therefore does not reflect the insider's view of his or her company's prospects. We also believe that information regarding option grants is most meaningful when presented in the context of the other compensation information presented in the proxy statement. We are not sure why investors would find this information more useful if made available on an accelerated basis, most likely at a time when their proxies are not being solicited.If the Commission wishes to modify its requirements regarding the disclosure of option grants, we suggest that this be done in the context of the other compensation disclosure requirements in the proxy rules.
d. Entry into Rule 10b5-1 Plans. Proposed Item 10 would require only the most general disclosure of an insider's entry into or modification of a 10b5-1 plan, with no information about the prices, time intervals or quantities of securities to be purchased or sold. The marginal value of such information to investors fails to justify the effort necessary to file the report. The entry into a 10b5-1 plan may reflect an insider's views of his or her company's prospects or may reflect his or her financial planning needs, but since crucial information is lacking in the disclosure, an investor could only guess at what those views or needs were. And an Item 10 report of the modification or termination of such a plan may or may not be a signal that an insider has become more optimistic or pessimistic but in any case lacks a point of reference.
We wish to make a stronger statement, however: even if the proposed Item 10 reporting requirements were modified to include price, timing and quantity information, we believe that reporting it at the time a 10b5-1 plan is entered into would be premature. Since an insider can always terminate a 10b5-1 plan for whatever reason, and since presumably an insider would do so if he or she thought that a transaction were about to be executed at a price that no longer reflected his or her views as to company prospects or no longer fit his or her financial needs, the parameters of a Rule 10b5-1 plan must be regarded as tentative. It is only when a purchase or sale is executed that the insider's current views on the company's prospects can be determined, and that is why reports of these purchases and sales alone are sufficient. In its current form, the proposed Item 10 disclosure regarding 10b5-1 plans can only provide sketchy information at best about an insider's personal financial plans. Like many other disclosures, proposed Item 10 disclosures about Rule 10b5-1 plans could become misleading as they grow stale. In this case, however, there is an extra element of confusion possible. Since an insider may execute transactions outside a Rule 10b5-1 plan even while the plan remains in effect and proposed Item 10 has no requirement that an insider's current purchases or sales be identified as part of a 10b5-1 plan, an investor can only speculate about the relation of the plan to the insider's current views on his or her company. Finally, you have asked for comment on whether disclosure of the counterparty or agent is useful. We believe this information is particularly irrelevant to an insider's views on company prospects.
e. Loans. The rationale given for most elements of Item l0 disclosure is to provide investors with prompt information regarding insiders' views on the prospects of their companies. In the case of the proposed loan disclosures, however, the rationale seems to be to let investors know about possible "receipt of de facto additional compensation by the director or executive officer." We fail to understand the connection between the receipt of additional compensation by an insider and that person's views on his or her company as an investment. We also believe that scattering this information piecemeal in various 8-K's is not the optimal presentation of this information for an investor considering how to vote. We believe that the annual proxy statement is the place for this information, so that it can be considered in the context of the rest of the executive compensation disclosures and all other information relevant to an investor's vote at a time when proxies are being solicited. The proposed loan disclosures, while admittedly prompt, would thus likely be premature. If it is now the Commission's view that loans to insiders may constitute additional compensation, we believe that the proxy rules should be modified accordingly so that all information about compensation can be presented in a consistent manner in one place, at one time and in connection with the annual election of directors. Loan disclosures made under proposed Item 10 in an 8-K may be forgotten or difficult to retrieve by the time that an investor has his or her next opportunity to vote for the board of directors. Finally, as a bank holding company with a number of banks, a mortgage company and broker/dealer subsidiaries, we hope that the Company's insiders obtain from our subsidiaries loans on terms comparable to other non-affiliated borrowers. The prompt disclosure of these loans, which increase the Company's earnings, would and should not be of interest to investors except to the extent disclosure is currently required under the proxy rules.
2. Reporting Deadlines
The two-business day deadline for transactions with an aggregate value of $100,000 or more simply does not allow enough time for the necessary reports to be prepared and reviewed internally or for the likelihood that, with no advance warning of a report being due, persons responsible for preparing them may not be available during those two days. Extra time will be required for companies, like ours, that contract with financial printers to EDGAR-ize their SEC filings. We believe that five business days is a more reasonable deadline. This would also allow for a weekend in case that were necessary to accommodate an unexpected project and temporarily absent personnel. This five-day deadline would be the same as the shortest deadline now applicable to other events reportable on Form 8-K. It is hard to believe that reports of insider transactions should be accorded more urgency than any other event reportable on Form 8-K.
Similarly, the apparently more relaxed deadline for employee benefit plans and awards , transactions and loans with an aggregate value below $100,000 and Rule 10b5-1 arrangements could prove illusory. By making these reports due on the second business day of the week following the occurrence of the transaction, the deadline becomes a flexible one, with six days allowed for transactions that occur on Monday and two days for those that occur on Friday. A two-day deadline entails the same problems described in the preceding paragraph. Again, using the deadlines already in effect for other events reportable on Form 8-K, we think the deadline for reporting insider transactions that are deemed less important should be 15 calendar days after the occurrence of the event.
3. Relationship Between Item 10 and Section 16 Reporting
Under this caption the proposing release asks whether any specified tabular format should be required and whether holdings information should be included in Item 10 reports to make the information useful to investors. This question points up the tension between Form 4 reporting and Item 10 reporting introduced by the proposal. We believe that the more that Item 10 reporting becomes like Form 4 reporting, the more burdensome and costly it will be for companies to meet filing deadlines. The more similar these two reports become, the more people will need to be trained to acquire familiarity with Form 4 information and where to get it. We believe that the best way to reduce the burden on reporting companies and thus increase the likelihood that they will meet the accelerated filing deadlines is to keep Item 10 filings as simple as possible and free of information from Form 4. The proposal is laudable in that a relatively straightforward narrative will satisfy the filing requirement. This will enable more people within a company to be able to file Item 10 reports, and reduce the need to train more people in the arcane rules of Form 4. If, on the other hand, information from Form 4 or coordination with Form 4 filing is made mandatory, then the filing deadlines should be increased. At the same time, however, to give companies flexibility, we believe that a Form 4 filed within the deadlines mandated by Item 10 should satisfy the Item 10 filling requirement, as provided in General Instruction B.3 to Form 8-K.
Because reporting under Section 16 has become so complex, it is unrealistic to think that the insiders themselves do their own reporting. With these new proposals the reporting burden clearly falls on the companies, who will probably depend on the same personnel who are already responsible for filing reports under Section 16, thus doubling the burden on them. We believe that if investors are truly to benefit from the speedier disclosure of useful information, as proposed Item 10 leads us to hope, then Item 10 should cover only those transactions which reflect an insider's current views and require the disclosure to be made on a realistic timetable. Thank you for your attentive consideration to these comments.
Very truly yours,
WELLS FARGO & COMPANY
By Robert S. Singley
Vice President and Assistant Secretary