August 26, 2002
Jonathan G. Katz, Secretary
RE: File No. S7-22-02
Dear Mr. Katz:
CIGNA Corporation appreciates the opportunity to comment on the Staff's proposals to augment Form 8-K filing requirements and accelerate the filing deadlines of Form 8-K. We are fully supportive of the Staff's efforts to improve the financial reporting process, and believe that more timely disclosure of certain corporate events would help investors better assess the financial condition of an enterprise. We offer the following comments and suggestions on the proposals.
Materiality and Timing
The concept of materiality arises in several of the proposals. We recommend that the Staff consider, in all places where appropriate, using the existing significant subsidiary tests of 10% of a company's assets or net income for the most recent fiscal year, as set forth in S-X Rule 1-02(w), as an appropriate threshold for required 8-K disclosure. An example of an appropriate use of this test is in an acquisition where disclosure should only be required if the acquired company has assets greater than 10% of the acquiring company's assets prior to the acquisition.
We believe that two days may not be sufficient time to prepare information for an 8-K filing for certain required items. We recommend that companies be given four business days to report more unusual matters that typically result in more complex analysis and disclosure. These additional days would give a company a more reasonable timeframe to determine "management's analysis and effect" of the relevant item and prepare the related disclosure.
Suggested items to be filed in four business days (if kept in final rule):
1.02 - Termination of a material agreement
1.03 - Termination or reduction of a business relationship with a customer
2.03 - Creation of a direct or contingent financial obligation
2.04 - Events triggering a direct or contingent financial obligation
2.05 - Exit activities
5.02 - Departure of directors or principal officers
Entry into a Material Agreement (Item 1.01)
We recommend that only entry into a definitive agreement trigger disclosure under this proposed item. Premature disclosure of significant potential business arrangements, the terms of which are still being finalized, could severely disrupt and possibly prevent a potential transaction. The rule as currently proposed could alter the outcome of these potential transactions. In addition, while we agree with the proposal that the definition of a "material" contract parallel the definition included in Item 601(b)(10) of Regulation S-K, we additionally suggest that determining "materiality" pursuant to a numerical threshold would be appropriate and helpful in providing consistent and meaningful disclosure. See the example of the use of the significant subsidiary tests discussed above.
We further recommend that, while companies would disclose a material agreement out of the ordinary course within two business days as currently proposed, the companies be permitted to file the actual material agreement at a later date. We propose that this later date be the filing date of the company's next Form 10-Q or Form 10-K, and the actual agreement would be filed as an exhibit to the applicable periodic report. We believe that the proposed disclosure on Form 8-K itself will provide investors with sufficient relevant information without requiring simultaneous disclosure of the actual agreement. If the Staff concludes that the actual agreement should be filed prior to the company's next periodic report, we suggest that companies be permitted to file the actual agreement at least two business days after the Form 8-K filing for this item. These additional days would provide a more reasonable timeframe to prepare the actual agreement for electronic filing.
In addition, we suggest that the Form 8-K cover page include boxes to indicate whether the filing of the Form 8-K will also satisfy filing obligations under Rule 165, Rule 14d-2(b) and/or 14a-12 to diminish duplicative disclosure that might confuse the public.
Termination of a Material Agreement (Item 1.02)
We recommend that there be no disclosure requirement until the business relationship to which the material agreement relates is actually terminated. As part of this recommendation, we propose that disclosure not be triggered until three business days after such a termination. Allowing a few days before triggering disclosure would discourage those seeking to use disclosure under this item as a renegotiation ploy. In addition, we do not believe that expiration of a material contract in accordance with its terms should trigger disclosure.
Creation of a Material Direct or Contingent Financial Obligation (Item 2.03)
We suggest that the SEC define "direct financial obligation" in the final rule. A refined definition of the required disclosures would assist in narrowing the scope to an appropriate group of transactions. The inclusion of registered sales of debt securities, private placements, bank loans, and credit facilities are clear and appropriate. However, the determination of obligations such as guarantees and purchase commitments is complex and companies would benefit from a clearer definition. For example, investment contracts issued in the normal course of business guarantee certain levels of assets or a minimum level of earnings for annuity contracts. We believe that guarantees related to these types of contracts should not be included in the final rule, or if they are, only if the related liability is in excess of a certain materiality threshold, as discussed above.
