AMERICAN BAR ASSOCIATION
Section of Business Law
750 North Lake Shore Drive
Chicago, IL 60611
February 26, 2003
By E-Mail -email@example.com
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0609
Attn: Jonathan G. Katz, Secretary
Re: Section 16 Electronic Reporting and Website Posting Proposals
Release Nos. 33-8170, 34-47069, 35-27627, IC-25872 (File No. S7-52-02)
Ladies and Gentlemen:
This letter is submitted on behalf of the Committee on Federal Regulation of Securities of the American Bar Association's Section of Business Law (the "Committee")1 in response to the Commission's request for comments in Release Nos. 33-8170, 34-47069, 35-27627, IC-25872 dated December 24, 2002 (the "Release"). The Release sets forth proposals intended to implement the requirements of Section 403 of the Sarbanes-Oxley Act that all reports by corporate insiders under Section 16(a) of the Securities Exchange Act of 1934 be (1) filed electronically, and (2) posted on the Commission's website and the website of the insider's company (if the company has one) within one business day after filing.
The comments expressed in this letter represent the views of the Committee only and have not been approved by the American Bar Association's House of Delegates or Board of Governors and therefore do not represent the official position of the ABA. In addition, this letter does not represent the official position of the ABA Section of Business Law, nor does it necessarily reflect the views of all members of the Committee.
We commend the Commission for its thoughtful and considered approach to the electronic filing and website posting directives of Section 403. If implemented as outlined in the Release, we believe this approach would achieve the objectives of earlier notification to the public of reports of insider transactions and wider public availability of the information reported about these transactions. Accordingly, we support the Commission's general approach, although we believe, as described in this letter, that there are a number of ways in which this approach can be improved. Our views are set forth below in the following order:
Need for simplified direct filing procedures and instructions
Extension of 5:30 p.m. Eastern Time filing deadline
Clarification of hardship exemption availability
Limited relief from Item 405 disclosure requirement
Elimination of magnetic cartridge filing method
Manner of presentation
Duration of posting
Cost-benefit analysis of direct posting v. hyperlinking
Electronic filing of Form 144
Need for Simplified Direct Filing Procedures and Instructions
We support the Commission's proposal to create a new on-line filing system under which insiders would log on to the SEC's website, fill out their Section 16(a) forms, and submit them for filing. Although there are many aspects of the proposed system that are unclear, the Commission has indicated that the system will include a number of user-friendly features. These consist of (1) an on-line help function, (2) an opportunity to review a form and correct errors prior to submission, (3) the ability to add attachments, (4) the ability to print a completed form before submitting it, (5) a right to receive an accession number immediately following submission, and (6) an opportunity to request a return copy of the filed form. All of these features are, in our view, critical to the design and operation of an efficient, easy-to-use system, and should be implemented as planned.
In formulating other aspects of the new system not mentioned above, we believe the Commission should bear in mind that many users of the system are likely to be persons who will have little experience with electronic filing methods or with the Commission's reporting requirements. Moreover, many of them will be insiders associated with small companies that are unable or unwilling to assist their insiders in completing and filing their Section 16(a) reports. Given these facts, as well as the demands placed on reporting persons by the two-business-day deadline for reporting most transactions, the system must be simple to access and easy to use. While the Commission's proposed system appears to be heading in this direction, we would like to offer some specific suggestions designed to make it as user-friendly as possible. These suggestions cover the following topics: (1) timing out, (2) inputting information, (3) pull-down menus, (4) instructional keys, (5) automatic population of known fields, (6) attachments, (7) transaction codes, (8) footnotes, and (9) multi-entry transactions.
