Comments of American Bar Association on S7-43-02

ABA

Defending Liberty
Pursuing Justice

AMERICAN BAR ASSOCIATION

Section of Business Law
750 North Lake Shore Drive
Chicago, Illinois 60611
(312) 988-5588
FAX: (312) 988-5578
email: businesslaw@abanet.org
website: www.abanet.org/buslaw

December 24, 2002

By e-mail: rule-comments @ sec.gov

Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Attention: Jonathan G. Katz, Secretary

Re: Conditions for Use of Non-GAAP Financial Measures - File No. S7-43-02

Ladies and Gentlemen:

We welcome the opportunity to comment on behalf of the Committee on Federal Regulation of Securities and the Committee on Law and Accounting of the American Bar Association's Business Law Section (the "Committees")¹ on Release Nos. 33-8145 and 34-46768 (the "Proposing Release"), which, among other things, proposes disclosure requirements and conditions for use of Non-GAAP financial measures to implement Sec. 401(b) of the Sarbanes-Oxley Act of 2002 and filing with the Commission of certain earnings releases and similar communications.

The comments expressed in this letter represent the views of the Committees 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 Association. 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 Committees.

Summary

We understand the Commission's needs to address disclosure issues related to use of non-GAAP financial measures. We believe, however, that there are certain improvements that can be made in the Commission's proposals in this regard that would simplify compliance and be of benefit to investors without sacrificing the Commission's investor protection goals. We are particularly concerned about the application of this proposal to communications subject to Regulation M-A.

We believe there are two premises, with which we agree, that underlie the Commission's approach to addressing the use of non-GAAP financial measures: (1) to avoid being overly prescriptive regarding company informal communications, such as earnings announcements and other press releases and (2) to codify existing Staff positions regarding use of non-GAAP financial measures in formal SEC filings. We believe application of these premises can help guide the proper resolution of a number of issues raised by the proposals.

While we understand the Commission's reasons for proposing that companies be required to "file," as opposed to "submit," earnings releases and similar communications, we do not believe that the need for such a requirement is as compelling as that for dealing with non-GAAP financial measures. We are concerned that the absence of precision as to when a "public disclosure" is made that is covered by Regulation G and Item 1.04 may mean that the Commission intends these requirements to be applicable simply to oral and telephonic disclosures, which would be extremely burdensome for preparers and, in some instances, could outweigh some of the envisioned benefits and present some difficult compliance problems. This would be particularly true if the Commission does not clearly and succinctly, in understandable language, in the text of the rules, articulate the relationship between the requirement to file earnings releases and similar communications and the Commission's proposals with regard to the use of non-GAAP financial measures in filings with the Commission, the requirements of proposed Regulation G and Regulations FD and M-A and provide relief from the duplications of coverage of the proposed requirement and the requirements of Regulations FD and M-A.

We have summarized below what we believe are our more important comments.

Application to Communications in Connection with Mergers and Acquisitions.

We do not believe that these proposals should apply to communications subject to Rule 165, Rule 14a-12 and Item 1015 of Regulation M-A.

Non-GAAP Financial Measures

Definitions and Clarifications. We believe that the proposed definition of Non-GAAP financial measure could be clarified, as we indicate below, to avoid potential confusion. In addition, we believe that the Commission should add definitions of "person acting on behalf of an issuer" and "public disclosure." In addition, we recommend revisions of some of the proposed prohibitions and clarifications of the applicability of the requirements to foreign private issuers. Without a more precise definition of non-GAAP financial measure, a much narrower definition of who speaks on behalf of issuers, a definition of public disclosure, revisions to the required disclosures and revisions and clarifications of the prohibitions and the applicability of the proposals to foreign private issuers, the proposals will lead to enormous burdens on issuers and not be consistent with the interests of shareholders and could result in inadvertent violations.

