Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W. Stop 6-9
Washington, D.C. 20549-6009
Re: "Aircraft Carrier" Release No. 33-7606A; File No. S7-30-98
Dear Mr. Katz:
These comments are being submitted on behalf of the Association of Publicly Traded Companies ("APTC") and the National Venture Capital Association ("NVCA") to SEC Release No. 33-7606A, widely known as the "aircraft carrier." Release 7606A will hereinafter be referred to as the "Release."
These comments are limited to Section XI of the Release, which describes various "Proposals Relating to Exchange Act Disclosure." The term "Proposals," as used in these comments, refers to the SEC's proposals made in Section XI of the Release.
The APTC and the NVCA support the fundamental goal of the Proposals: to improve the timeliness and the quality of the information disclosed to the public by domestic reporting companies.
However, the APTC and the NVCA have serious concerns about the practicality of the steps that the SEC is proposing as means to this end, as well as concerns about the increased exposure to liability that the Proposals would create for reporting companies, their officers and their directors.
The APTC and the NVCA recognize the importance of the federal securities laws and of the SEC's role in protecting investors and the integrity of this country's securities markets. However, these functions do not include regulating the management of America's public companies. We are wary of disclosure requirements that have the ultimate goal of affecting corporate behavior rather than improving the quality of information available to investors.
Thus, any changes to securities regulations should be carefully crafted to provide the necessary protections, while imposing as few constraints as possible on the ways companies conduct their businesses. Also, and especially in light of recent Congressional actions that recognize the serious and on-going potential for abuses in private securities litigation, the Commission should not act so as to increase the exposure of companies to securities litigation without the strongest possible justification for so doing.
Even where the Proposals contain ideas that may be feasible and appropriate for some public companies, these ideas may be neither feasible nor appropriate for all public companies. In order to avoid placing undue burdens on any public company, the SEC should be alert to the "one-size-fits-all" syndrome and should craft rules that are reasonable and flexible enough so that any public company, regardless of size, industry, or management structure, can meet its obligations without undue burden.
We have serious reservations about the Proposal to require all public companies to provide updated "risk factor" analyses every quarter. As attractive as this Proposal might seem at first blush, we believe that it would add little information actually useful to investors and that, at the same time, it has the potential of creating a great deal of mischief.
This Proposal is based on the unstated assumption that a description of "risk factors" is capable of being fine-tuned on a quarterly basis. This assumption, in turn, is based on the assumption that management, over periods of time that are quite short, can weigh the relative importance and the relative likelihood of various risks and make fine adjustments in the way they are described. This assumption is unrealistic.
Moreover, in considering this Proposal, the Commission should pay particular attention to the substantial burden that would be placed on management and its advisers. The difficulty faced by management in drafting a single, well-thought-out "risk factors" section of a prospectus or Form 10-K should not be underestimated. It is challenging, to say the least, to identify the specific risks faced by a particular company in a particular industry and to describe them so that investors can readily understand them. The Commission would increase this burden significantly.
However, the burden on companies is not the critical point. The fact of the matter is that a discussion of "risk factors" does not lend itself readily to frequent up-dating. Indeed, as a practical matter, the Proposal is counter-productive, because the more often risk factors must be stated, the greater will be the temptation to use broad, "boiler-plate" language. We accept the axiom that a company’s description of the risks it faces should be as meaningful as possible, but we respectfully submit that this goal is best achieved by the Commission reminding public companies that boilerplate and generalities should be avoided, in favor of a "plain," easily understandable description. Absent unusual circumstances (in which case Form 8-K, Item 5 disclosure should be made), an annual re-visiting of risk factors is sufficient, and in fact superior to a quarterly drill.
Finally, this Proposal is contrary to the basic proposition underlying the 1995 Reform Act legislation: a company should be protected against litigation challenging the reasonableness of its forward-looking statements if it also makes "meaningful cautionary statements" -- regardless of whether future adverse developments result from a listed risk, or a risk that was mentioned in the MD&A. If the Proposal is adopted, companies will be subjected to criticism in hindsight, not only on whether they included all the significant risks in their list of risk factors, but also on whether they gave them the proper relative emphasis on a quarter-by-quarter basis.
As a general matter, we concur with the SEC that there should be a "level playing field" between those (usually professional) investors who "have" access to the most current information and those (usually non-professional) investors who "have not" access to this information. We also agree with the SEC's approach of balancing the burden for reporting companies against the benefit to investors. We disagree, however, concerning the relative benefits and burdens of the specific Proposals related to the expansion of the information that is required to be disclosed on Form 8-K.
