August 26, 2002 Jonathan G. Katz, Secretary,
Dear Mr. Katz: We are pleased to have this opportunity to submit this letter in response to the Securities and Exchange Commission's request for comments on its proposal to require U.S. public companies to make additional disclosures on Form 8-K and to accelerate the Form 8-K filing date, as contained in Release Nos. 33-8106 and 34-46084 (collectively, the "Proposing Release"). Summary We support the Commission's efforts to provide for additional current disclosures of specified corporate events. While we generally agree with the approach toward meeting this goal by setting forth specific items regarding disclosure, we have a number of general concerns about the Proposing Release as well as specific comments on the individual items requiring disclosures. As a general matter, we are concerned that the sheer number of additional Form 8-K reporting requirements will have several short-term and long-term implications for the capital markets that the Commission has not fully considered. In the short term, the substantially greater number of filings may very well contribute to market volatility. In the long term, the increased volume of filings may be counterproductive as investors will begin to discount the value of an individual filing on Form 8-K. We view the revised filing deadlines as the principal difficulty posed by the Proposing Release. We believe that two business days is not sufficient for many registrants to prepare accurate, complete and meaningful disclosure for many of the items that the Commission proposes be disclosed on Form 8-K. Many of these items involve complicated judgments as to materiality and require preparation of a discussion of management's analysis of the effect of the reportable event on the registrant. Accordingly, we respectfully suggest that the Commission provide for different filing deadlines, segregating the items giving rise to a disclosure obligation into two categories. We recommend that the rule require a registrant to file a Form 8-K within five business days of a reportable event in the first category of items. This category should include only those items that would, by their nature, pose less difficulty to registrants in preparing accurate and complete disclosure of such items in the five-business-day period. The occurrence of an event giving rise to a filing requirement for an item in this category should be relatively objective and should not require difficult materiality judgments. In order to meet the five-business-day deadline, the disclosure required by the items in this category should not require a discussion of management's analysis of the effect of the reportable event on the registrant. The second category of items should include all other items and have a filing deadline of 15 business days from the date of a reportable event. We believe that the implementation of different deadlines would strike an appropriate balance between investors' need for timely information and the appropriate time required to prepare accurate, complete and meaningful disclosures while furthering the Commission's objective of improving the quality of disclosure. We also encourage the Commission to consider the significant liability concerns of registrants in connection with the Form 8-K requirements. Subjective standards of disclosure, numerous specific reporting obligations and short reporting deadlines each heighten the risk that registrant's legitimate assessments of reporting obligations will be subject to an inappropriate risk of hindsight review through civil litigation. We also offer a number of comments on specific aspects of the proposed rules. In particular, we believe that letters of intent and other non-binding agreements should not be included in the definition of "agreement" and should not trigger an obligation to file a Form 8-K. We also believe that the determination of whether to record a restructuring charge or material impairment is most appropriately left to the closing of a financial period and preparation and review of a registrant's quarterly or annual financial statements and therefore should continue to be reported in Forms 10-Q and 10-K. Additionally, given the number of proposed Items and the short time frames in which to prepare the required disclosure, we respectfully suggest that the Commission revise the eligibility requirements for use of "short-form" registration statements under the Securities Act of 1933 (the "Securities Act") to no longer require that Form 8-K filings have been timely filed during the preceding 12 months, but rather require as a precondition to eligibility that the registrant's Form 8-K filings be current at the time the registration statement is filed (as is currently the case for Form S-8). Two Business Day Filing Deadline In light of the proposed departure from purely objective standards applied to a discrete number of items requiring accelerated disclosure, we view the revised filing deadlines as one of the most significant practical difficulties posed by the Proposing Release. Two business days is simply not sufficient for many registrants to identify and evaluate the events potentially giving rise to a Form 8-K filing obligation under the Commission's proposal and to prepare accurate, complete and meaningful disclosure for those items. Many of the items requiring disclosure involve complicated judgments as to materiality and require preparation of a discussion of management's analysis of the effect of the reportable event on the registrant. It will be extremely difficult for many registrants to prepare, review and obtain appropriate input from outside counsel and, if appropriate, outside auditors in a two-business-day period. Under the proposed rule, registrants will have only one business day to learn of a reportable event and prepare and review the required Form 8-K given that the form must be "EDGARized" and filed on the second business day. The careful preparation of an accurate and complete Form 8-K involves a number of potentially time-consuming steps. These may include:
