James P. Shanahan The CIT Group, Inc.
Senior Compliance Officer 650 CIT Drive
Associate General Counsel Livingston, NJ 07039-5795
June 30, 1999
Mr. Jonathan G.. Katz
Securities and Exchange Commission
450 5th 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 CIT Group, Inc. ("CIT" or "we") to SEC Release No. 33-7606A, widely known as the "aircraft carrier" release. Release No. 33-7606A is referred to in this letter as the "Release". CIT, which commenced operations in 1908, is a leading diversified finance organization with over $26 billion of managed assets at December 31, 1998. We offer secured commercial and consumer financing primarily in the United States to smaller, middle-market and larger businesses and to individuals through a nationwide distribution network. CIT's Class A Common Stock trades on the New York Stock Exchange.
These comments are limited to the following sections of the Release: Section V, which describes "Proposals Altering the Securities Act Registration Process", Section VII, which describes "Communications During the Offering Process", Section VIII, which describes "Prospectus Delivery", and Section XI, which describes "Proposals Relating to Exchange Act Disclosure".
II. Basic Position
CIT supports the fundamental goal of the Release, to increase the flexibility of the registration system, without compromising investor protection. CIT believes that many of the proposals set forth in the Release represent a significant step toward that fundamental goal. However, CIT also has some serious reservations about several of the proposals.
The history of federal securities regulation in the U.S. is a history of disclosure of material information about the operations and financial performance of America's public companies. One of the most notable results of this disclosure process is the relative transparency to investors of U.S. public companies. It is this disclosure that allows investors to evaluate the performance of public companies and the integrity of their respective managements. CIT believes that this disclosure has contributed to the unparalleled resilience and breadth of the U.S. public markets. This disclosure also has enabled the U.S. markets, both public and private, to achieve the flexibility necessary to constantly direct funds to new initiatives, without the guidance of governmental mandates, as the U.S. and global economies constantly reinvent themselves.
CIT applauds any efforts to enhance the disclosure to investors that does not increase the burden of reporting on issuers or decrease the flexibility of the markets. To the extent that any aspects of the Release fall short of that goal, CIT believes that such parts should be studied further for alternative solutions.
III. The Securities Act Registration Process
A. Eligibility for Form B
CIT generally supports the the eligibility standards for Form B that are proposed in the Release. For investors purchasing in the secondary markets, the disclosures set forth in periodic reports filed by an issuer under the Securities Exchange Act of 1934 (the "Exchange Act") are clearly more critical to their decision than a registration statement filed under the Securities Act of 1933 (the "Securities Act"), which may or may not be outdated. Since issuers with publicly traded securities already file periodic reports under the Exchange Act, it makes sense to continue to focus disclosure requirements on those periodic reports and to incorporate the information by reference into any registration statements. Form B simply continues the process that was already begun under Form S-3.
However, it appears that Form S-3 allows certain additional flexibility that may be missing from the proposed Form B. Currently, if an issuer's equity securities are privately held, but the issuer has issued publicly traded debt securities and files periodic reports under the Exchange Act, the issuer is eligible to use Form S-3. Under the Release, the eligibility standards for Form B appear to contemplate only equity securities. CIT believes that this limitation is unnecessary. An issuer of publicly traded debt securities, even if its equities securities are privately held, is still subject to substantially the same disclosure requirements as an issuer of publicly traded equity securities. Although CIT's equity securities began trading again on the New York Stock Exchange in 1997, after an absence of 17 years, during which CIT was a subsidiary of a series of corporations and major banks, CIT's debt securities have traded continuously in the public markets since before the stock market crash of 1929. During CIT's 17 year absence from the public equity markets, it was still eligible to use Form S-3 to register its debt securities. CIT noticed no significant difference in the disclosure required for publicly traded equity securities versus publicly traded debt securities, based upon the disclosure requirements for periodic reports under the Exchange Act.
CIT suggests that an additional standard should be established for privately held companies or wholly-owned subsidiaries that fund themselves through the public debt markets. If an issuer has $250 million of publicly traded debt securities outstanding, then it will be subject to most of the same Exchange Act reporting requirements as if it had an equal amount of publicly traded equity securities outstanding. Therefore, CIT suggests that an issuer should be eligible to use Form B based upon $250 million of publicly traded debt securities outstanding.
CIT also has some reservations regarding the standards for disqualifying an issuer from using Form B. This reservation is limited to the final category, consisting of issuers that fail to resolve an SEC staff comment on an Exchange Act periodic report that the issuer would incorporate by reference into Form B. There are undoubtedly many instances in which reasonable people can disagree over the nature of a disclosure item. For a frequent issuer such as CIT, disqualifying the issuer from using Form B based upon a disagreement with the SEC staff over a disclosure item in effect gives the staff veto power, since registering and issuing securities frequently on Form A would be particularly onerous. Therefore, CIT suggests that if an issuer fails to resolve an SEC staff comment on an Exchange Act periodic report, it should still be permitted to continue using Form B, provided that it notes the disagreement in the applicable prospectus.