The Commission expresses a concern that small ("have-not") investors are at a disadvantage concerning access to current financial information, because they are not as likely as professional investors to receive earnings information when it is released in a company's "earnings release." The Commission's proposed solution to this perceived problem is to require that "selected financial data" (as defined in Regulation S-K, Item 301) be filed on Form 8-K as soon as it is released to the public, or, if earlier, 30 days after the close of the fiscal quarter.
Our difficulties with this Proposal are three-fold. First, we are not convinced (and we have seen no study supporting the proposition) that small investors are, in fact, at a disadvantage in gaining access to this information, as compared to professional investors. Press releases publicizing current financial information are required by the rules of the NYSE and the NASD, among others, to be given wide dissemination. Moreover, in this era of electronic communications, this information is, in fact, given wide dissemination. Services such as Reuters and Bloomberg News regularly carry items such as these. This information also appears on numerous financial web sites and the companies' own web sites. Active small investors have ready access to this information through these media.
Second, small investors are not more likely to gain access to this information simply because it is filed with the Commission and is available through EDGAR. This is not to say that EDGAR is not a tremendously valuable vehicle for the dissemination of information about public companies. It is. However, we doubt that EDGAR is the place that most small investors with Internet access look for news about public companies. There are many financial news sites that have been created for this purpose. And they are, in fact, structured in such a way that an investor's attention is more likely to be attracted to current information of importance to him or her.
Third, the Commission's Proposal would require the filing of three more SEC forms annually, which is a significant additional burden. Moreover, the information on these forms would be superceded by the filing of Forms 10-Q only 2 or 3 weeks later, resulting in unnecessary duplication.
In this connection, we should add that, although we oppose any acceleration in the filing of Item 301 "selected financial data" earlier than is required under current rules, we prefer the alternative of accelerating the filing of the entire Form 10-Q (which contains the requisite financial information under current rules) over a requirement to file yet another form every quarter.
We concur that the matters required to be reported on Form 8-K should be expanded to include the "other reporting events" listed in the Proposals. We believe that these events are so significant in the life of a public company that investors should be informed about them as soon as possible.
We have one concern about this list, however: in several respects, it is not sufficiently clear. For example, among the new "disclosure events" are several that must be "material;" yet the notion of "material" is notoriously vague. In order to assure that every reporting company is fully aware of its obligations, the definitions of the events that will be required to be disclosed should be as clear and precise as possible.
We disagree with the Proposal to accelerate the filing deadlines for Form 10-Q. The job of preparing the financial and other information required by Form 10-Q is burdensome enough so that completion of these Forms within 45 days of the close of each quarter is not easy for many public companies. Accelerating this deadline to 30 days would substantially increase this burden, and it would also be counter-productive because it would reduce the ability of companies to draft high-quality disclosure language.
Similarly, we disagree with the Proposal to accelerate the filing deadline for Form 10-K. The job of preparing the financial and other information required by Form 10-K, including audited financial statements, is burdensome enough so that completion of these Forms within 90 days of the close of each year is challenging for many public companies. Accelerating this deadline to 60 days would substantially increase this burden. It would also be counter-productive in that it would reduce the ability of companies to draft the disclosure language that the SEC (and issuers) want very much to improve.
As discussed above concerning the content of Forms 8-K, we are concerned about the burden that the Proposals would place on public companies to file Forms 8-K with substantially more information than is now required. This burden would be increased geometrically to the extent that the time periods for preparing and filing these forms is shortened.
We strongly oppose the portion of the Proposals that would shorten the time period for filing Forms 8-K from 5 business days to 1 business day. Even assuming that management has nothing else to do but to draft and file the form, it is simply unrealistic to suppose that this task can be accomplished in that time frame. The Commission should keep in mind that the events that are currently required to be reported with 5 business days typically involve substantial turmoil at corporate headquarters. During these events, circumstances change rapidly and usually a number of individuals, including members of the board and management, are active in trying to resolve whatever the situation might be. The facts are often complicated and often require several pages of well-thought-out explanation to convey to the public an accurate picture of what has transpired. This task, even when given the highest priority, cannot be accomplished "overnight." Drafts have to be prepared, circulated, reviewed, revised, discussed, finalized, EDGARized and filed. To complete these tasks in the quality fashion expected by the Commission and the public simply takes a few days under the best of circumstances.
