American Society of Corporate Secretaries
June 24, 2002
Jonathan G. Katz, Secretary
United States Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
RE: File No. S7-09-02
Comments on Release No. 33-8090; 34-45742
Dear Mr. Katz:
On behalf of the American Society of Corporate Secretaries, Inc., we are pleased to have the opportunity to comment on Proposed Rule: Form 8-K disclosure of certain management transactions. The Society has over 3,800 members representing over 2,500 corporations in the United States and other countries.
The Society strongly supports the Commission's purpose to require that public companies provide investors with prompt disclosure of management transactions, so that investors will be able to make investment and voting decisions on a better-informed and more timely basis. In this period of challenge, it is in the interests of all constituents to work together to provide assurances that relevant information is disclosed promptly, in order to restore confidence in the US capital markets. However, based upon a survey of our members, we believe that certain provisions of the proposal would burden companies without a corresponding benefit. We have included suggestions intended to simplify the proposed new requirements, with the goal of reducing the associated administrative costs while still supporting the purpose of the proposal.
THE RESULTS OF OUR SURVEY
We surveyed our member companies, and 220 companies responded. We believe this sample to be statistically representative. Those responding include a wide variety of industries, and the survey results do not show consensus on any item. Following is an extract of the survey results.
As to filing the information electronically within two days
As to transactions under plans that, by the terms of the plans, cannot be priced within two days (such as a 5-day formula for pricing)
Some companies indicated that time periods for reporting plan transactions by vendors, to whom plan administration has been outsourced, would need to be amended. For example, in order to hold down costs when plan administration is outsourced, reporting to both the company and the participant is often provided on a monthly or quarterly basis.
As to the need to hire additional staff to file within two days
Several companies noted that they would need to hire staff but could not, due to economic pressures to keep head count low. Those companies are particularly worried about having adequate resources to ensure compliance with the new rules.
As to the need to implement additional systems, software or training to file within two days
Companies reported widely varying costs, including
OUR SUGGESTIONS. We make the following suggestions:
1. Cover only executive officers. Define them as either (a) the named executives listed in Summary Compensation Table of the last proxy statement, which we think captures those persons whose trades most interest investors and analysts, or (b) officers subject to Section 16(a) reporting requirements. Using either of the above definitions for "executive officers" avoids having a different "group" to track for the new reporting requirement.
2. Limit Filings To One Day A Week. Use a deadline of Wednesday (or the third business day) of the following week for reporting all transactions, regardless of size or type. This greatly reduces the burden upon issuers by
3. Eliminate Need To Track Transactions By Value or Type. Do not phase in the rules, or vary the due dates for the new filing, based upon transaction value or type. This creates additional administrative burden in calculating and categorizing. And it limits the delegation of responsibility for mechanical tasks to a fairly sophisticated level employee.
4. Simplify Content of New Filing. Require disclosure of only the nature of an intended transaction and number of shares involved, but not the details of the final transaction. This would alert the market to an executive's intended actions, such as to increase or decrease his or her holdings in the stock. And those interested in the data from the final transaction could refer to the Form 4 for details. For example, in the case of a stock option exercise:
This suggestion eliminates problems where pricing formulas are not completed within the deadline or where data from a broker or plan vendor is not yet available. This suggestion also reduces the administrative burden on issuers with complex plans. For example, a member reports a complex "swap to the max" reload provision in a stock option plan. Under this plan, what in substance is one stock option exercise transaction can involve as many as eleven separate "sub-transactions" that each might be considered a reportable transaction under the proposal.
5. Allow Early Form 4 or 144 in Lieu of New Report. To reduce paperwork and to eliminate potential confusion of investors and media, we suggest eliminating duplicative reporting. This could be accomplished by allowing, in lieu of the 8-K, the electronic filing of either a Form 4 or a Form 144 by the new deadline. Or, if expedited, electronic Form 4 and Form 144 filings are not permitted in lieu of the 8-K, we suggest allowing a "wrap" with the new filing consisting of only the 8-K cover and signature pages and the Form 4 or Form 144 as an exhibit.
6. Exclude Certain Grants. Exclude grants and other non-market acquisitions of securities that are exempt pursuant to Rule 16b-3. These acquisitions do not involve discretion by the insider, so learning about the transactions "faster" does not inform outsiders about an insider's perception of the market or the issuer's prospects. And it would eliminate a number of 8-K filings, thus reducing the administrative burden of the proposal.