When viewed in light of the practical steps involved in preparing a Form 8-K, a two-business-day filing deadline is in many cases simply inadequate to prepare accurate, complete and meaningful disclosures that are useful to investors. Aside from the practical difficulty in satisfying a two-business-day filing deadline, we believe that in many cases a two-business-day filing deadline will not facilitate the Commission's objective of improving the disclosure made available to the public. The Commission has recognized the tendency of registrants to produce boilerplate-type responses to required disclosure items and has warned that such responses will not be acceptable. Preparation of adequate disclosure necessarily entails that registrants take the time to carefully analyze and prepare the required disclosures. Despite the Commission's warnings otherwise, it is likely that many registrants that are forced to meet a two-business-day filing deadline will resort to standardized boilerplate disclosures in order to avoid the consequences of a late filing, which include the 12-month loss of eligibility to use Forms S-2 or S-3 for a short-form registration of securities. The Commission also expects companies to respond with specificity to each disclosure item, and in most cases to provide a discussion of management's analysis of the effect of the reportable event on the registrant. In addition, the Commission encourages registrants to provide quantitative information whenever possible. We respectfully suggest that the more important objective of improving the quality of disclosure would be better served by providing management with more than two business days to prepare certain disclosures required by the Proposing Release. To address the concerns discussed above, we respectfully suggest that the Commission provide for different filing deadlines, segregating the items giving rise to a disclosure obligation into categories that appropriately balance the benefits to investors from more rapid disclosures with the difficulty of preparing such disclosures as well as the potential harm from premature or inaccurate disclosures. We believe that the implementation of different deadlines would reflect an appropriate balance between investors' need for timely information and the burden placed on registrants to provide such information while furthering the Commission's objective of improving the quality of disclosure. We recommend that the rule require a registrant to file a Form 8-K within five business days of a reportable event for the first category of items. This category would include only those items that, by their nature, involve relatively straightforward, objective judgments by companies and pose less difficulty to companies in preparing accurate and complete disclosure within the five-business-day period. The occurrence of an event giving rise to a filing requirement for an item in this category should be relatively objective and should not require difficult materiality judgments. In order to enable registrants to meet the five-business-day deadline, the disclosure required by the items in this category should not require a discussion of management's analysis of the effect of the reportable event on the registrant. Based on the items proposed in the Proposing Release, we believe that the proposed items that should be included in the first category are:
We believe that the second category of items should include all other items. These items are, in our view, more likely to require judgments as to materiality and significant efforts by management to prepare accurate and complete disclosure in keeping with the Commission's desire that such disclosure not be boilerplate and include meaningful analysis. We recommend that this second category of items have a filing deadline of 15 business days from the date of a reportable event. We believe that this approach would strike a meaningful balance between investors' need for timely information and the time needed by companies to prepare accurate, complete and meaningful disclosures. This period will also facilitate the adoption and implementation by registrants of meaningful processes to identify, evaluate and analyze the occurrence and anticipated effects of developments that will be reported in a Form 8-K and craft appropriate disclosures to communicate those effects. Comments on Specific Proposed Items
Paragraph one of the Instruction to proposed Item 1.01 provides that an "agreement" means:
We believe that letters of intent and other non-binding agreements and similar documents, such as term sheets, should not be included in the definition of "agreement" and should not trigger an obligation to file a Form 8-K. In our experience, parties to a proposed transaction often engage in a series of negotiations in an effort to reach agreement on certain fundamental business terms of a proposed transaction prior to negotiating definitive agreements. In the course of negotiations, the parties often exchange preliminary documents setting forth the outlines of their discussions as an important aid to the negotiation process. These documents are frequently referred to by the parties as terms sheets or letters of intent and are sometimes signed or initialed by one or more of the parties to the negotiations as a step in the process of ultimately completing an agreement. In many cases, these documents expressly state that no obligations or commitments arise from the execution thereof, except perhaps for limited obligations relating to the negotiation process such as those that relate to confidentiality, exclusive negotiations, allocation of costs and expenses incurred in connection with the negotiation process and other similar provisions. Once parties negotiating a possible transaction complete a terms sheet, letter of intent or other non-binding agreement, the parties will usually engage in a series of negotiations over the terms of definitive agreements. The final definitive agreements will often vary significantly from the preliminary documents because of the renegotiation of various terms and the inclusion of provisions that were not set forth in the preliminary documents. In many cases, the parties will also perform due diligence during this period. As a result of the process of negotiating definitive agreements and performing due diligence, many parties ultimately decide not to proceed with the transaction that was the subject of the letter of intent or non-binding agreement and consequently never execute a definitive agreement. We believe that it would be inappropriate to require registrants to report the preparation of letters of intent and other non-binding agreements on Form 8-K. In our view, a rule requiring such disclosure may require registrants to make difficult judgments as to which documents fall within the definition (for example, what would be the basis for concluding that an unsigned "Outline of Anticipated Terms" would not require disclosure but a