[LETTERHEAD OF JERRY W. POWELL]
VIA E-MAIL AND UPS OVERNIGHT EXPRESS
September 27, 2002
Securities and Exchange Commission
Re: Release Nos. 33-8124, 34-46427 and IC-25722 (the "Final Rule"); File No. S7-21-02
On behalf of Compass Bancshares, Inc. ("Compass"), we respectfully submit these comments relating to the extension of the certification requirements contained in the Final Rule to definitive proxy statements and other information statements filed by public companies with the Commission. For the reasons set forth below, we urge the Commission to abandon any further consideration of requiring the certification of reports filed with, or submitted to, the Commission pursuant to the Securities and Exchange Act of 1934 (the "Exchange Act"), other than annual and quarterly reports. We do not believe the certification of information contained in a company's proxy statement is either necessary or desirable.
Compass is a financial services company that was organized in 1970 and operates approximately 340 full-service banking offices in Alabama, Arizona, Colorado, Florida, Nebraska, New Mexico and Texas. Compass has $23.5 billion in assets and is among the top forty (40) bank holding companies in the United States in terms of assets. Shares of Compass' common stock are traded on the Nasdaq stock market under the symbol "CBSS". Compass is a financial holding company and its principal executive officer and principal financial officer are required to file the certifications adopted in the Final Rule and presumably would be required to file any similar certification required for definitive proxy and other information statements filed with the Commission.
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
On July 30, 2002, President Bush signed the Sarbanes-Oxley Act of 2002 (the "Act") into law. Section 302 of the Act directed the Commission to promulgate rules requiring the principal executive officer and principal financial officer of public companies to make certain certifications regarding the financial and other information contained in the company's annual and quarterly reports. On August 29, 2002, the Commission issued the Final Rule implementing the provisions of Section 302 of the Act. The Final Rule amends the rules relating to the Exchange Act by adding Rule 13a-14 and Rule 15d-14 which require that the following certifications be provided by the principal executive officer and principal financial officer, or persons performing similar functions, of companies filing periodic reports under section 13(a) or section 15(d) of the Exchange Act:
(1) The signing officer has reviewed the report being filed;
(2) Based on the signing officer's knowledge, the report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the report;
(3) Based on the signing officer's knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects1 the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in the report;
(4) The signing officer and the other certifying officers are responsible for establishing and maintaining disclosure controls and procedures (as such term is defined in the new rules2) for the issuer and have:
(i) Designed such disclosure controls and procedures to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which the periodic reports are being prepared;
(ii) Evaluated the effectiveness of the issuer's disclosure controls and procedures as of a date within 90 days prior to the filing date of the report (the "Evaluation Date")3; and
(iii) Presented in the report their conclusions about the effectiveness of their disclosure controls and procedures based on their evaluation as of the Evaluation Date.
(5) The signing officer and the other certifying officers have disclosed, based on their most recent evaluation, to the issuer's auditors and the audit committee of the board of directors (or persons fulfilling the equivalent function):
(i) All significant deficiencies in the design or operation of internal controls which could adversely affect the issuer's ability to record, process, summarize and report financial data and have identified for the issuer's auditors any material weaknesses in internal controls; and
(ii) Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer's internal controls; and
(6) The signing officers and the other certifying officers have indicated in the report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
The amendments to the Exchange Act contained in the Final Rule require a certification only of a public company's annual and quarterly reports; however, the Commission solicits comment as to whether the certification requirements set forth in the Final Rules should be extended to "other documents filed under the Exchange Act, such as registration statements on Forms 10 and 10-SB and definitive proxy and information statements". We urge the Commission to abandon any further consideration of this initiative.
We assume that, in seeking these comments, the Commission is considering whether to require principal executive officers and principal financial officers of public companies to provide a certification (a "Certification") for proxy and other information statements in the same form as set forth in the Final Rule. The form of the certification required pursuant to the Final Rule in connection with annual reports on Form 10-K is attached hereto as Exhibit A for ease of reference. For purposes of these comments, we limit our comments to the appropriateness of requiring certification of a company's definitive proxy statements; however, we urge the Commission to consider our comments in the context of other documents filed under the Exchange Act, to the extent that they are applicable.