Another reason to exclude these types of guarantees from disclosure is the competitive harm that the proposed rule could cause to companies in the creation of new products. For instance, a company could develop an insurance product that, by its nature, creates a contingent obligation if certain performance measures are not met. If the company were required to furnish a description of the agreement, the nature of the obligation, and events that may cause the obligation to arise, any competitive advantage the company had with this new product would be lost, because a competitor would be able to obtain this information. The Financial Accounting Standards Board currently has an Exposure Draft, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others", that would not require disclosure of the guarantee in this example. This Exposure Draft should be taken into consideration as the Staff develops the final rule.
Events Triggering a Direct or Contingent Financial Obligation that is Material to the Registrant (Item 2.04)
We agree with the concept that such items should be disclosed. We suggest that the definition of "triggering event" be modified to require disclosure only if written notice of the events described in paragraph (b) of the proposed Item 2.04 occurs. We also agree with the Staff's proposal that no triggering event be deemed to occur while parties are in negotiations or discussions as to whether a triggering event has occurred. However, we request that the Staff reconsider the proposal to allow a party to provide notice that a triggering event has occurred during such negotiations or discussions. By allowing this, we believe the rule could interfere with the negotiation process by creating an incentive for one party to give notice of a triggering event or threaten to give notice, which will change the negotiating dynamic inappropriately.
Exit Activities Including Material Write-offs and Restructuring Charges (Item 2.05)
The decision to restructure operations, like other strategic decisions, often involves various decisions and extensive analysis occurring over a sometimes lengthy timeframe. For purposes of discussing the proposed new rule, consider the following hypothetical example:
We believe that the fact pattern in the hypothetical example above illustrates the complexity of major exit activities and the difficulty of applying the proposed rule, as companies might be forced to disclose information before they are appropriately prepared to do so. As discussed in the above example, there would still be implementation details to address after board approval of the plan. Requiring disclosure upon this approval would be premature.
In addition, companies must consider the effect of announcing exit activities on the morale of their employees and perception of the company as a good corporate citizen. In spite of the timing indicated in the example provided, few companies would find it advisable to announce restructuring plans that involve significant job eliminations before the start of a holiday period.
As a practical matter, companies have to consider how best to disclose events such as the example presented above in light of all of the facts at their disposal and when they believe that they are sufficiently prepared to report them. The resolution of employment notification issues, final internal review of calculations and documentation, review of the transaction by third parties such as external counsel and independent auditors, and resolution of any other outstanding items will require time following board approval, as illustrated above. Because of these activities, we propose that the earlier of (1) resolution of these implementation matters and (2) 30 days after the approval by the board of directors or other authorized officers trigger disclosure under this item. With this proposal, companies would have a more reasonable timeframe to address and hopefully resolve outstanding matters while providing a deadline, i.e. within 30 days of board or authorized executive approval, by which disclosure under this item would be triggered. As stated above, we would suggest that companies have four business days after the trigger date to file the Form 8-K for this item.
Rating Agency Decisions (Item 3.01)
We believe that disclosure of rating agency decisions is not necessary because rating organizations typically issue press releases on a timely basis about rating changes. However, if this proposal is included in the final document, disclosures should be limited only to rating agency decisions when there is a contractual relationship between the company and the rating agency. Decisions by rating agencies without a contractual relationship with a company are generally less meaningful as such rating agencies do not have the benefit of meetings with company officials. We support the proposal that no disclosure is required while a company is in negotiations with a rating agency.
Should the Staff have questions concerning the comments in this letter or desire additional information to assist in preparing the adopting release, please do not hesitate to contact me at 215-761-2327.
Very truly yours,
/s/ James A. Sears
James A. Sears