document styled as a non-binding "letter of intent" would). More importantly, we believe that the proposed disclosures would likely result in many registrants deciding not to document preliminary discussions and negotiations relating to possible business transactions or not pursue potential transactions. The former would significantly hamper the negotiation process and the ability to complete important business transactions, which will ultimately harm commerce. Although we recognize that the Commission has stated that it does not intend to change the current law as to when disclosure of negotiations is required, we believe that the breadth of the proposed definition of the term "agreement" needlessly introduces uncertainty to this area. For these reasons, we respectfully suggest that the Commission clarify the instruction to proposed Item 1.01 to provide that letters of intent and other non-binding agreements are not "agreements" for purposes of this proposed Item. As to the types of business transactions for which "material" agreements would require an accelerated filing on Form 8-K, we understand the Commission's aim to be to accelerate reporting of these agreements rather than to expand the category of agreements required to be filed under existing requirements. As such, we suggest that the Commission clarify that the agreements required to be disclosed under proposed Item 1.01 represent only those that would be required to be filed in a registrant's Annual Report on Form 10-K pursuant to Item 601(b)(10) of Regulation S-K. We believe that this clarification will enhance compliance with the proposed Item by reducing confusion associated with having inconsistent standards and by avoiding new interpretive issues. As discussed above, it can take a significant amount of time to EDGARize material agreements and to review the final EDGAR proof to ensure that the EDGARization process was successfully completed. Moreover, these agreements often are subject to confidentiality obligations or include commercially sensitive information. The Commission's rulemaking should account for the practical requirements for evaluating and preparing a confidential treatment request within the pre-filing period. Given these practical limitations and that proposed Item 1.01 requires a description of the material terms of the material agreement, we suggest that registrants be permitted to file the material agreements that are the subject of the Form 8-K disclosure as exhibits to the registrant's next Form 10-Q or 10-K. Proposed Item 1.01 would require disclosure of business combination agreements and other agreements that relate to extraordinary corporate transactions that are material to the registrant and not made in the ordinary course of business. Registrants may also be required to make separate filings under Rule 165 under the Securities Act and Rule 14d-2(b) or Rule 14a-12 under the Securities Exchange Act of 1934 (the "Exchange Act"). To simplify filing obligations and avoid the need to make duplicative filings, we support the proposal suggested in the Proposing Release that Form 8-K satisfy other filing obligations including boxes on the cover page so that the filer may indicate that the filing of the Form 8-K also satisfies the filing obligation under Rule 165, Rule 14d-2(b) and/or Rule 14a-12.
Proposed Item 1.02 would require registrants to disclose the termination of a material agreement not made in the ordinary course of business if the termination of the agreement is material to the registrant. This would include disclosure of the termination of an agreement that terminates in accordance with its terms, such as after a period of months or years, even if the termination provisions of such agreement have been previously disclosed in one of the registrant's periodic reports. If such disclosures were required, the burden on registrants to review every agreement that terminates in accordance with its terms and to determine its materiality at the time of such termination will be severe. Registrants would be required to inventory substantially all of their existing and future agreements to determine whether or not such agreements were made outside the ordinary course of the registrant's business and, if so, to maintain a calendar of the termination dates of such agreements. Each time such an agreement terminates in accordance with its terms registrants would be required to determine whether or not it was a material agreement and whether the termination of the agreement is material to the registrant at the time of termination. We respectfully suggest that the burden that this would place on registrants outweighs the benefit of such disclosure to investors. Accordingly, we suggest that proposed Item 1.02 be revised such that registrants are not required to disclose the termination of agreements that terminate in accordance with their terms. If the Commission nevertheless decides to require disclosure of the termination of agreements in accordance with their terms, we respectfully suggest that such disclosure only be required if (i) the registrant is substantially dependent on the agreement and (ii) the registrant has not previously disclosed the term of the agreement in one of its reports or has not filed the agreement as an exhibit to one of its reports. The Proposing Release would in several circumstances accelerate disclosure of termination "events" in a manner that would potentially prejudice registrants. The first of these is the proposal to require a Form 8-K filing by a company that receives a termination notice by another party to the relevant contract. In many cases, termination notices may simply be a step in a process of renegotiating the terms of an agreement upon its normal termination; in other cases a requirement by one party to file a Form 8-K will subject it to economic harm because the other party may use the implicit threat of termination as a means of extracting favorable terms in negotiation. The second of these is the proposed requirement for disclosure when the registrant itself decides to terminate. In light of the registrant's implicit determination that termination is in its best interests, the public purpose served by any disclosure obligation in this case is far from clear, but in any event, the subjective nature of the "decides to terminate" triggering event fails to recognize either the realities of the corporate decision-making process or the risks posed to registrants by those who would second-guess the timing of the required filing.
