Citigate Dewe Rogerson
1440 Broadway
16th Floor
New York
NY 10018
Tel 212 688 6840
Fax 212 838 3393
May 10, 2002
Mr. Jonathan G. Katz
Secretary
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
| Re: | Acceleration of Periodic Report Filing Dates and Disclosure Concerning Website Access to Reports File No. S7-08-02 |
Dear Mr. Katz:
We appreciate the opportunity to respond to the Commission's request for written comments relating to the proposed rule changes outlined in the Acceleration of Periodic Report Filing Dates and Disclosure Concerning Website Access to Reports proposed in Release No. 34-45741, File No. S7-08-02 (April 12, 2002).
Citigate Dewe Rogerson ("CDR") regularly provides communications advice, including public and investor relations counsel, to domestic and foreign companies that are reporting companies under U.S. securities laws or may periodically be subject to them. This advisory role informs our comments regarding the proposed rule changes. The comments, however, are solely our own and are not intended to represent the views of any client nor those of any other party that has provided us with information.
As financial communications consultants, we support the Commission's efforts to increase the timeliness of disclosure, improve its transparency, and expand the use of the Internet in the most practicable ways possible to deliver and archive material information.
We are also keenly interested in the reception and comprehension of the information companies release to the public. With this in mind, recent research leads us to believe that adoption of the proposed rule changes for quarterly reporting could cause an unprecedented information overload for America's investing public. Under one easily envisioned scenario, we believe as many as 60% of U.S.-listed companies could issue earnings releases and file their Form 10-Qs within the last 8 days of a 30-day reporting period.
While we think that the current communications delivery infrastructure of paid news wires, free Internet information sites, conference call and webcast providers could provide this information under the accelerated time frame, we believe the resulting overload would be at odds with the Commission's admirable intent of improving the quality of investor communications overall. The potential overload outlined below could disadvantage certain issuers and inhibit the meaningful reception of earnings releases and Forms 10-Q that many of our clients tell us will take substantial effort to prepare. At the end of this comment, we propose a two-stage adoption of a "modified accelerated reporting period" for the Commission's consideration in place of the proposed new rule.
Potential Information Overload
An integral part of our firm's work involves advising companies on the content of quarterly earnings releases and in the design and content of so-called "glossy" annual reports. This comment focuses primarily on the proposed rule as it relates to Form 10-Q. While our firm neither prepares nor files the Forms 10-Q and 10-K, we are heavily involved in preparing the press releases that often form the basis for these filings. These releases typically appear somewhat before or on the same day as a company files its Form 10-Q. They are the market's first indication of quarterly performance. The days on which they appear after the close of the quarter-along with the accompanying conference calls and webcasts-provide a valuable guide to the potential information flow that might exist if the proposed rule were adopted.
To examine this information flow, Corporate Communications Broadcast Network (CCBN), a leading provider in enabling direct communications between public companies and the investment community over the Internet, agreed to provide Citigate Dewe Rogerson with information from its universe of 6,000 companies. CCBN is also a leading provider of earnings-related webcasts, servicing more than 3,000 events in a typical quarter. Given the scope and size of the CCBN universe, we believe its information serves as a valid proxy for the U.S. market as a whole and we treat it as such in this comment.
CCBN provided our firm with the volume of earnings announcements issued over its network during the last three quarters of 2001, that is, April-June, July-August, September-December. We are aware that not every U.S. company is on a January-December fiscal year. But most are. For ease of illustration, we treat the companies reporting below as if they were on a January-December fiscal year.
Based on the CCBN information provided to us, in the last three quarters of 2001:
Under the proposed rule, this last group of companies would need to file its Forms 10-Q (and issue related earnings releases) before Day 30 to be in compliance. Human nature and common sense suggest that if every company in this 27.5% group could, in fact, comply and was subject to the proposed rule, they would nevertheless report earnings and file 10-Qs no sooner than the last 8 days of the proposed 30-day filing period.
Similarly, if the average 34.5% of all companies now reporting results from days 23-30 remained unchanged under the new rules, were also all subject to the rule changes, and also filed their Forms 10-Q in the same period, then our reporting system could find about 62% of its earnings releases being issued and Forms 10-Q being filed in the last 8 days of the reporting period.