B. Effectiveness of Registration Statements
CIT supports the proposal in the Release to permit issuers to elect the timing in which a registration statement on Form B will become effective. As proposed in the Release, the disclosure process will place greater emphasis on periodic reports under the Exchange Act, and will also place greater emphasis on SEC review of those periodic reports. Permitting issuers to elect the timing in which a registration statement becomes effective is the logical next step. For issuers, it removes a substantial variable regarding timing from the registration process. For investors, increased SEC review of Exchange Act reports should more than compensate for any theoretical decreased protection resulting from the accelerated registration process.
CIT does not object to obtaining the concurrence of underwriters to the effective date designated in the registration statement. Due to the vagaries of memory, CIT believes that such concurrence should be written, rather than oral. Naturally, requiring written concurrence will create logistical concerns. Therefore, CIT believes the SEC should permit the issuer to file a conformed copy of the underwriters concurrence, provided that it retains an original or a facsimile of an executed copy of the concurrence in its files for five years, which must be produced upon request of the SEC. Issuers that routinely use multiple underwriters in different combinations for successive transactions should designate one or more underwriters as the principal underwriter or underwriters for purposes of concurring in the effective date of the registration statement.
C. Delayed Shelf Registration Statements
CIT supports allowing issuers to continue filing delayed shelf registration statements. Although Form B permits an issuer to elect the date on which the registration statement becomes effective, this does not create sufficient flexibility to justify abandoning delayed shelf registration statements. Frequent issuers, like finance companies, will be significantly burdened if they have to file a new Form B registration statement for each debt offering, which in the case of CIT, may total 30 to 40 per year. CIT believes that delayed shelf registration statements are more useful for debt securities than for equity securities for two reasons. First, market overhang from securities on a delayed shelf registration statement will impact the trading price of equity securities, but is largely irrelevant to debt securities. Second, frequent issuers will generally issue debt securities on a regular basis. In contrast, equity securities tend to be issued at substantially longer intervals.
While Form B may provide much the same flexibility to issuers of equity securities that delayed shelf registration statements have provided, those same benefits are not readily available to frequent issuers of debt securities. Therefore, CIT supports allowing issuers to continue filing delayed shelf registration statements. If the SEC believes there is some benefit to limiting the use of delayed shelf registration statements, CIT would propose that delayed shelf registration statements be reserved for the issuance of debt securities, whether senior or subordinated.
CIT also supports extending to as long as 6 to 10 years the time in which the debt registered on a shelf can be issued. As long as the disclosure materials, as amended, are accurate, it should not matter how long the registration statement has been in effect. CIT also supports permitting issuers to replenish the amount of securities registered on the delayed shelf registration statement by amendment, rather than having to file a new shelf, and permitting issuers to pay their registration fees either quarterly or annually, based on projected issuances, or on a transaction by transaction basis.
D. Form of Registration Statement and Prospectus
CIT supports the more streamlined version of "offering information", rather than the version that emulates the existing Form S-3 disclosure. For large, seasoned issuers, it makes sense to continue shifting the emphasis for disclosure from the Securities Act registration statements to the Exchange Act reports that was begun with Form S-3. Focussing the disclosure process on the Exchange Act reports provides investors with protection, without increasing the burden on issuers. If any additional disclosure items, such as risk factors or a description of the securities outstanding, are added to the Exchange Act reports, issuers should be permitted to delete the disclosure from the prospectus and incorporate it by reference.
E. Prospectus Delivery Requirements
CIT supports delivery of a securities term sheet itemizing the material terms of the transaction, rather than requiring issuers to deliver a preliminary prospectus containing all of the transactional disclosure currently required in Form S-3. For large, seasoned issuers, CIT believes that investors in equity securities make their investment decision based on the information they have already gleaned from the Exchange Act reports and based upon the summary information regarding the individual transaction. With respect to debt securities, CIT believes that investors rely heavily on the ratings issued by one or more nationally recognized securities rating agencies, in addition to the terms of the individual transaction. The balance of the information included in Form S-3 is largely superfluous to the investment decision, or has already been factored into the decision through the Exchange Act documents.
In terms of delivery of the prospectus, CIT believes that it may make sense to apply different guidelines to different markets. Because of the way in which the equity markets function and the traditional timing of delivery of the preliminary prospectus vis-à-vis the timing of the investment decision, it is generally not a hardship on issuers, and it is a benefit to investors, to require delivery of the securities term sheet before the investor makes its investment decision.
