From: Klafter, Cary [cary.klafter@intel.com] Sent: Monday, June 24, 2002 2:51 PM To: 'rule-comments@sec.gov' Subject: File No. S7-09-02 -- Release No. 33-8090; 34-45742 June 24, 2002 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 C/o rule-comments@sec.gov Attn: Jonathan J. Katz, Secretary Re: File No. S7-09-02 -- Release No. 33-8090; 34-45742 Form 8-K Disclosure of Certain Management Transactions Dear Mr. Katz: Intel Corporation is pleased to submit this letter setting forth its comments on Securities and Exchange Commission ("SEC" or "Commission") Release No. 33-8090 and 34-45742. That Release concerns proposals to require some public companies to file current reports on Form 8-K describing directors' and executive officers' transactions in company equity securities, directors' and executive officers' arrangements for the purchase and sale of company equity securities, and loans of money to a director or executive officer made or guaranteed by the company or an affiliate of the company. Executive Summary Intel supports the Commission's goal of improving the quality and timeliness of disclosure to investors. We believe, however, that the proposals outlined in Release No. 33-8090 are overbroad in that they would inundate the existing disclosure system with a huge volume of irrelevant, immaterial, and largely duplicative filings. In our view, the increased number of filings would overwhelm investors and obscure the key information critical to investor decision-making. Consequently, our recommendations, which are described more fully below, focus on limiting the coverage of the Commission's proposals to those officer and director transactions of greatest significance to investors. We believe this could be accomplished by * Limiting the persons covered by new Item 10 of Form 8-K to the "named executive officers" listed in the company's proxy statement for its most recent annual meeting of stockholders; * Limiting the transactions to be disclosed to only those with an aggregate value exceeding significant thresholds; * Deleting Rule 10b5-1 arrangements, as well as transactions pursuant to such arrangements, from the coverage of proposed Item 10; and * Making corresponding changes to the existing disclosure system, such as electronic filing of Form 144 and eliminating use of Form 5 for deferred reporting of certain management transactions, so that the overall quality and timeliness of disclosure to investors is improved without generating additional filings relating to immaterial events. We believe that the recommendations listed above would substantially improve the quality of disclosure of insider transactions by focusing on prompt disclosure to investors of the most significant events. Should the Commission determine, however, that the coverage of Item 10 should not be scaled back as recommended above, we would recommend that the Commission revise its proposal to require that all transactions, regardless of size, be filed by the third business day of the week following occurrence of the event. Discussion and Analysis I. Use of Form 8-K Should Be Limited to the Most Significant Events Adoption of new Item 10 in its proposed form would create overlapping filing regimes for reporting of transactions by officers and directors. Form 144, Section 16 reports, Item 404(c) of Regulation S-K, and new Item 10 all require disclosure of transactions by officers and directors but have different reporting deadlines. In certain cases, the information required by Item 10 duplicates information contained in other filings with the SEC. Since the thrust of the Commission's Form 8-K proposal is on the timing of disclosure of management transactions rather than the appropriateness of the other regimes as the vehicle for disclosure, we believe that new Item 10 should be limited to those situations where timely dissemination of the information is most critical. We believe this could be accomplished by adopting the following recommendations. Limit Coverage to Named Executive Officers. As proposed, new Form 8-K Item 10 would encompass transactions by all company directors and executive officers. Intel believes, however, that investors would be better served by limiting the persons whose transactions are required to be disclosed to those company officers identified as "named executive officers" in the proxy statement for the company's most recent annual meeting ("covered persons"). As with the rules governing executive compensation disclosure, investors are most interested in transactions in company securities by the company's CEO and the four most highly compensated executive officers. If all officers and directors were required to report their transactions pursuant to Item 10, we believe that the volume of filings that would be generated would obscure the more relevant information on transactions by the named executive officers. For example, 24 individuals have served as directors and/or executive officers of Intel since January 2000. If new Item 10 in its proposed form had been in effect at the beginning of 2000, Intel would have filed over 200 Item 10 Form 8-Ks since that time. By contrast, if the covered persons were limited to the named executive officers for the past three years, approximately 70 filings would have been made since 2000. The steady stream of 8-K filings may overwhelm investors and cause them to discount the information. We also note that information relating to transactions in company securities by officers and directors other than the named executive officers would continue