The Release states that the system will "time out" if the user takes too long to complete the form, and that a user will not be able to save partially completed forms upon automatic termination of a filing session. We believe that if a time limit is to be established (and we can understand why the Commission wishes to have such a limit), it is important that the user not lose the work completed to that point. The loss of such work would be extremely frustrating to the user, and would inhibit the timely filing of the report. Accordingly, we think it is essential that the Commission build into the system a "SAVE" feature of the type that is a staple of software programs offered by commercial vendors for preparing and filing Section 16(a) reports. This feature should (a) permit the user to elect to save on the system a partially completed form until his or her next log-on session, and (b) prompt the user (as does the LEXIS on-line legal research service) at a prescribed interval (perhaps two minutes) before the end of the session either to save the information within the remaining period or allow it to be deleted.
Aids for Inputting Information
The new system should provide various aids to users that will enable them to prepare reports with relative ease. These aids should include the following:
Pull-Down Menus. The new system should make extensive use of pull-down menus from which selections can be made for easy inputting of information into the reporting form. Among the items that should be included in these menus are transaction codes (all available ones), dates (for selecting month, date or year, as necessary), and type of security (with choices such as common stock, convertible preferred stock, nonconvertible preferred stock, and various option descriptions, such as option to buy, obligation to buy, option to sell, and obligation to sell). The menu for type of security also should permit the user to bypass the menu if the menu does not permit a satisfactory description of the security. In addition, the menu for the transaction code should permit the user, through placing a cursor over a code, to bring down a description of the meaning of the code, much as Microsoft Windows does if you place a cursor over an icon in the tool bar.
Instructional Keys. The general instructions to the respective reporting forms that relate to specific portions of the forms should be keyed directly to those portions, rather than set forth in a separate document port at the front of the form that can easily be overlooked or forgotten when preparing the form. For example, instead of including General Instructions 4 through 8 of Form 4 at the outset in a separate document port, each of these instructions (which relate, respectively, to transactions and holdings, price of securities, additional information, signature, and transaction codes) should appear automatically on the screen when the user reaches the portion of the form to which the particular instruction applies.
Automatic Population of Known Fields. The new system should, to the extent appropriate, automatically populate the boxes that provide identifying information at the top of the first page of each reporting form, based on data already on file with the Commission. This should occur after the user has inputted the appropriate EDGAR access codes, and should be based, for initial reports, on the information contained in the application for the codes. For subsequent reports, the information should be based on the information in the boxes for the last previous report. The user should have the ability to override any of this automatically inputted information that is not applicable or correct. This automatic population technique is well developed and used by nearly all on-line forms and on-line transaction companies (such as mail order companies), and should be able to be included in the new system without excessive difficulty.
Attachments. It is unclear from the Release how attachments would be incorporated into a Section 16(a) report under the new system. We think the Commission should provide specific instructions in this regard, and should, if possible, adopt an approach that avoids the need for separately EDGARizing attachments. Further, in the case of the most common attachment, a power of attorney granted by the insider to a designated person (or persons) to sign Section 16(a) reports for the insider, we think the Commission could dispense with the filing requirement entirely. These types of powers of attorney are common, and typically do no more than designate the person (or persons) authorized to sign the reports on behalf of the insider. In light of their formulaic and uncomplicated nature, we think the public interest would be better served by simply (i) allowing the insider to furnish a copy to the issuer, which would make it available to the Commission upon request, and (ii) requiring the insider to indicate, in a box created on the reporting form, the name or names of persons authorized to sign Section 16(a) reports on the insider's behalf, rather than filing the underlying power of attorney.
Transaction Codes. The Commission should consider adding more transaction codes (including codes for common complex transactions, such as reclassifications), to reduce the need for use of the all-purpose "J" code that requires an explanation of the transaction in a footnote. We also think it might be worthwhile to reexamine the names of some existing codes (such as several of those relating to Rule 16b-3), with a view to shortening them or replacing them with names that are more intuitive and user-friendly.
Footnotes. Footnotes to reported transactions frequently are necessary to explain fully the nature or extent of a transaction. Because many of these footnotes are commonplace, it would further simplify the filing process if the most common were included in a pulldown menu. We would be pleased to supply some suggested footnotes for this purpose if the Commission believes it would be helpful.