We have significant concerns about whether a workable Form 8-K disclosure obligation may be structured around the termination or reduction in business relationships with a customer. Reductions in the volume of business transactions may occur for a variety of reasons, many of which are either not directly attributable to the registrant or, in fact, do not even represent an adverse development for the registrant. Inventory levels, seasonal buying patterns, changing buying and distribution patterns and other factors may affect sales volumes to a particular customer. Moreover, many of these factors may not readily be recognized by management in assessing the reasons for a reduction in business volume attributable to a particular customer. As for contractual terminations, the threat of termination or reduction by a customer may place a registrant at a severe competitive disadvantage in negotiating contractual terms with, or even collecting receivables from, a customer. Accordingly, we respectfully suggest that proposed Item 1.03 not be adopted. If the Commission proceeds with the proposed Item 1.03, we believe that the Commission should harmonize proposed Item 1.03 with the requirements of Item 101(c)(vii) of Regulation S-K, which requires disclosure if sales to a customer are made in an aggregate amount equal to 10% or more of the registrant's consolidated revenues and the loss of such customer would have a material adverse effect on the registrant and its subsidiaries taken as a whole. Accordingly, we respectfully suggest that proposed Item 1.03 be revised to require disclosure only if the loss of the customer would have a material adverse effect on the registrant and its subsidiaries taken as a whole. We would also suggest that the Commission clarify that Item 1.03 requires disclosure only if the amount of the loss of revenues in the current fiscal year to the registrant from the termination or reduction of the scope of a business relationship with the registrant represents an amount equal to 10% or more of the registrant's consolidated revenues using the most recently completed fiscal year. In other words, the amount of the loss of revenues should be the loss in the current fiscal year as opposed to the loss of estimated revenues that could have been derived in all future periods. To the extent that future revenues attributable to the customer have been forecast, current obligations to update should be sufficient to require disclosure required by investors.
Proposed Item 2.01 would carry forward the existing requirements of Item 2 of Form 8-K. We suggest that this proposed Item be harmonized with proposed Item 1.01 such that registrants are only required to disclose the completion of an acquisition or disposition of assets if such transaction was previously reported under proposed Item 1.01. We believe that this approach will lead to more understandable disclosure for investors. We also have several specific comments on the text of proposed Item 2.01. First, in clause (c) of the proposed Item, we suggest that the Commission require disclosure of "the formula or principle followed in determining the amount of . . . consideration" only in cases where there is a material relationship between the parties to the transaction of the sort referred to in clause (d). Where the parties are not affiliated, this disclosure should not be required as disclosure of the "nature of amount of consideration" should be sufficient. Registrants may sometimes elect to explain the pricing methodology of a transaction to persuade the market of its merits, but many registrants prefer not to describe the underlying pricing formula because of competitive reasons as well as the possibility that the parties to the transaction used different valuation methodologies in arriving at the agreed price. We do not believe the requirement in existing Item 2(a), to disclose "the principle followed" in determining the consideration, has typically generated meaningful disclosure, and we would not carry it forward. Second, in clause (e) of the proposed Item, the language should be clarified (presumably, "a description of the transaction" is meant to refer to the financing transaction), and the requirement to disclose funding sources should be limited. Because proposed Item 2.01 relates to completed transactions, the registrant will have already obtained the funding. Unless the funding source was a party to the acquisition or disposition, or an affiliate of one of those parties, its identity should not be material to investors after completion of the transaction. Moreover, if funding was obtained from an unregistered offering of securities (for example, in the "Rule 144A market"), a disclosure naming the underwriters would arguably constitute a "general solicitation" that could preclude the underwriters from completing the sale of any unsold allotments. Accordingly, we suggest that the Commission delete from clause (e) any requirement to name funding sources, other than funding sources that are parties to the transaction or affiliates of such parties. Third, the definition of "disposition" in instruction 2 to the proposed Item, includes a "mortgage" or a "hypothecation of assets". We agree that a mortgage can be used by the mortgagor to divest any substantive economic interest it has in an asset. More commonly, however, mortgages are used to provide security interests in routine financings, where the borrower retains substantive economic ownership and use of the asset. Proposed Item 2.03 may well require disclosure of such arrangements in the context of describing "direct financial obligations". We believe the Commission should clarify, however, that proposed Item 2.01 is not intended to cover such routine financing arrangements. Accordingly, the Commission should clarify instruction to include only those mortgages that are intended to result in a disposition of the asset.