to be disclosed to investors on Form 144 and in Section 16 reports. Furthermore, information relating to loans would continue to be disclosed in the company's proxy statement pursuant to Item 404(c) of Regulation S-K. By limiting application of Item 10 to the CEO and the four most highly compensated officers of the company, the Commission can provide more timely information to investors without generating additional immaterial filings. In the event that the CEO ceased to be employed by the Company, we would recommend that the successor CEO immediately become subject to reporting pursuant to Item 10 of Form 8-K. Further, if one of the other named executive officers ceased to be employed by the Company, we would recommend that the next most highly compensated individual for the preceding fiscal year would become subject to the reporting requirement of Item 10 until the filing of the proxy statement for the next annual meeting of shareholders. Limit Coverage to Transactions Exceeding the Filing Thresholds. By requiring that all transactions by officers and directors, regardless of size or type, be disclosed pursuant to proposed Item 10 of Form 8-K, the Commission's proposal would generate many immaterial and irrelevant filings that would obscure the information of greatest value to investors. We recommend that the Commission revise its proposal by limiting disclosure to only those management transactions having an aggregate value exceeding the specified filing thresholds. As stated above, we believe that these changes to the Commission's proposal would help to reduce the volume of insignificant filings while focusing investor attention on management transactions that may signal a change in view regarding the future prospects of the company. Transactions in Company Equity Securities. In its proposed form, Item 10 would require filings on Form 8-K for all transactions by officers and directors, regardless of size or significance to the investor. As a result, the disclosure system would be overloaded with numerous filings, many of which would be immaterial to the investor. As the Commission notes in its proposing release, however, "[t] he two business day accelerated deadline is intended to provide investors with rapid disclosure of the most significant events [emphasis added]..." In our view, the significance of the information depends to a great extent on the significance to the individual officer or director. Accordingly, we believe that the Commission should revise its proposal to require that only transactions exceeding the greater of $100,000 or 5% of the individual's stockholdings, as measured by the total number of shares reported on the officer or director's most recent Form 4, be disclosed pursuant to Item 10 of Form 8-K. Transactions not exceeding this threshold would continue to be reported pursuant to existing rules. By amending the threshold in this manner, the Commission would ensure timely disclosure of only those transactions of most significance to the investor. In addition, by tying the reporting deadline to the significance of the transaction to the individual officer or director, the Commission would ensure that all issuers are treated equally, regardless of market capitalization. As the Commission stated in its proposing release, "Changes in securities ownership and some management transactions that are disclosed also can provide information regarding management's view of the company's performance and prospects." In our view, a 5% test seems a reasonable standard for determining the point where a given transaction may be perceived as a signal to the market. Furthermore, we believe that in order to determine whether or not a given transaction is a signal to the market, it is necessary to view the significance of the transaction to that individual. Accordingly, we believe that applying the percentage calculation to the officer or director's individual stock holdings is the appropriate method of measuring the significance to the individual. Since officer and director stock holdings are already reported on Section 16 forms, the 5% calculation would not be inordinately cumbersome to issuers and would be easily visible to investors. Loans to Officers and Directors. As in the case of transactions in company equity securities, we believe that the Commission's proposals with respect to disclosure of loans to officers and directors could have the effect of generating numerous filings having little or no significance to investors. We believe that the significance of loan information to the average investor depends largely on the size of the company. Accordingly, we recommend that the Commission revise its proposal to institute a single filing threshold for loan transactions, which would be the lesser of $1,000,000 or 1% of the company's net income for the preceding four quarters as reported in the company's filings with the SEC. Loans with an aggregate value of less than $60,000, which is the established threshold for reporting loans pursuant to Item 404(c) of Regulation S-K, would not be required to be disclosed even if they exceed the filing threshold. Loans not exceeding the filing threshold would not have to be disclosed on Form 8-K. In addition, we would propose that relocation loans secured by home mortgages be exempted from the disclosure requirement; these are typically routine compensatory activities that are unlikely to be of interest to investors. We believe these changes would better facilitate the prompt dissemination of information that might be viewed as