Filing Earnings Releases and Similar Communications (Proposed Item 1.04 of Form 8-K)

Definitions and Clarifications. We believe that definitions of the following terms used in proposed Item 1.04 of Form 8-K are necessary to clarify and simplify compliance obligations:

Item 1.04(a)- "any person acting on ...behalf [of the registrant]"
Item 1.04(b)(1)- "within 48 hours of"
Item 1.04(b)(2), (3) and (4)- "the presentation"
Item 1.04(b)- "similar means"

Scope. We believe that the scope of proposed Item 1.04 of Form 8-K is too broad and overly prescriptive, and as such, it would not be "necessary or useful for the protection of investors", as provided in Sec. 409 of the Sarbanes-Oxley Act and section 13(l) of the Securities Exchange Act, which provides for real time issuer disclosure in accordance with Commission rules.

We especially do not believe that these proposals should apply to communications subject to Rule 165, Rule 14a-12 or Items 1015 of Regulation M-A and certain other communications.

Application to foreign private issuers. Proposed Item 1.04 would not apply to foreign private issuers and we do not believe that it would be necessary or useful to apply proposed Item 1.04 to foreign private issuers.

Application to small business issuers. Subject to our comments as to the scope of Item 1.04 and our other comments on this Item, we have no objection to the Commission applying that Item to small business issuers.

Safe harbors and related matters. We believe that the Commission should provide safe harbors from liability for proposed Item 1.04 disclosures.

I. Application to Communications in Connection With Mergers and Acquisitions

We believe that proposed Regulation G and Item 10 of Regulation S-K should not apply to disclosures relating to business combination transactions that are subject to Rule 165 or Rule 14a-12, or to disclosures that are required under Item 1015 of Regulation M-A.

In enacting Rule 165 and amendments to Rule 14a-12 three years ago, the adopting release specifically identified as one of the Commission's goals the promotion of communications with security holders and the markets in the context of business combination transactions to permit the dissemination of more information to security holders on a timely basis, including information about the terms, benefits and risks of a planned extraordinary transaction. The Commission noted that "free communications relating to business combination transactions are in the public interest and consistent with the protection of investors."

We believe that the proposed rules governing disclosure of non-GAAP financial measures would undermine these goals and, contrary to the objectives underlying the adoption of Rule 165 and amendments to Rule 14a-12, the proposed rules would have a potentially chilling effect on the quality and quantity of information that issuers make available to security holders and the markets about business combination transactions.

As noted by the proposing release, disclosures about business combination communications often include statements regarding the potential benefits sought to be obtained by the business combination, such as synergies, valuations, and dividend amounts. Many acquiring companies include in press releases and in other communications relating to such transactions the anticipated pro forma effects of the transaction, including the pro forma impact on EBITDA, cash flow, and numerous other non-GAAP financial measures--all of which measures would be subject to additional disclosures under the proposed rules. These non-GAAP financial measures have become a routine part of press releases and investor/analyst meetings, particularly in transactions involving companies where these pro forma consequences may be viewed as more meaningful to investors and the markets than the pro forma consequences of the transaction on GAAP financial measures. For example, with the application of purchase accounting to business combination transactions and the resulting periodic write-down of impaired assets, including goodwill, the pro forma consequences of a transaction on earnings per share, a GAAP financial measure, may be a much less relevant measure to investors and the markets of the anticipated benefits of a proposed transaction to a company, than the pro forma impact on its EBITDA or cash flow.

Compliance with the proposed rules will undoubtedly require considerable time and effort to prepare the requisite GAAP financial measures and the reconciliation of the disclosed non-GAAP financial measures to the most comparable GAAP financial measure. Management teams will need to work closely with accountants to prepare and review such required disclosures. Unlike a public offerings of securities or the preparation of other annual or periodic filings with the Commission, disclosures pertaining to a business combination transaction will invariably require detailed analysis of the financial statements of two companies. As a practical matter, we believe that it is unrealistic to expect that parties to business combination transactions will be able to prepare the additional disclosures required under the proposed rules in a timeframe consistent with the initial announcement of the transaction. As a result, if the required additional disclosures for non-GAAP financial measures cannot be prepared on a timely basis, the new rules would have the effect of reducing rather than enhancing the quality and quantity of information made available to the market at the important first announcement of the transaction.