However, the decision making process, and the timing of the investment decision, are completely different in the debt markets. Since substantial information is already available through Exchange Act documents for large, seasoned issuers, investors are able to evaluate new, plain vanilla debt securities relatively rapidly based upon ratings and yield, without the need for a formal term sheet. In additon, from CIT's perspective, the terms of debt securities are usually negotiated in the morning, during the first few hours of the trading day. The underwriter typically begins selling the deal immediately after the underwriter and issuer verbally agree to the terms, even before the parties exchange a term sheet confirming the transaction. The underwriter moves quickly to minimize the risk of changes in market rates, but the fast start makes it impossible to file the securities term sheet before the investor makes its decision. If the underwriter is required to wait for the securities term sheet to be filed with the SEC, it may decide to increase the fees that it requires in order to compensate for the additional risk, which would increase the rates paid by issuers, but not necessarily the yield to investors. Therefore, CIT suggests that any requirement to file the prospectus term sheet before the investor makes its investment decision should be limited to equity securities. Debt securities should continue to be issued under the old rules, in which the securities term sheet would have to be filed within forty-eight hours after the terms are finalized.
IV. Communications During the Offering Process
CIT supports the proposed changes regarding communications during the pre-filing period and the waiting period, particularly the proposed safe harbors. The exemption for offers during the pre-filing period, the new safe harbors and the new treatment of free-writing materials will provide large, seasoned issuers with useful flexibility in communicating with existing shareholders and potential new shareholders. Although there may be exceptions, CIT concurs that it is unlikely that communications made by large, seasoned issuers while they are registering securities will have a significant impact on the market.
CIT is concerned, however, with the requirement under the Bright-Line Communications Safe Harbor that the issuer take reasonable steps to prevent further distribution of information outside of the safe harbor time period. Once an issuer releases information, whether or not that information is subsequently republished is generally outside of the issuer's control. CIT can understand requiring issuers to take reasonable steps to insure that the initial release of information occurs during the safe harbor period. However, the issuer should not be responsible for republication of the information by third parties after the initial release.
CIT is also concerned about the reference to an issuer's internet web site. Much of the information on CIT's web site falls within the scope of the proposed Communications Safe Harbor for factual business communications. However, as with any form of advertising and marketing, there is some degree of self-promotion, or extolling our own virtues. CIT assumes that this is understood by the SEC and that there is no intention to require issuers to rewrite their web sites during an offering period, but suggests that the SEC to clarify this issue.
CIT also believes it would be useful to distinguish between equity offerings and debt offerings. Most issuers sell equity securities infrequently, and in that context, the safe harbors, and particularly the Bright-Line Communications Safe Harbor, should work well. However, certain companies, such as finance companies, issue debt securities frequently. Frequent issuers could go for several months and always be within the offering period of one issue of debt security or another, which effectively eliminates the benefits of the Bright-Line Communications Safe Harbor. Since it is unlikely that debt securities are susceptible to the same hype as equity securities, CIT suggests that the cut-off for availability of the Bright-Line Communications Safe Harbor be set at the commencement of an offering, rather than 15 days before.
As for the definition of an "offering period", CIT is unclear as to how it will be implemented. Under proposed Rule 166, an issuer, underwriter or participating dealer can make an offer to sell or solicit an offer to buy securities prior to filing a registration statement, provided certain requirements are met. Under proposed Rule 167, any communication made prior to the offering period does not constitute an offer to sell or an offer to buy securities. Yet, under Form B, the offering period is defined to begin 15 days prior to the first offer. The definitions taken together appear to be circuitous. CIT assumes that the intent is to begin the offering period 15 days prior to the first offer after the effectiveness of the registration statement, but that is not clear from the two rules and Form B. If CIT's assumption is correct, then it concurs in the proposed rules. However, regardless of whether CIT's assumption is correct, CIT suggests that the definition of the offering period should be clarified.
V. Periodic Reports Under the Exchange Act
A. Risk Factors Disclosure
CIT is opposed to requiring issuers to describe risk factors of their business, operations, and financial condition in their Exchange Act periodic reports. Requiring issuers to disclose their risk factors in their Exchange Act reports will increase the burden on issuers, particularly if there is an expectation that the disclosure be modified and updated quarterly, without a commensurate benefit to investors. The few times that CIT has done more than one equity offering within the space of one to two years, CIT has found that there are not material changes in risk factors from one offering to the next.
However, if the SEC decides to proceed with requiring issuers to disclose risk factors in Form 10-K, it should clearly state that no additional disclosure is required in Form 10-Q, unless (i) there are additional risk factors that were not previously disclosed or (ii) there have been material changes in previously disclosed risk factors since the most recent Form 10-K. CIT believes that it is unlikely that there will be a significant number of material changes in the risk factors for any given industry from quarter to quarter. Notwithstanding the constant and rapid changes occurring in the world, those changes tend to occur within the context of existing risk factors. In addition, CIT suggests that if risk factors are added to Form 10-K, then they should not be required in Form B, since they can be incorporated by reference.
B. Disclosure Deadlines for Annual and Quarterly Results
CIT favors providing the information required in Item 301, through a press release filed with the SEC on Form 8-K, rather adopting shorter filing deadlines for Form 10-K and Form 10-Q. CIT is opposed to requiring issuers to include any additional information beyond what is required in Item 301. However, issuers should have the option to include additional information in their press releases and Form 8-K, and to change the type of information included from time to time, in order to be responsive to the questions and concerns of analysts and investors.
CIT recommends setting the deadline for filing the selected financial information on Form 8-K at not less that 30 days after the end of each quarter and not less than 60 days after the end of each fiscal year. Although larger companies would generally have the resources to comply with a shorter time frame, smaller companies may find a shorter time frame to be a significant burden. Even for larger companies, a shorter time frame will inevitably reduce management's ability to shift the reporting burden forward or backward within the reporting period in order to allocate resources to other purposes.
C. Expansion of Required Filings on Form 8-K
It is difficult to object to the proposed expansion of the required filings on Form 8-K, since the additional filing events would presumably each be material to some or all security holders. Of greater concern is shortening the deadline for filing, in particular for those filing events for which a filing deadline of one business day is proposed. Notwithstanding all of the advances in global communications, one business day is generally too short to complete the report and would create an unnecessary burden on the issuer without a commensurate benefit to investors. With key executives frequently traveling, whether around the country or around the globe, simply gathering the information necessary to complete the report in one business day may be problematic, even before addressing the logistics of drafting the report, obtaining the necessary reviews and approvals, executing the report, and filing it with the SEC. If the SEC feels compelled to shorten the filing period, CIT believes that it makes sense to do so gradually, beginning at ten calendar days or five business days, rather than immediately jumping to one business day.
D. Applicability of Plain English Rules
CIT does not object to expanding the applicability of the plain English rules, provided that it is done in a reasonable fashion. In the long run, it doesn't make sense to follow one writing style for Securities Act documents and another style for Exchange Act documents. If anything, describing the business or presenting the MD&A in clear, concise language, using the active voice, in Securities Act documents, while reverting to the passive voice for the same sections in Exchange Act reports creates a risk of generating unnecessary questions about what the disclosure means. Therefore, even without a change in the rules, CIT would likely begin gravitating toward disclosure based on the plain English rules in all documents, not just prospectuses.
However, as the SEC has undoubtedly discovered through its review process, the plain English rules must be applied judiciously, rather than in a rigid manner across the board. CIT believes that it is generally more difficult to apply plain English rules in the context of describing legal documents, legal proceedings, tax and pension issues, and quantitative and qualitative disclosures of market risk. Even in the description of the business, it may be easier to apply plain English rules to more mature industries, which investors may understand better and be able to put in context, than to newer, evolving industries. While CIT does not object to expanding the applicability of plain English rules, we suggest that the SEC move slowly in such an expansion to allow issuers to adapt and gain experience with the rules. We believe that this can be accomplished without unduly harming investors.
E. Management Report to Audit Committee
CIT does not believe investors will derive any significant benefit from requiring issuers to file a management report to the Audit Committee regarding the procedures that are followed to ensure that the information reported in Exchange Act reports are accurate. CIT believes that most issuers have likely already adopted the necessary procedures, or should have, in order to fulfill their obligations as part of the audit process. Requiring a management report to the Audit Committee is unlikely to increase the number of issuers with adequate procedures, but will undoubtedly increase the exposure of the issuer to liability. Any deviation from the filed procedures, regardless of how much sense it made at the time, and regardless of whether the independent auditors concurred, creates a potential for criticism and a lawsuit in the context of 20/20 hindsight.
CIT is opposed to requiring every officer and director who signs Form 10-K to certify that they have read the report, since CIT sees no significant benefit to be derived. The signatories potential liability exposure under securities laws should already provide sufficient motivation to read the reports and ask any pertinent questions. Certifying that they have read it is unlikely to provide any additional inducement to do so. In addition, CIT believes that it is unnecessarily burdensome to require a majority of the Board of Directors to execute Form 10-Q, even under the existing 45 day filing deadline. CIT would have three additional documents for which we would have to obtain signatures from directors who are, literally, scattered across half the globe, without any discernable benefit to investors.
If you have any questions regarding any of our comments, please do not hesitate to contact me.
Very truly yours,
James P. Shanahan