material to the investor. Two Business Day Filing Deadline. Intel supports the Commission's goal of providing investors with timely information. We believe, however, that because of the logistics involved in tracking and reporting management transactions in company securities, two business days is not sufficient time for preparation of the Form 8-K. At Intel, employees (including executive officers) are not required to use a specific broker to handle their stock transactions (except in connection with the exercise of stock options). Accordingly, we would be dependent upon either the employee or the broker to provide us with timely information regarding officer transactions. Although procedures exist within Intel to gather this information, those procedures were developed in the context of the timeframe for making Section 16 filings, which also provides sufficient time to review the filing for accuracy. Ideally, any new disclosure requirement regarding officer and director transactions should similarly provide adequate time to ensure that the information contained in the Form 8-K is reviewed for accuracy prior to filing. Given the compressed timeframe for disclosures pursuant to new Item 10, we believe that our existing procedures would be inadequate and would have to be significantly modified in order to ensure our compliance with the rule. In particular, two business days would not provide sufficient time to obtain the information, prepare the filing, and have the filing reviewed for accuracy. This becomes especially difficult if the officer or director is unavailable at the time due to his or her travel schedule or for other reasons. Moreover, the Commission's proposal would involve the additional step of EDGARizing the filing, which is not presently required for Section 16 reports. Intel prepares many of its EDGAR filings in-house, however, we believe that this increases the critical path tasks in the proposed two-day window and we would have to devote substantial additional resources to handle the increased volume of filings that we expect would be generated by proposed Item 10. Furthermore, we believe that a reporting system that bases the 8-K filing deadline on the size of the transaction would be too complicated to administer. Not only would issuers have to track officer and director transactions, they would have to analyze those transactions to determine the appropriate filing deadline for a particular transaction. In addition, the Commission's proposal to aggregate transactions below $10,000 places additional burdens on issuers to monitor the officer or director's transactions to determine if and when the threshold has been exceeded and a filing has been triggered. In our view, the resources we currently utilize in the preparation and filing of Section 16 reports would be inadequate to handle multiple 8-K filings from multiple officers and directors, all with different filing deadlines. Accordingly, in the event the Commission decides not to amend its proposed Item 10 filing thresholds as suggested above, we recommend that the Commission amend its proposal to require Item 10 disclosure to be filed no later than the third business day of the following week, regardless of the size of the transaction. This should provide a window of three to eight business days to complete the filing, depending on the day of the week on which the transaction occurs. In our view, this would give us adequate time to obtain the required information, prepare the filing, review the filing for accuracy, and EDGARize the filing. Delete Rule 10b5-1 Arrangements from Coverage of Item 10. Rule 10b5-1 was adopted in recognition of the fact that there may be situations in which the company's future prospects do not factor into the purchase or sale of securities. For example, the seller of securities may have a need to fund a particular commitment such as a child's college expenses through the ongoing sale of securities. Further, Rule 10b5-1 requires that the arrangement be entered into at a time when the individual is not in possession of material inside information. Consequently, any subsequent transactions effected pursuant to a 10b5-1 plan or arrangement does not reflect the officer or director's view at that time regarding the business or prospects of the company. Accordingly, inclusion of Rule 10b5-1 arrangements within the scope of proposed Item 10 does not further the Commission's stated goal of providing investors with information regarding management's view of the company's performance and prospects. We would note that sales pursuant to Rule 10b5-1 plans are currently reflected on Forms 144 and that the Form's signature block is edited to indicate that the sale was made pursuant to such a plan. We recommend that the Commission amend its proposal to remove Rule 10b5-1 arrangements from the coverage of new Item 10. Notwithstanding our comments in the paragraph above, in the event that the Commission determines that Rule 10b5-1 arrangements are properly within the scope of Item 10, we recommend that the Commission amend its proposal to provide that the filing deadline for disclosure of Rule 10b5-1 arrangements, as well as subsequent sales pursuant to such plans, be increased to 10 business days. Since sales pursuant to these plans bear no correlation to the individual's current views regarding the prospects of the company, we do not feel that accelerated disclosure of these arrangements is warranted. Revise Forms 144 and 5. We believe that the Commission's proposals must be viewed within the