We do not believe this is a recipe for improving disclosure to the investing public and creating better overall financial reporting for our capital markets. In fact, investors don't currently process even half of that volume of quarterly earnings releases. According to CCBN, only 29% of the total volume of quarterly earnings releases were issued in the busiest weeks of the second, third, and fourth quarters of 2001.
Potential Disadvantages to Issuers and Constrained Advisory Resources
Prudent human judgment still stands behind most investment decisions, even if it's aided by technological advances. That judgment requires time. Under the scenario above, or something like it, we believe the opportunities for considered judgment could be compromised or some market participants might be forced to make decisions that could disadvantage certain issuers.
We're particularly concerned about the sell-side analyst coverage given to smaller and medium-sized companies. We believe this coverage would be adversely affected by the proposed rule, and might also result in less attention being given to these companies from institutional investors as well.
Information provided to Citigate Dewe Rogerson by Multex, a global provider of investment information and technology solutions for the financial services industry, illustrates another likely problem. Multex tells CDR that it has about 8,100 companies in its coverage universe. Slightly more than 3,700 of them have full-year earnings estimates provided by sell-side analysts. (The remaining 4,400 may have some type of coverage, but no full-year estimates.)
Of the slightly more that 3,700 hundred companies with full-year earnings estimates, some 1,650 companies, or 45%, are covered by 3 or fewer analysts. These analysts, of course, will have to deal with the dramatically compressed volume of quarterly information outlined above. If sell-side analysts face commenting on twice the volume of quarterly earnings releases they now cover in order remain timely with their institutional clients, we suspect a large number of companies could lose or face a reduction in what is now limited coverage. This is most likely to affect small-to-mid-sized companies that can least afford it.
We do not think America's listed companies nor the investing public would be well-served by a reduction in analytical coverage under these circumstances. Indeed, whatever ills may have befallen research analysts in recent years, we need a more objective, vibrant-and transparent-sell-side, not an overtaxed, less active one.
In fact, a related moral hazard might arise. Companies that lose coverage-particularly those in the 45% covered by 3 or fewer analysts-would look to find new sell-side analysts to cover them. But new pressures from an information-overload environment could inadvertently create a moral hazard for issuers to engage in some type of investment banking relationship that might also include research coverage.
In response to some egregious lapses at a few companies, the Commission is calling for greater review and accountability by companies, Boards of Directors, audit committee members and independent auditors in the preparation of filings made with the Commission. For some companies, this also includes a broader MD&A discussion. In the current environment, the audit profession is likely to be exceptionally conservative. Greater review, greater responsibility, a conservative audit profession, and greater information requirements all argue for more time, not less, to file quarterly and annual reports.
We are not experts in the production of internal information to prepare press releases or the information required for Forms 10-Q or 10-K. But an informal survey of Citigate Dewe Rogerson clients revealed that while some of our clients do not believe they will have a problem meeting the deadlines under the proposed rule, many believe it will be difficult to comply. In particular, they cite the internal review, the resources needed to close the books, prepare earnings releases, and to prepare the more extended quarterly filing.
We will let others who are expert in these areas comment on their company's ability to produce the necessary information under the proposed rule.
An Alternative Approach
With an eye towards faster reporting and a focus on the best reception and comprehension of earnings information, Citigate Dewe Rogerson suggests a two-step approach to accelerated reporting.
Over the next two years, we recommend that the Commission take 5 days per year off the current 45-day reporting period for Form 10-Q, and 10 days per year off the current 90-day requirement for filing Form 10-K.
This gradual approach would allow companies, their advisors, their Boards of Directors, audit committees, and the American investing public to adjust to accelerated reporting. We also believe it would insure better information, review and oversight. Most important, we believe it would mitigate an information overload that could potentially choke the system and disadvantage certain issuers.
We also understand the Commission's desire to reduce the interval between the issuance of earnings releases and the filing of the Forms 10-Q and 10-K. If closing that gap is the Commission's highest priority, then it should simply set a limit of calendar days between the issuance of a press release and the filing of Form 10-Q. (We believe, however, that this type of limit would be substantially more complicated for year-end earnings releases and the filing of Form 10-K.) Even if such a limit delayed the filing of earning releases, under Regulation FD companies would still be obligated to inform the market of any expected material changes to previously released public forecasts about their performance.
We appreciate the opportunity to comment on the Release. If the Commission or the staff has any questions concerning this comment, please call me directly at (212) 419-4219.
Sincerely,
John McInerney
Senior Director
Citigate Dewe Rogerson