7. Exclude Certain Periodic Transactions. The election, rather than the actual transaction, is what is of interest in periodic transactions, so we recommend that only the election be reported and that the periodic transactions. Examples of such transactions include the purchase of stock with X% pay each pay period under a 401K plan, the purchase of phantom units with X% pay each pay period under a deferred compensation plan or the purchase/sale of stock under 10b5-1 plans. Reporting the periodic transactions would be handled as it is now, on Form 4 or 5 depending upon the type of transaction. We believe this is consistent with the purpose of the proposed new filing requirement because the executive uses discretion in making the election, but not in the periodic transactions themselves. Typically, a broker or plan administrator executes the periodic transactions with no action by the executive. After making the initial election, the executive exercises no discretion unless and until he or she makes a new election, either to end the periodic transactions or to change the amount involved. Since that new election also would be subject to the new filing requirement, each transaction involving discretion (about whether, or how much, to invest in, or divest from, the stock) would be picked up by the new reporting requirement.
8. Exclude Certain Loans. Exclude loans for purposes other than those relating to the purchase or sale of the issuer's securities. The exclusion would eliminate a significant new burden. Many members have pre-clearance policies in effect for all transactions involving securities -- this gives them a system that already is in place to track the loans relating to the purchase or sale of the issuer's securities. However, for other loans, data is typically tracked annually in connection with preparation of the proxy statement and other related party disclosures. Examples of such other loans include relocation loans, expense account advances, ordinary course of business loans between the issuer and a company affiliated with a director and extensions of credit for which disclosure would not be required under S-K 404©. Our members in the banking industry note that such an exclusion would cover ordinary loans from affiliated banks (that are in any event subject to Regulation O of the Federal Reserve Board) and broker margin loans (also subject to regulation). To create a continuous tracking system for such other loans, many of which are extended to all individuals on a similar basis and are not otherwise reportable, would be a significant new burden. And there is already extensive required reporting regarding other loans which are reportable in the proxy statement and the 10-K (and the Notes to Financial Statements, which are included in a number of filings).
9. Exclude Certain Family and Trust Transactions. Exclude transactions by family members, other than spouses and minor children, and transactions by trusts as to which the executive officer is not a trustee. Our experience is that those situations generally are not of interest to the public and are not easily linked to members' systems for Section 16 reporting.
10. Create a New Form Instead of Using Form 8-K for the New Filing. We support using a form other than 8-K for the new filing requirement. We are concerned that many issuers will have so many 8-K filings under the proposed rule that other 8-K filings will be "buried." We also think that for many in the media and the investment community, an 8-K indicates significant news, as opposed to many of the "plain vanilla" transactions that would be reported under the proposal.
11. Develop a Web-Based System for the New Filing. We strongly suggest development of a web-based filing site for all reports of insider trades, including Section 16 reports, Forms 144 and 8-Ks (or alternative form, if our suggestion in paragraph 10 is accepted). We have heard staff talk about such a site, where filers could log-on from anywhere and enter information in designated fields. By eliminating the need for EDGAR software or formatting, administrative cost and burden would be significantly reduced. In-house staff could handle reporting from laptops and hotel business centers while off-site and the elaborate special EDGAR training would not be needed. This would greatly offset the burden imposed by the faster deadlines.
12. Allow Ample Transition Time. Last, but most important, we suggest a minimum of nine months before the final rules take effect. This would allow our members time to hire staff, acquire new software, redesign tracking systems and more involved pre-clearance programs for covered persons, and reassign responsibilities as required to ensure compliance. We note that many of the persons who will handle these transition tasks are the same persons who will be responsible for implementing the other proposed rules including additional 8-K events and expedited 10-K and 10-Q filings. And the staff of these same persons will be tasked with the implementation of the many mechanical steps needed to execute the changes. We believe that those companies that are better positioned, due to staffing and budgets, would voluntarily comply as soon as possible, due to investor expectations.
Should you have questions concerning the comments in this letter, or wish us to gather additional information, please do not hesitate to contact me at (908) 298-7354.
American Society of Corporate Secretaries
By: Susan Ellen Wolf
Co-Chair, Securities Law Committee
cc: Pauline Candaux