Proposed Item 2.03 would impose significant new disclosure obligations on registrants when they enter into a transaction or agreement that creates a material direct or contingent financial obligation. As an initial matter, these two categories of obligations raise fundamentally different disclosure concerns and we believe they should not be treated together in a single combined item. We believe that a qualitative materiality standard is appropriate for purposes of determining whether to disclose a transaction or agreement that creates a direct financial obligation. Many registrants routinely enter into transactions and agreements that create direct financial obligations. In order to ensure compliance with proposed Item 2.03, management will need to analyze each transaction to determine whether or not such transaction creates a material financial obligation. In order to assist management in making materiality judgments on a transaction by transaction basis in a relatively short timeframe, we suggest that the Commission include an instruction to proposed Item 2.03 that provides registrants with guidance in making this decision. We suggest that the instruction provide that a transaction or agreement that creates a direct financial obligation that constitutes less than 5% of the total assets of the registrant and its subsidiaries should not be considered material for purposes of this proposed item and therefore disclosure would not be required. We believe that the disclosure required by this proposed Item should be limited to direct financial obligations. Registrants are already required to record liabilities in their financial statements for contingencies that are probable and reasonably estimable and must make footnote disclosure for material possible contingencies (and probable but non-estimable contingencies). We believe that the assessment of contingencies is properly made in connection with the closing of a financial period and preparation and review of a registrant's quarterly or annual financial statements. If additional disclosure of contingent financial obligations is to be required, we recommend that it be required in the context of Form 10-Q and 10-K disclosure. Accordingly, we suggest that the Commission limit the disclosure required by this proposed Item to direct financial obligations. In the event that the Commission nevertheless decides to require disclosure of contingent financial obligations under this proposed Item, we have several additional comments. While we are very concerned about the subjectivity involved in making the required filing assessment, we believe that the qualitative materiality standard is appropriate for purposes of determining whether to disclose a transaction or agreement that creates a contingent financial obligation. The significance of contingent financial obligations necessarily depends on the probability of the obligation being triggered, as well as the dollar size if triggered. In order to assist management in making materiality judgments on a transaction-by-transaction basis in a relatively short timeframe, we suggest that the Commission include an instruction to proposed Item 2.03 that provides registrants with guidance in making this decision. We suggest that the instruction provide that a transaction or agreement that creates a contingent financial obligation that constitutes less than 10% of the total assets of the registrant and its subsidiaries should not be considered material for purposes of this proposed item and therefore disclosure would not be required. We believe that the scope of the direct or contingent financial obligations that would require disclosure is too broad and should be narrowed. We have several suggestions in this respect. First, registrants should not be required to report sales of securities that are sold in SEC-registered transactions or borrowings under lines of credit or similar commitments that have been previously reported. Second, we would clarify Instruction 4 to the proposed Item to make it clear that a registrant is not required to report any borrowings in the commercial paper market. Similarly, registrants should not be required to report standby commitments arranged in connection with borrowings in the commercial paper market. Third, a registrant should not be required to disclose the incurrence of a new direct financial obligation if the registrant uses or intends to use the proceeds received from such financial obligation to repay an existing financial obligation where there is no material effect on the amount of the registrant's financial obligations as a result of such transaction after giving effect to the repayment. Similarly, disclosure should not be required when a registrant incurs a new contingent financial obligation that replaces an existing contingent financial obligation and the result of which there is no material change in the amount of the registrant's contingent financial obligations. Clause (c) of proposed Item 2.03 would also require disclosure of underwriters and underwriting compensation. Although this information may be considered material to investors purchasing the particular direct financial obligations, the information is likely not material to an understanding of the registrant or its financial condition or results of operations and should not be included in a Form 8-K that is a disclosure aimed at the investing public rather than at particular investors. In addition, requiring registrants to identify underwriters on Form 8-K could create a significant problem for the "Rule 144A market". Disclosure of an underwritten offering in that market, which would be required within two business days of pricing under the proposed Item, would arguably constitute a "general solicitation" that could preclude underwriters from completing the sale of any unsold allotments. Accordingly, we suggest deleting clause (c) of this proposed Item. We suggest that the definition of "contingent financial obligation" be revised by deleting the last clause - "and all other obligations that exist or may arise under an agreement" - which would encompass literally any contractual obligation of any nature whatsoever. We also suggest that the definition of "keepwell agreement" be clarified to make it clear that it is limited to arrangements where the "provision of funds or property" is for the purpose of supporting or enhancing the recipient's ability to meet its obligations; as proposed, the term would encompass, for example, a contract for the sale of goods at fair value.