totality of the existing disclosure system. Adoption of new Item 10 would create three separate filing regimes with respect to transactions in company equity securities by officers and directors. This would lead to duplicative internal processes and inefficient use of corporate resources, which would significantly increase the costs to issuers. Accordingly, we recommend that the Commission look at additional and coordinated changes to its disclosure system, which would be less costly to issuers and involve less administrative burden, but would still achieve the goals stated in the Commission's proposal. In conjunction with our recommendations to limit the coverage of Item 10 disclosure, we believe that improvements could be made to the existing disclosure system, which would improve the quality and timeliness of information provided to investors without generating additional filings. We recommend that the Commission revise its rules to require electronic filing of Form 144 and limit the use of Form 5 for deferred reporting of certain management transactions. Since Form 144 indicates a present intention of a company affiliate to sell company securities in open market transactions, an electronic filing would serve to immediately disseminate this information to the marketplace. As a result, investors would immediately be aware of potential shifts in the alignment between management's and shareholders' economic interests, and would have access to potentially useful information regarding management's views regarding the company's future performance. Additionally, we would recommend that the Commission consider eliminating the use of Form 5 filings to report certain officer and director transactions. As has been reported in the press, there has been a great deal of criticism recently regarding the ability of officers and directors to defer reporting of certain transactions until the annual Form 5. For example, investors have been highly critical of deferred reporting by officers and directors of sales of company stock to the company. Accordingly, we would recommend that Form 5 be amended so that it would no longer be available to defer reporting of transactions that could be reported on a Form 4 with little or no additional burden on companies or affected individuals. Specifically, we believe that grants of equity securities, including stock options, pursuant to a company plan and sales of company stock to the company by officers and directors should be reported on a Form 4 rather than deferred to the Form 5. In our view, these changes would ensure that information regarding officer and director transactions was rapidly disseminated to the marketplace while limiting the use of Item 10 to the most significant transactions. II. Additional Comments Intel agrees with the Commission's view that Item 10 Form 8-K delinquencies should not affect an issuer's form eligibility or the company's reporting status under Rule 144(c). To do otherwise would be to hold the company's entire filing regime, its access to public capital, and the ability of individuals to use Rule 144, hostage to the Item 10 information to be provided by covered persons and their brokers. In addition, we view the Commission's proposal as representing a significant change in policy in shifting responsibility, and any attendant liability, for reporting transactions by covered persons from the individual to the company. Since the company is dependent on outside sources in many cases to provide the information required to prepare proposed Item 10 of Form 8-K, Intel believes that it would not be appropriate to deem the Item 10 Form 8-K as being "filed" for purposes of Section 18 liability. We believe also that additional amendments should be made to Forms 10-K and 10-Q if new Item 10 is adopted. Currently, companies are required to disclose Form 8-K filings made during the relevant timeframes set forth in Form 10-Q and Form 10-K. In the absence of appropriate amendments to Forms 10-K and 10-Q, companies would be required to include a laundry list of Item 10 disclosures made during the relevant period. We do not believe that inclusion of this information in these reports adds value to investors since the stated purpose behind new Item 10 is to provide timely disclosure of significant transactions by covered persons. Instead, the rules as proposed would add another step to the preparation of quarterly and annual reports at a time when the Commission is proposing to accelerate the filing deadlines for these reports. In light of the administrative burdens involved in compiling this information, and the lack of usefulness of the information in the EDGAR environment, we believe that it would be appropriate for the Commission to exclude Item 10 information from the Form 8-K disclosures required in the Form 10-K and Form 10-Q. We further suggest that the Commission considering a complete deletion of the 8-K list from the Forms 10-K and 10-Q; the availability of 8-Ks on EDGAR has made the quarterly list a patently obsolescent device. * * * We thank you for consideration of our views and we would be pleased to discuss the issues further at your convenience. /s/ Cary Klafter Cary Klafter Director of Corporate Affairs, Legal Department Intel Corporation 2200 Mission College Blvd. Mail stop SC4-203 Santa Clara, CA 95052-8119 dd (408) 765-1215 /s/ Salil R. Virkar Salil R. Virkar Senior Attorney, Corporate Affairs Group (972) 985-7452 _____________________________ Cary Klafter Intel Corporation 408.765.1215 408.653.8050 (fax) 408.219.6959 (cell)