Multi-Entry Transactions. The Commission should examine the feasibility of including in the system aids to reporting transactions that require multiple entries on the reporting form. For example, a same-day exercise and sale requires three separate line items to be completed on a Form 4 (two entries in Table I and one entry in Table II). The Commission might include in the system a mechanism whereby the selection from a pull-down menu of the code for a same-day exercise and sale would (i) lead the insider through the information needed (i.e., number of shares exercised, exercise price, number of shares sold, sale price), and (ii) automatically complete the three line items that are required to report all facets of the transaction.
Extension of 5:30 p.m. Eastern Time Filing Deadline
In order to be considered timely, the Release provides that a Form 4 must be electronically filed with the Commission by 5:30 p.m. Eastern Time on the second business day following the date of the transaction which triggers the filing obligation. We believe the 5:30 p.m. Eastern Time deadline would impose a significant burden on insiders, and that the Commission should extend the deadline for the receipt of a report until at least 10:00 p.m. Eastern Time on the due date.
A large majority of insiders are natural persons who will not be familiar with either the complex reporting requirements of Section 16(a) or the Commission's electronic filing methods. Moreover, many will have to rely on others (such as brokers and plan administrators) to provide information necessary for the completion of a report. The time lost as a result of these factors, together with the need for directors and executive officers to attend to their company responsibilities, ordinarily will leave relatively little time for insiders to meet their filing obligations within the shortened deadline now in place. The problem of inadequate time for filing will be increased for insiders located outside of the Eastern Time zone, because they will not have two full business days to meet their reporting obligations because of the time differential. And it will be even further compounded in the case of insiders of companies (many of which are small by public company standards) that provide no reporting assistance to their insiders.
We are not aware of any reason why the Commission cannot extend the deadline for receipt of Section 16(a) electronically filed reports to at least 10:00 p.m. on the due date for the report. (Indeed, we understand that there is no technical obstacle to the Commission leaving the filing window continually open, although we recognize that cost may be a consideration in this regard.) The Commission currently allows registrants to transmit periodic reports electronically until 10:00 p.m. on each business day, and we think the same courtesy should be provided to insiders, along with an extension of their filing deadline to that time. Insiders, as a class, generally do not have the same resources available for electronic filing as issuers. If anything, they should be treated more, rather than less, kindly by the Commission insofar as filing Section 16(a) reports is concerned.
Extension of the filing deadline would rectify the unfair treatment now being visited upon non-Eastern time zone insiders, and should have no meaningful delaying effect on the flow to the public of information contained in reports filed after 5:30 p.m. This is due to the fact that reports filed shortly before 5:30 p.m. apparently are not posted on EDGAR until the next business day, at the earliest.
Clarification of Hardship Exemption Availability
The Release indicates that the hardship exemptions contained in Regulation S-T that generally apply to electronic filings would be available with respect to filings made on Forms 3, 4 and 5, but would be granted infrequently. Currently, Rule 201 of Regulation S-T permits filers who experience unanticipated technical difficulties that prevent timely preparation and submission of an electronic filing to file in paper format under cover of Form TH within one business day of the filing due date, provided that the filer also files an electronic copy of the form within six days of the date on which the paper filing is made. In addition, Rule 13(b) of Regulation S-T provides that the filing date will be adjusted in the event a filer makes a good faith attempt to file electronically but encounters technical difficulties beyond the filer's control.
Although we understand the Commission's desire not to grant hardship exemptions relating to Section 16(a) reports on a regular and frequent basis, we think Section 16(a) reports are substantially different from the types of reports that heretofore infrequently have been granted hardship exemptions. Electronic reports currently are required of issuers and beneficial owners of more than 5% of a class of equity securities. Each of these two classes of filing persons can be assumed to have substantial resources to meet their electronic filing obligations. This is in contrast to Section 16 insiders, who in the aggregate constitute a far greater number of persons (over 100,000, we believe) with far fewer resources and expertise to meet the electronic filing requirements. Given these circumstances, we think the Commission should adopt a tolerant attitude regarding the availability to insiders of the hardship exemptions, at least during the first 12 months that insiders are transitioning to a strange and complex system that places heavy demands on them within a short time frame.