We agree that disclosure of the occurrence of an event of acceleration or similar event in respect of a direct or contingent financial obligation should be based upon a qualitative materiality standard. Our comments on the definitions of "contingent financial obligations" and "keepwell agreement", noted above in respect of proposed Item 2.03, apply to Item 2.04 as well. We also agree that Item 3 of Form 10-Q should be deleted if proposed Item 2.04 is adopted.
Proposed Item 2.05 would require a registrant to disclose when its board of directors or an authorized officer definitively commits the registrant to a plan to terminate or exit an activity under which the registrant will incur material write-offs or restructuring charges. We believe that singling out write-offs and restructuring charges (as well as impairment charges under proposed Item 2.06) as financial events that require disclosure on Form 8-K is arbitrary and not particularly helpful to investors when disclosed in isolation. Such events are, in our view, no more significant than any other financial event that has a material effect on a registrant's income or expense. We believe that is more appropriate to disclose the occurrence of these events in the context of a Form 10-Q or 10-K where investors will have the benefit of a complete management's discussion and analysis of the financial results for the entire period. We also believe that the determination of whether to record a write-off or restructuring charge resulting from the exit of an activity is typically made in connection with the closing of a financial period and preparation and review of a registrant's quarterly or annual financial statements. This determination is inherently complex and requires management to make difficult judgments as to the appropriate amount that the registrant should record as a write-off or restructuring charge. This determination can take significant time and often involves discussions between management and the registrant's outside auditors. Accordingly, we respectfully suggest that the Commission delete this proposed Item and that registrants continue to report write-offs and restructuring charges resulting from exit activities in financial statements included in Forms 10-Q and 10-K. This will, among other things, enable the proposed charge to be subject to an auditor's review or audit conducted in connection with the relevant report containing financial statements. If the Commission nevertheless decides to adopt this proposed Item, we have several comments. First, we believe that substantial room for interpretation often exists as to when a company "definitively commits" to terminate or exit an activity, especially when the process leading up to implementation of such a course of action is subject to varying factors evaluated by management as to whether to terminate or exit the activity or management is considering a range of alternatives. We also believe that registrants should be afforded more than two business days to coordinate disclosure of decisions to terminate or exit activities with the many communities that are effected by such a decision, including the registrant's investors, employees and customers as well as State and local community officials. Accordingly, we suggest that the Commission require disclosure under this proposed item only when a registrant takes significant steps to implement a decision to terminate or exit an activity as opposed to when such a decision is made. We understand that registrants will sometimes seek to sell a particular business, or will seek equity or debt financing from third parties for such business, prior to or as alternatives to terminating or exiting the business. In some cases a registrant may decide that it would be appropriate for the registrant to terminate or exit the activity if it is not successful in selling the business on favorable terms or is unable to obtain equity or debt financing from third parties on terms it deems acceptable. Often registrants undertake a "dual track" approach, which could be construed as a commitment to terminate or exit a business, prior to actually implementing a decision. Disclosure of the registrant's plans in this regard, particularly disclosure of anticipated write-offs, could significantly hamper the registrant's negotiating position and the terms upon which the business could be sold or the terms of the financing. Accordingly, we suggest that disclosure not be required under this proposed Item if the registrant is in negotiations to sell the related business or obtain financing. We agree that a qualitative materiality standard is appropriate for purposes of determining whether to disclose a write-off or restructuring charge. In order to assist management in making materiality judgments, we suggest that the Commission include an instruction to proposed Item 2.05 that provides registrants with guidance in making this decision. We suggest that the instruction provide that a write-off or restructuring charge that constitutes less than 10% of the registrant's consolidated revenues using the most recently completed fiscal year should not be considered material for purposes of this proposed item and therefore disclosure would not be required.