On the other hand, we do not oppose the portion of the Proposals that would shorten the 15-calendar-day period. The events in question are important to investors, and, it would seem to us, after 15 days the information may very easily become stale. A company can reasonably be expected to file all its 8-K disclosures as soon as is reasonably possible. In our view, the trade-off between company burden and investor benefit argues in favor of shortening the 15-calendar-day time frame to 5 business days.
In short, we would suggest that 5 business days should become the standard for filing Forms 8-K, regardless of the Item or Items in question. Such a rule would have the benefit of consistency and simplicity and should permit companies, if they proceed with diligence, to comply with their obligations on a timely basis.
Finally, the SEC should keep in mind that the additional burden the Proposals would impose on public companies is substantial, that any such burden must be fully justifiable on public interest grounds, and that, therefore, these burdens should not be increased in any final rulemaking beyond the extent proposed.
We believe that the SEC is making a serious mistake in trying to use the "stick" of increased liability exposure to encourage companies to pay more attention to their periodic reporting obligations, as opposed to relying on "carrots," such as the ability to incorporate these reports into Securities Act filings.
We oppose the Proposals to the extent that they would add to the list of individuals who would be required to sign Exchange Act filings.
We oppose the Proposal to require a majority of the board of directors to personally sign quarterly reports, on two grounds. First, it will be simply impossible from a logistical point of view for most companies to accomplish: preparation of a draft quarterly report, review of the draft quarterly report by directors, coordination of comments from directors, preparation of a final quarterly report, circulation of the final quarterly report, and coordination of receipt of signatures, all within 45 days of the end of each fiscal quarter. It is even "more impossible" within the 30 days proposed by the SEC.
Second, it is doubtful that most members of most boards of directors of public companies are experienced enough in the fine points of corporate disclosure to be able to comment on the phraseology of corporate reports. Yes, they could ask questions such as, "Is the description of [Matter X] adequate?" However, the ability of a director to comment on the details of the specific language proposed by management (or whomever prepares the first draft) is highly doubtful. Thus, the marginal benefit of requiring review and signing by a majority of the directors is likely to be very small, especially in comparison to the logistical burden of accomplishing such review and signing.
We believe that the text of the quarterly reports should be the responsibility of those corporate officers (in most cases the CEO, CFO and chief accounting officer) and their advisors (lawyers and accountants) who are experienced in phrasing corporate disclosures and who are hired for this purpose. We would agree that directors should be closely informed as to the disclosures that their company is making so that they can exercise their oversight responsibilities. This end can be accomplished through requiring that each director be provided copies of quarterly reports promptly upon filing (as is proposed for Forms 8-K), but we believe that requiring close involvement by directors in the drafting process will add little to the quality of corporate disclosure.
We oppose the Proposal to require corporate officers to sign quarterly reports in their individual capacity. To do so simply increases the possibility of individual liability, without any significant likelihood of improving the quality of corporate disclosure. We would support a requirement that each quarterly report be signed by both a high-ranking executive officer and a high-ranking financial officer, but the corporation should be able to choose who the appropriate officers should be, and they should sign on behalf of the corporation, not in their individual capacities.
We believe strongly that the proposed certifications are merely an invitation to mischief by potential litigants, without significantly increasing the quality of the disclosure in Exchange Act filings. It is not necessary, for present purposes, to engage in a detailed analysis of the elements of causes of action under the various provisions of the federal securities laws upon which potential plaintiffs might base their claims. Suffice it to say that certifications contained in the Proposals would substantially increase the litigation exposure for each signatory.
It is not clear, on the other hand, that bringing the "Sword of Damocles" ever closer to the necks of corporate officers and directors will result in the increased quality of corporate disclosure sought by the SEC. The vast majority of corporate officers approach the job of formulating corporate disclosure with energy and professionalism. We suggest that the following would have the desired effect without the adverse impact on potential future litigation: a statement by the company placed just before the signatures to the effect that the company "certifies that the foregoing information has been reviewed and approved by [the company's] chief executive officer, chief financial officer, and chief accounting officer." Such a statement would emphasize the importance of careful review by the appropriate corporate officers, without creating an unnecessary and unwarranted exposure for individuals in the event of future litigation.
We note that the SEC is proposing to require companies to include their Internet Web-site address on the front cover of registration statements and other filings. We believe that this requirement is unwise, because it might be interpreted as an invitation to potential investors to consider the information contained on that Web site when making investment decisions, when, in fact, the Web site might not have been intended for that purpose.
Companies should be permitted to include this information, and, if they were to do so, they presumably would take care to assure that potential investors had access only to information that was intended for them.
Dana T. Ackerly II
On behalf of
Association of Publicly Traded Companies
and National Venture Capital Association