We believe that in considering whether to require a Certification of proxy statements, the Commission has failed to consider the distinction between filings containing full financial disclosures, such as annual and quarterly reports, and filings containing a wide variety of largely non-financial information, such as proxy statements. Annual and quarterly reports are the vehicles by which public companies summarize and analyze their financial condition and results of operations for their shareholders and other interested parties. As the Commission notes in the Final Rule, these reports are intended to provide the investing public "with a materially accurate and complete picture of an issuer's financial condition, results of operations and cash flows". Proxy statements were not designed for this purpose.
Proxy statements are intended solely to provide shareholders with specific information to enable them to exercise their right to vote, in an intelligent and well-informed manner, on corporate matters to be acted upon at meetings of shareholders. While a company's annual and quarterly report certainly can aid shareholders in making more intelligent and informed voting decisions, its proxy statement provides only limited information regarding its financial condition, results of operations and cash flows. We wonder how the Certification, which is tailored to provide investors certain assurances regarding the preparation and presentation of a company's financial performance, is appropriate for use with a proxy statement, which is a filing intended to convey a wide variety of specific and largely non-financial information.
Following is a description of the four broad categories of statements required in the Certification, assuming that each would be applied to proxy statements. The four categories are (i) review of the report, (ii) untrue statements and omissions, (iii) presents fairly in all material respects and (iv) disclosure controls and procedures and internal controls. Our comments regarding the appropriateness of each category as applied to proxy statements is included.
REVIEW OF THE REPORT
Paragraph (1) would require the signing officers to certify that they have reviewed the proxy statement prior to making the Certification. If the Commission intends to require any certification of definitive proxy statements, it is reasonable that the principal executive officer and principal financial officer certify that they have reviewed the materials being certified.
UNTRUE STATEMENTS AND OMISSIONS
Paragraph (2) essentially would require the signing officer to certify that, to his or her knowledge, the proxy statement does not contain untrue statements or omissions of material facts. For two fundamental reasons, we are opposed to a requirement that such a statement be made by a certifying officer as it relates to definitive proxy statements. First, we believe that the standard of disclosure suggested by the Certification currently exists and a certification of compliance with this standard would be of little value to the investing public. Second, we believe that the bulk of the information contained in most proxy statements is not the appropriate subject matter of the Certification, particularly as it relates to information not provided by a company's management.
Standard of Disclosure. The language of the prohibition of Rule 14a-9 of the Exchange Act regarding the presence of false and misleading statements in proxy materials is strikingly similar to the language of the Certification. Rule 14a-9 provides that
The principal executive officer and principal financial officer of a company are in a position to assure investors that the proxy materials prepared by management to solicit proxies are in compliance with this standard of disclosure; however, they are not in a similar position regarding proxy materials prepared by other individuals or groups. For example, in the case of a contested solicitation involving the election of directors,4 both management and an insurgent group are required to file certain information with the Commission. We wonder what individuals will be required to provide Certifications in these instances. Certainly, the Commission is not considering requiring these or any other officer of a company to provide a Certification regarding proxy materials prepared and distributed by other parties.
Even in situations in which the proxy materials are prepared and distributed by management, the proxy materials often contain information that was not prepared by management, such as shareholder proposals and committee reports.
Shareholder Proposals. Rule 14a-8 of the Exchange Act requires that companies include proposals submitted by shareholders, if such shareholders own at least one percent or $2,000 in market value of securities for at least one year prior to the date the proposal is submitted. A company may omit a shareholder proposal in certain circumstances, but we question whether under any circumstance it should be the responsibility of management to certify information provided by a shareholder or any other party not specifically solicited by management.
Committee Reports. A large percentage of proxy statements are required to contain reports of the audit committee5 and the compensation committee6 of a company's board of directors. Although a company's management most likely participates in the preparation of these reports, the contents of these reports are ultimately the responsibility of the members of the audit committee and the compensation committee, respectively.7 We do not believe that these reports are the proper subject for certification by the principal executive officer and the principal financial officer.
Liability. As the Commission notes in the Final Rule, while the signing officers already "can be liable for material misstatements or omissions under general antifraud standards and under our authority to seek redress against those who cause or aid or abet securities law violations", officers providing false certifications "potentially could be subject to Commission action for violating Section 13(a) or 15(d) of the Exchange Act and to both the Commission and private actions for violating Section 19(b) of the Exchange Act and Exchange Act Rule 10b-5". Imposing liability for providing a false certification regarding information potentially not provided by the signing officer or under his or her control is, in our opinion, entirely inappropriate.