We believe that the determination of whether or not an asset is impaired is typically made in connection with the closing of a financial period and preparation and review of a registrant's quarterly or annual financial statements. This determination is inherently complex and requires management to make difficult judgments as to the appropriate amount that the registrant should record as an impairment charge. This determination can take significant time and often involves discussions between management and the registrant's outside auditors. Accordingly, we respectfully suggest that the Commission delete this proposed Item and that registrants continue to report asset impairment charges in financial statements included in Forms 10-Q and 10-K. If the Commission nevertheless decides to adopt this proposed Item, we have several comments. First, the impairment of an asset may arise gradually, over time, and be subject to considerable uncertainty. The point when management "concludes" that an asset is impaired will often be highly subjective, particularly where the possibility of an impairment has been considered over a period of time. Accordingly, we respectfully suggest that the triggering event for this proposed item should occur when the registrant actually records a material charge for impairment to one or more of its assets. This would enable the registrant to disclose the actual amount of the impairment charge. Second, we agree that a qualitative materiality standard is appropriate for purposes of determining whether to disclose an impairment charge. In order to assist management in making materiality judgments, we suggest that the Commission include an instruction to proposed Item 2.06 that provides registrants with guidance in making this decision. Finally, we suggest that the instruction provide that an impairment charge that constitutes less than 10% of the registrant's consolidated revenues using the most recently completed fiscal year should not be considered material for purposes of this proposed item and therefore disclosure would not be required.
The Proposing Release states that rating agencies typically disclose rating changes publicly via press release at the same time or shortly after they notify affected companies of the changes. Press releases that mention the name of a registrant, including those issued by third parties such as rating agencies, are widely available to investors without charge on a number of different websites and may easily be accessed by performing a search using the name or trading symbol of the registrant. Given the widespread availability of press releases issued by rating agencies, we respectfully suggest that proposed Item 3.01 not be adopted. In the event that the Commission decides to adopt proposed Item 3.01, we have several specific comments on this proposed Item. First, the proposed definition of the term "rating agency" could be read to include a significant number of entities, including entities that are not widely accepted by users of securities ratings. For example, it could be possible for a securities analyst that primarily engages in the issuance of research reports on debt securities to be a rating agency for purposes of this definition. We do not believe that is the intent of the Commission. We believe that only those rating organizations that are widely accepted in the United States as issuers of credible and reliable ratings should be considered rating agencies for purposes of this proposed item (e.g., Standard and Poor's Corporation, Moody's Investors Service, Inc. and Fitch Investors Service, Inc.). The term "nationally recognized statistical rating organization" has been used by the Commission in several regulations issued pursuant to the Securities Act, the Exchange Act and the Investment Company Act of 1940, and has been used by Congress in the Exchange Act. Accordingly, we suggest that the proposed Item use the term "nationally recognized statistical rating organization" rather than the term "rating agency". We believe that it would be inappropriate to use a different term in the context of the proposed item. Second, there is a possibility that there could be confusion as to when a registrant has been notified of a decision by a rating agency to change or withdraw a credit rating. In our experience, a communication from a rating agency, which may be construed to be a "notice" under the proposed Item, may commence a process in which the registrant and the rating agency discuss the rating agency's preliminary determination that the existing rating should be changed or withdrawn. Accordingly, we respectfully suggest that the event that triggers the disclosure obligation under this proposed item should be the public announcement by the rating agency of its decision. Finally, the Commission should clarify further what constitutes providing information to a rating agency for purposes of the proposed Item. We suggest that the instructions to this proposed Item clarify that a registrant does not provide information to a rating agency if it simply provides copies of documents that are publicly available from the registrant (e.g., press releases, presentations made available to the public and all documents filed with or furnished to the Commission). In addition, the instructions should clarify that attendance by a representative of a rating agency at an investor conference or the like does not constitute providing information to a rating agency.
If the Commission decides to adopt proposed Item 3.03, we suggest that the item only require disclosure of a sale of equity securities in a transaction that is not registered if such sale is material to the registrant.
We agree with the Commission's proposal that would require a Form 8-K in the event that a registrant withdraws previously issued financial statements or receives notice from its auditor to the effect that it may no longer rely upon a previously issued audit report. While the importance of this disclosure is self-evident, the sensitivity of the information, as well as the time and effort required to prepare meaningful disclosure must be weighed in determining the time period to be allowed for disclosure. We believe that a single integrated filing containing all appropriate disclosures and issued at an appropriate time rather than the multi-step disclosure contemplated by the Proposing Release would be in the best interests of investors.
Registrants should have the opportunity to plan appropriately for succession, including the ability to conduct an executive search, prior to publicly announcing that an officer has resigned or been terminated. In addition, officers that resign to pursue other employment or interests should have the opportunity to decide when it is appropriate to publicly announce the officer's resignation. Accordingly, we respectfully suggest that the triggering event for proposed Item 5.02(b) be the public announcement by the registrant or the officer of the resignation or termination of the officer. Proposed Item 5.02(b)(2) would require disclosure of the reasons for the resignation or termination of certain officers. As the Commission can appreciate, there can be a wide range of reasons why an officer resigns or is terminated. These reasons can include performance related issues as well as personal issues, such as an officer's illness or the illness of one of the officer's family members. In some cases the required disclosure could needlessly invade the privacy of the officer and her family or damage the reputation of departing executives, in each case without providing any meaningful benefit to investors. We believe that it would be inappropriate to require registrants to disclose these reasons, particularly in disclosure that requires candor given that such disclosure subjects the registrant to liability under the federal securities laws. In addition, in some cases the registrant and officer may not agree on the underlying reasons for the officers resignation or termination or the description of such reasons in the registrant's Form 8-K. Such disagreements could result in defamation claims and the like by the former officer against the registrant. Accordingly, this item should not require disclosure of the reasons for the resignation or termination of an officer.
We believe that the Commission should delete this proposed Item in light of the requirements of Section 306 of the Sarbanes-Oxley Act of 2002.
In order to be eligible to file Securities Act registration statements on "short-forms" (e.g., Forms S-2 and S-3), registrants must have filed in a timely manner all reports (including reports on Form 8-K and periodic reports on Forms 10-Q and 10-K) required to be filed during the 12 calendar months immediately preceding the filing of the short form registration statement. Although most registrants will seek to comply with the Commission's requirements, we believe that it is inevitable that there will be good faith inadvertent late filings on Form 8-K given the sheer number of proposed Items and the short time frames in which to prepare the required disclosure. We believe that registrants should be eligible to use short-form registration statements so long as all required Form 8-Ks are on file before the registrant files a short-form registration statement. Accordingly, we suggest that the Commission revise the eligibility requirements for use of short-form registration statements to no longer require that Form 8-K filings have been timely filed during the preceding 12 months, but rather require as a precondition to eligibility that the registrant's Form 8-K filings be current at the time the registration statement is filed (as is currently the case for Form S-8). In the event that the Commission decides not to modify the eligibility requirements, we respectfully suggest that the Commission expand the proposed safe harbor provision to provide that registrants' eligibility to file Securities Act registration statements on short-forms will not be affected by a late Form 8-K filing if the conditions of the safe harbor are satisfied. We also suggest that the safe harbor be expanded to provide that a registrant's current reporting status under Rule 144(c) of the Securities Act will not be affected by a late Form 8-K filing if the conditions of the safe harbor are satisfied. Effectiveness of Rules If the Commission adopts final rules requiring these additional Form 8-K disclosures, we suggest effectiveness of those rules be delayed for at least 180 days, while encouraging earlier compliance as a best practice during this period. A transition time of 60 days will be insufficient for many companies to put in place the internal procedures necessary to comply with the expanded and accelerated Form 8-K disclosures that have been proposed particularly in light of the numerous enhancements to corporate governance and disclosure practices that will be required as a result of the Sarbanes-Oxley Act of 2002 and pending amendments to the New York Stock Exchange and Nasdaq listing requirements. * * * We appreciate this opportunity to comment on the Commission's proposal, and would be happy to discuss any questions the Commission or its staff may have with respect to this letter. Any such questions may be directed to John T. Bostelman (212-558-3840) in our New York office or to Scott D. Miller (650-461-5620) or William S. Anderson (650-461-5652) in our Palo Alto office.
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