In further recognition of the difficulties that many insiders undoubtedly will experience in collecting information, analyzing the applicability of unfamiliar reporting requirements to their specific situations, and engaging in the preparations necessary for electronic filing, all within the short time frame of two business days, we think the Commission should consider adopting an approach similar to that applied to issuers that file Form 12b-25 for an extension of time to file required periodic reports. Issuers that file this form are granted the extension automatically if they make certain limited representations in the Form. Because this approach is considered appropriate for issuers having far greater resources and expertise than insiders, and is available for reports in which the investing public generally has far greater interest than attaches to reports of individual insiders, we think it is justifiable for insiders to an even greater degree.
In our view, the Commission also should consider clarifying that Note 1 to Rule 201 will not result in an issuer losing its ability to use Forms S-2, S-3, S-8, F-2 and F-3 simply because one of its insiders failed under the temporary hardship exemption to file an electronic copy of the form within the six days required by Rule 201(b). While we think there is little doubt than an insider's failure to meet the electronic filing obligations imposed by the Commission should have no effect on the issuer's filing status, it would be helpful to make that clear.
Limited Relief From Item 405 Disclosure Requirements
If the Commission determines not to extend the proposed electronic acceptance deadline of 5:30 p.m. for reports on Form 4, and not to clarify the application of the electronic filing hardship exemption in the manner suggested above, we believe that the Commission should at the least provide some limited relief to insiders and issuers from having to disclose under Item 405 of Regulation S-K reports that are filed within one business day after the deadline. This relief could take the form of a Commission statement that a report during the first 12 months after the new system is in effect that is filed within one business day after the deadline will not be considered delinquent for purposes of disclosure under Item 405. This type of relief would be temporary, and given in recognition of the difficulties which insiders are likely to experience during the initial period of becoming accustomed to the new system.
Elimination of Magnetic Cartridge Filing Method
We support the Commission's proposal to eliminate magnetic cartridges as a transmission medium and the related proposal to eliminate Form ET. Magnetic cartridges are merely an alternative to direct EDGAR submission as an electronic filing medium, and we believe that very few issuers, insiders or third party filing agents ever utilize the alternative. The Release confirms this belief, noting that only one filer submitted a magnetic cartridge in the past year, and did so only because of technical difficulty encountered when trying to file by EDGAR.
We believe that issuers, insiders and third party filing agents have sufficient alternative electronic filing methods available to them without the need for magnetic cartridges as an alternative transmission medium. Issuers can and do purchase from a variety of third party vendors software that enables them to make filings electronically via EDGAR. In addition, financial printers and other third party filing agents offer EDGAR filing services at affordable prices and regularly make electronic filings for issuers, insiders and other filing persons. We expect that third party vendors of software, and third party filing agents, will offer similar products and services to assist insiders in filing their Section 16 reports on the new web-based electronic filing system. These alternatives to direct-access filing will be more convenient than creating and submitting a magnetic cartridge, and therefore issuers and insiders are unlikely ever to file Section 16 reports by magnetic cartridge.
For the foregoing reasons, we believe that the availability of magnetic cartridges as a transmission medium is of little utility to the filing community and can be eliminated without inconvenience to filers. Because Form ET serves only to provide information relating to filings made by magnetic cartridge, we believe that Form ET also should be eliminated.
A survey of the websites of about 20 issuers that already are posting information voluntarily with respect to Section 16 filings has provided a preview of techniques that appear to be feasible and useful for website posting. It should be noted that what is feasible for larger companies in a position to provide voluntary early compliance may not necessarily be practicable within a one-business day deadline for companies that do not have the resources to establish and maintain well-developed investor relations domains on their websites.
In order for website posting to provide the speedy access to Section 16(a) reports evidently contemplated by the Act, the information needs to be easy to find. The sites we visited that provided investor information all used similar paths to navigate from the home page to the Section 16 filings. A typical pattern is as follows: About the Company > Investor Relations > SEC Filings > Section 16 Reports. Six of the companies began with a link "About the Company" on the home page, while the remainder had a direct link to "Investor Relations" on the home page. For most companies, the Section 16 information was accessed in three or fewer clicks. We believe this pattern is likely to be duplicated many times when the number of companies posting the information grows. Accordingly, we feel that the standard set forth in Note 45 of the Release, which refers to companies that do not normally disseminate investor information through their websites and requires use of a location on the website that the issuer "reasonably believes will facilitate user access to the forms," is an appropriate standard for all issuers that maintain corporate websites.
Manner of Presentation
About one-third of the sites we visited provided copies of the forms through a third-party service using links to all of the issuer's SEC filings. This approach seems relatively economical and offers entirely satisfactory access. A number of the sites we visited provided more information than the filings themselves. Some companies gave this additional information in chart form to synthesize the information. A few companies also made it possible to review all the information with respect to each insider by clicking on that insider's name. The final rules should make it clear that the practice of voluntarily providing explanatory information in these or other formats is permissible so long as the actual forms may also be accessed. It should also be permissible to provide a guide to the Commission's transaction codes used in the forms.
Duration of Posting
We believe the one-year period contemplated by the requirements for hyperlinking that is stipulated in Section II.B. of the Release is an appropriate period for all website posting methods.
The Release indicates in the "Summary" section that the Commission "intend[s] to adopt the amendments to implement the statutory changes as soon as reasonably practicable" before the July 30, 2003 deadline mandated by the Sarbanes-Oxley Act. We believe that the Commission should not make electronic filing mandatory under Section 16 until the last possible date.
Allowing as long a transition period as possible for insiders and those who assist them to become familiar with the new filing system will provide a buffer for dealing with the technological and other difficulties that inevitably will surface, and promote a high level of compliance. A substantial transition period would be particularly beneficial to insiders of small companies, who can be expected to need the maximum amount of time available to prepare for the new system. A long transition period also would allow third party vendors more time to develop products designed to assist insiders in complying with their new electronic filing obligations. Finally, having both an electronic filing system and a paper filing system operate in parallel during the transition period should not present any significant problems, since these two systems have operated side-by-side since 1995 without any apparent problems.
Electronic Filing of Form 144
The Commission mentioned in the Release that it may require Forms 144 to be filed electronically. In light of the prompt reporting of stock sales by Section 16 insiders under the new Section 16 reporting regime, the Commission should consider eliminating the requirement for affiliates to file Form 144 where they already will be reporting the same transaction within two business days on Form 4. The Form 144 largely is redundant with respect to such insiders, and its filing can engender confusion by creating the impression that the insider has sold twice as many shares as have in fact been sold.
* * * * *
We appreciate the opportunity to provide the foregoing comments to the Commission. Members of the Subcommittee on Employee Benefits, Executive Compensation and Section 16 are prepared to meet and discuss the matters addressed in the Release with the Commission and the staff, and to respond to any questions that may arise. Please contact Scott P. Spector at (650) 858-7251 if further information is desired.
Chair, Committee on Federal
Regulation of Securities
Peter J. Romeo, Chair
Alan L. Dye
Sharon J. Hendricks
Keith F. Higgins
J. Sue Morgan
Ronald O. Mueller
Anne G. Plimpton
Drafting Committee (cont.)
Scott P. Spector
Ann Yvonne Walker
cc: William H. Donaldson, Chairman
Cynthia A. Glassman, Commissioner
Harvey J. Goldschmid, Commissioner
Paul S. Atkins, Commissioner
Roel C. Campos, Commissioner
|1|| References in this letter to "we" and "our" mean the Committee.