FAIRLY PRESENTS IN ALL MATERIAL RESPECTS
Paragraph (3) would require the signing officers to certify that the proxy statement fairly presents the financial condition, results of operations and cash flows of the company. We do not believe that it is possible for a principal executive officer or principal financial officer to make this statement given the nature of the information contained in a company's proxy statement. With rare exceptions, proxy statements do not contain, and are not intended to contain, financial disclosure of the type that would provide investors with an "accurate and complete picture of an issuer's financial condition, results of operations and cash flows". To ask a principal executive officer or principal financial officer to certify as such is entirely inappropriate.
As the Commission noted in the Final Rule, the financial disclosure that is the subject to the Certification is quite broad. It includes management's discussion and analysis of financial condition and results of operations, selected financial data and other financial information contained in a report, in addition to the financial statements and the accompanying footnotes. Certifying officers, knowing that proxy statements do not contain this sort of financial disclosure, cannot certify that a company's definitive proxy statements fairly presents in all material respects the financial condition, results of operations and cash flows.
Again, with rare exceptions, the type of financial disclosure described by the Commission as the subject of the Certification is not a part of the proxy statement. The proxy statement may incorporate this information by reference or, as discussed below, may be accompanied by such information. If this is the case, it is more than likely that this information will have been certified elsewhere pursuant to the amendments adopted by the Final Rule. Therefore, any certification of this information in the proxy materials is redundant.
Annual Report and Other Financial Information. When soliciting proxies from its shareholders for the annual meeting of shareholders, public companies must furnish all shareholders with an annual report. Although furnished along with a company's proxy materials, the annual report is not considered part of its proxy statement. The information contained in the annual report is the proper subject for the Certification; however, the bulk of the information contained in the annual report likely will have, or will later be, certified elsewhere pursuant to the Final Rule.
The financial disclosure requirements of the annual report are largely the same as those of an annual report on Form 10-K. Many companies, including Compass, include their Form 10-K in the annual report to shareholders in order to satisfy the bulk of the requirements of the annual report to shareholders. Companies that do not follow such a practice, merely lift information from their Form 10-K and reproduce it in their annual report to shareholders. In any event, this information must be certified as part of the Form 10-K filed with the Commission. We do not believe a duplicate certification of this information provides any benefit to the investing public or any other users of the information.
Other Information Required. Rule 14a-101 of the Exchange Act requires that certain information regarding a meeting of shareholders be included in a proxy statement. Generally, information required in a proxy statement includes the following, none of which is, in our opinion, the proper subject of a Certification:
Again, we wonder how any of the information above is the appropriate subject for a Certification or how a Certification of such information will be of any benefit to investors.
DISCLOSURE CONTROLS AND PROCEDURES
Paragraph (4), (5) and (6) would require the signing officers to make certain certifications relating to a companies disclosure controls and procedures and its internal controls. These certifications are not specific to any certain report filed with the Commission but relate to the company in general. Pursuant to Section 302 of the Act and the Final Rule, principal executive officers and principal financial officers of public companies must provide certifications regarding the maintenance, effectiveness, evaluation and disclosure of their disclosure controls and procedures and their internal controls on a quarterly basis. We do not believe it necessary or desirable to provide such certifications any more frequently, particularly in connection with the filing of a company's definitive proxy statements.
If the Commission determines that it is imperative that a company's principal executive officer or principal financial officer certify the information contained in the company's proxy and other information statements filed with the Commission, we would suggest that the form of certification set forth on Exhibit B is more appropriate than the form certification adopted in the Final Rule. We also would suggest that this certification be required only from a company's principal executive officer and principal financial officer in connection with a definitive proxy statement prepared and distributed by management of the company.
We respectfully submit these comments with the hope that they are helpful to the Commission's consideration of the initiative to extend the certification requirements adopted in the Final Rule to proxy and other information statements. We would be happy to meet with representatives of the Commission to discuss our comments.
/s/ Jerry W. Powell
Jerry W. Powell
Form of Certification for Annual Report on Form 10-K
I, [identify the certifying individual], certify that:
Suggested Form of Certification for Proxy Statements
We, [identify the certifying individuals], have each reviewed this proxy statement, and, based upon our knowledge, it does not contain any statement which, at the time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact, nor does it omit to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of a proxy for the same meeting or subject matter which has become false or misleading. The following information contained in this proxy statement was not prepared by, or on behalf of, us or the board of directors of [identify registrant]; therefore, the statements made in the previous sentence do not apply to the information: