Compass Bancshares, Inc.
VIA ELECTRONIC MAIL
December 9, 2002
Securities and Exchange Commission
Re: Release Nos. 33-8144 and 34-46767 (the "Proposing Release"); File No. S7-42-02
On behalf of Compass Bancshares, Inc. ("Compass"), we respectfully submit these comments relating the Commission's proposal to require disclosure, in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") section of an issuer's disclosure documents, of an issuer's (i) off-balance sheet arrangements, (ii) contractual obligations and (iii) contingent liabilities and commitments. The proposals set forth in the Proposing Release (the "Proposals") are intended, among other things, to implement the provisions of Sections 401(a) of the Sarbanes-Oxley Act of 2002 (the "Act"), which was signed into law by President Bush on July 30, 2002.
Compass is a financial services company that was organized in 1970 and operates approximately 344 full-service banking offices in Alabama, Arizona, Colorado, Florida, Nebraska, New Mexico and Texas. Compass has $23.7 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 considered an issuer for purposes of the Act and, therefore, is subject to the provisions of Sections 401(a) of the Act and the Proposals.
We have not addressed all of the specific requests for comment proposed by the Commission, but rather have limited our comments to those items with which we have concerns or for which we have suggestions for improvement. To the extent we have comments to the Commission's specific requests for comments, they are provided below.
GENERAL COMMENTS REGARDING MD&A
In the Proposing Release, the Commission notes that it "has long recognized that there is need for a narrative explanation of financial statements and accompanying footnotes and has developed MD&A over the years to fulfill this need." According to the Commission, MD&A is designed to achieve the following purposes:
Simply stated, MD&A is intended to aid investors in understanding an issuer's financial condition, changes in financial condition and results of operations primarily by providing investors with certain contextual information relating to the issuer's financial condition, changes in financial condition and results of operations. The notes to financial statements (the "Notes"), on the other hand, are intended as the instrument for the presentation of material information that is essential to the fair presentation of financial position, results of operation and changes in financial position but that cannot be conveniently included on the face of the financial statements. We believe that the Commission, through the Proposals and other recent initiatives, is unnecessarily confusing the purpose of MD&A with that of the Notes. We believe the distinction between the purposes of MD&A and the Notes is important and should be preserved.
In our opinion, information should be included in the Notes if that information (i) is required for the fair presentation of the results of operations, financial position or changes in financial position of an issuer and (ii) relating to the periods covered by the financial statements. Information should be included in MD&A if that information (i) will aid an investor's understanding of the results of operations, financial position or changes in financial position of an issuer by providing a context in which the financial statements should be analyzed ("Contextual Information") and (ii) that cannot conveniently be included in the Notes. Such Contextual Information would include information such as trend analysis and matters that may have, or may cease to have, an impact on future operations.
We believe that much of the information that would be required to be disclosed under the Proposals is an integral part of an issuer's results of operations, financial position and changes in financial position rather than Contextual Information. Hence, we are of the opinion that such information would be more appropriately included in the Notes rather than in MD&A. The Commission could accomplish this by amendment to Regulation S-X or through action by the Financial Accounting Standards Board.
OFF-BALANCE SHEET ARRANGEMENTS
Summary of Proposals. In order to implement the provisions of Section 401(a) of the Act,1 the Commission proposes to amend Item 303 of Regulations S-K and S-B, Item 5 of Forms 20-F and General Instruction B. of Form 40-F to require an issuer to include, under a separately-captioned section of MD&A, a discussion of the issuer's off-balance sheet arrangements. For purposes of the discussion below, we limit our comments to the proposed amendments to Item 303 of Regulation S-K, as Compass would be subject to its provisions. To the extent our comments are applicable to other proposed rules contained in the Proposing Release, we urge the Commission to consider them in those contexts.
Definition of "Off-Balance Sheet Arrangement." The Commission proposes to define the term "off-balance sheet arrangement" as follows:
We generally agree with the Commission's definition of the term "off-balance sheet arrangement;" however, since we are of the opinion that the information regarding off-balance sheet arrangements is more appropriately included in the Notes than in MD&A, we urge the Commission to replace the words "(excluding the footnotes thereto)" as they appear in the definition of the term "off-balance sheet arrangement" and replace them with words "(including the footnotes thereto)."
Proposed Disclosure. In order to implement the provisions of Section 401(a) of the Act, the Commission proposes to amend Item 303 of Regulation S-K to require issuers to include, in MD&A, the following information regarding off-balance sheet arrangements:
We generally agree with the Commission's proposals implementing the provisions of Section 401(a) of the Act; however, we have the following comments:
(a) We encourage the Commission to replace the word "may" as it appears in the sixth line of paragraph (a)(4)(i)(C) of proposed Item 303 of Regulation S-K with the words "is reasonably likely to" in order to align the disclosure threshold of other similar information. See discussion under the caption "Disclosure Threshold" below.
(b) We urge the Commission to delete paragraph (a)(4)(i)(D) as (i) the first sentence of paragraph (a)(4)(i)(D) is redundant, as we are unaware of any further analysis that management could provide that is not covered under paragraphs (a)(4)(i)(A) through (C), (ii) the second sentence of paragraph (a)(4)(i)(D) is more appropriately included in paragraph (a)(4)(i) and (iii) if our understanding of the third sentence of paragraph (a)(4)(i)(D) is correct, the information required thereunder is easily ascertainable by investors from a review of the disclosure document as a whole without any further analysis by management. In the event such disclosure is required, we believe that this information, unlike most of the other information required under the Proposals, is appropriately included in MD&A.
(c) We do not believe the information set forth in paragraph (a)(4)(ii) is entirely essential and may result in overburdening investors with a raft of unnecessary information; however, if it is required, this information is appropriately included in MD&A rather than the Notes.
Disclosure Threshold. The Commission proposes to require disclosure of off-balance sheet arrangements if they "may have a current or future material effect on the company's financial condition, changes in financial condition, results of operations, revenues or expenses, liquidity, capital expenditures or capital resources." As proposed, disclosure would not be required for off-balance sheet arrangements where the likelihood of either the occurrence of an event, or the materiality of its effect, is remote.
As the Commission notes in the Proposing Release, "a registrant [currently] has a duty to disclose prospective information in its MD&A where a trend, demand, event, commitment or uncertainty is both presently known to management and reasonably likely to have future material effects on the registrant's financial condition or results of operations." (emphasis added) The Commission, however, adopted a lower threshold for disclosure as it views the language of the Act as mandating the adoption of a "lower disclosure threshold for prospectively material information related to off-balance sheet arrangements" and that "the disclosure threshold is best captured by the concept of `remoteness.'" We disagree.
We do not believe that the Act intended that a lower threshold apply to disclosures regarding off-balance sheet arrangements than to all other disclosures in MD&A. We noted nothing in the legislative history of the Act that indicates that the Act was intended to provide such a lower threshold. The Commission's suggestion that the choice of the word "may" in Section 401(a) of the Act mandates the lower threshold ignores the reality of the hurried circumstances under which the Act was passed and assumes an artfulness in drafting that is not evidenced in other provisions of the Act.2 In addition, we believe that the adoption of a lower disclosure threshold for off-balance sheet information would attribute unwarranted standing to information relating to off-balance sheet arrangements in relation to other important information.
We encourage the Commission to make the following revisions to sections (a)(4) of proposed Item 303 of Regulation S-K and any corresponding revisions in other rules necessary for the sake of continuity:3
Specific Questions. Below is our response to a specific question posed by the Commission in the Proposing Release.
Is it appropriate to apply our existing policy of excluding preliminary negotiations from MD&A disclosure to off-balance sheet arrangements?
Yes. The Proposals currently include an instruction that no obligation arises to make a disclosure regarding an off-balance sheet arrangement "until a definitive agreement that is unconditional or subject only to customary closing conditions exist or, if there is no such agreement, when settlement of the transaction occurs." Not only is this policy consistent with the Commission's existing policy but also in the best interest of investors. The disclosure of information regarding a transaction that may never occur runs the risk of misleading investors and overburdening them with unnecessary information.
CONTRACTUAL OBLIGATIONS AND
CONTINGENT LIABILITIES AND COMMITMENTS
Summary of Proposals. The Commission proposes to require issuers to disclose aggregated information about contractual obligations, aggregated by type, in tabular format4 in MD&A. In addition, the Commission proposes to require issuers to disclose, either in tabular or textual format, the expected amount, range of amounts or maximum amount of contingent liabilities or commitments that are expected to expire in less than one year, from one to three years, from three to five years and more than five years. According to the Commission, the disclosure of such information in a single location will "improve transparency of registrant's short- and long-term liquidity and capital resource needs and demands."5 We do not disagree with the Proposals in this regard; however, for the reasons stated above under the caption "GENERAL COMMENTS REGARDING MD&A" above, we believe this information is more appropriately included in the Notes.
SAFE HARBOR PROVISIONS
Summary of Proposals. The Commission proposes to extend the statutory safe harbor protections6 for forward-looking information that would be required to be disclosed under the Proposals. We fully support the Commission's expressly applying these safe harbor provisions to the information required pursuant to the Proposals, whether such disclosure is made in MD&A or in the Notes.
We respectfully submit these comments with the hope that they are helpful to the Commission's consideration of the Proposals. We would be happy to meet with representatives of the Commission to discuss our comments.