In the mergers and acquisitions arena, compliance with the proposed rules will also create serious limitations on the ability of parties to use non-GAAP financial measures following the initial announcement of business combination transactions. Rule 425, Rule 14a-12 and Rule 14d-2(b)(2) all require that specified written communications in connection with business combination transactions be filed with the Commission no later than the date of first use or publication, as applicable. In contested takeover situations, the same day filing requirement, coupled with the required new disclosures, could effectively prevent hostile bidders in tender and exchange offers, and shareholders in proxy fights, from soliciting tenders or soliciting votes on the basis of poor management performance, where that performance is indicated by non-GAAP financial measures. For example, hostile bidders might not be able to wage campaigns (or respond on a real time basis to incumbent management claims) about a company's stock trading performance where the relevant performance criteria relate to non-GAAP financial measures, such as stock price performance as multiple of EBITDA or funds from operations.

In this regard, business combination transactions should be exempted from both proposed Regulation G and Item 10 of Regulation S-K because the limited exemptions from filing non-GAAP financial measures under proposed Regulation G will provide no relief for business combination transactions. While proposed Regulation G would allow issuers using non-GAAP financial measures that are released orally, telephonically, in a webcast or broadcast by similar means, to provide the required accompanying information on the registrant's website, the filing requirements under Rule 425, Rule 14a-12 and Rule 14d-2(b)(2) would effectively require that publicly disseminated information in the context of business combination transactions be filed, therefore becoming subject to the additional disclosure requirements under Item 10 of Regulation S-K. As a result, the limited exemptions available for filing non-GAAP financial measures under Regulation G will be largely unavailable in the mergers and acquisitions arena.

Accordingly, with respect to business combination transactions, where there is no record or evidence of abuses in the use of non-GAAP financial measures, we believe, on balance, that issuers, investors and the markets are better served by timely dissemination of non-GAAP financial measures under the current regime, where such communications remain subject to potential liability under Section 10(b), Section 12(a)(2) and Rule 14a-9, as applicable, than they would be under the proposed rules, where companies unable to prepare the requisite disclosures on a timely basis would have to remain silent with regard to critical non-GAAP financial measures.

Similar concerns also apply to the application of the proposed rules to the required disclosures under Item 1015 of Regulation M-A concerning reports and analyses prepared by financial advisors. In these reports, the investment banks frequently include analyses based upon non-GAAP financial information pertaining not only to the parties to the particular business combination transaction, but also to other companies and other transactions that the advisors deem relevant. These analyses, which include discounted cash flow analyses, public company analyses, and precedent transaction analyses, are generally prepared starting with publicly available GAAP financial information, which the bankers then analyze to estimate non-GAAP financial measures for the relevant companies and transactions. In such instances, neither the parties to the transaction nor the investment banks preparing the reports would be able to prepare the required additional disclosures required under the proposed rules, nor would such additional disclosure be meaningful to security holders or the markets. Accordingly, we believe that proposed Regulation G and Item 10 of Regulation S-K should not apply to required disclosures under Item 1015 of Regulation M-A.

II. Non-GAAP Financial Measures

A. Definitions

We believe that several of the terms used in the proposals relating to non-GAAP financial measures must be clarified to assure compliance and simplify the burdens of compliance.

Non-GAAP financial measure. We suggest the following changes to the Commission's proposed definition of non-GAAP financial measure in order to incorporate the more helpful clarification of the definition that the Commission has set forth in the Proposing Release:
"Person acting on behalf of an issuer" -- This phrase is important both in the prohibition in Section 100(b) from making misleading disclosures of non-GAAP financial measures and in the relief in proposed Section 100(c) for foreign private issuers from the proposed requirement to accompany non-GAAP financial measures with additional disclosure when, among other things, "the information is disclosed or released by or on behalf of the registrant only outside the United States." As such, we suggest that a "person acting on behalf of the issuer" be defined only to include those persons covered by Item 101(c) of Regulation FD. We believe that this would facilitate compliance and avoid inadvertent violations.
"Public disclosure" - Proposed Section 100 of Regulation G requires compliance whenever material information that includes a non-GAAP financial measure is "publicly" disclosed. The language of Note 1 of Section 100 states that public disclosure includes disclosure that is made "orally, telephonically, by webcast or broadcast or by similar means." Since the terms orally and telephonically could be misunderstood, we recommend that the term "public disclosure" be defined as public disclosure by means of a press release or oral communication that is webcast, broadcast or made through another method (or combination of methods) of disclosure that is reasonably designed to provide broad, non-exclusionary distribution of the information to the public. This definition uses some of the terminology in the definition of "public disclosure" in Rule 101(e)(2) of Regulation FD.

B. Scope

Need for exceptions if the term "public disclosure" is not defined as set forth above. If the Commission does not agree with our recommended definition of "public disclosure," we recommend that Regulation G be amended to add exceptions for communications of non-GAAP financial measures to certain recipients of information similar to many of the exceptions contained in Regulation FD, such as non-GAAP financial measures communicated (1) by employees other than senior officials or other persons who regularly communicate with securities professionals or investors to customers, suppliers, etc., (2) to temporary insiders, such as attorneys, accountants and investment bankers, (3) to persons who expressly agree to maintain the confidentiality of the information, and (4) communication to rating agencies that use the information to publish a public rating.
Use of websites. We agree with the Commissions' view that publication on a company's website would be sufficient disclosure under the proposed release. We believe, however, that the Commission should clarify that information on a company's website does not have to specifically indicate that it is disclosed to provide the reconciliation of non-GAAP financial measures reconciliation disclosure, and that the information could be in multiple locations or forms on a company's website. We believe that references to the GAAP information in Form 10-K, Form 10-Q and Form 8-K filings should be sufficient. We also believe a good faith effort to post promptly reconciliation information after disclosure of non-GAAP financial measures should be evident of sufficient compliance with this proposal.

C. Content of Disclosure in Non-SEC Communications

Presentation of most directly comparable financial measure. The proposal to require registrants to accompany the non-GAAP financial measure with a presentation of the most directly comparable financial measure calculated and presented in accordance with GAAP is not necessary as long as the non-GAAP financial measure is reconciled to the most directly comparable financial measure. This reconciliation will provide investors with sufficient and adequate information to understand the non-GAAP financial measure without confusion. We do not believe that it is necessary for a registrant to provide such a reconciliation in a full balance sheet, income statement or cash flow statement in any case.
Explanation of reasons for use of non-GAAP financial measures. Proposed Item 10(e)(1)(i)(C) and (D) would require registrants to explain the reason why it uses the non-GAAP financial measure and why it believes that the presentation of that financial measure provides useful information to investors. While we agree with the Commission's proposal to require additional disclosure beyond that to be required by Regulation G, we believe that there is no substantive difference between (C) and (D) and that (C) could be eliminated, as it is as less clear than (D). In addition, we suggest, for purposes of clarity, that the Commission include in an instruction to proposed Item 10(e)(1)(C) or (D), as revised, its view set forth in footnote 40 of the Proposing Release that security analysts' use of the non-GAAP measure of performance is not itself a satisfactory reason for the issuer to use to explain why the presentation provides useful information. We understand that the Commission expects registrants to explain why it believes that the information is useful, not simply that the information is requested by analysts or others.
Presentation of non-GAAP financial measure. We do not believe that the non-GAAP financial measure needs to be presented in a separate section of a filing. What is important is that the non-GAAP financial measure be accompanied with the reconciliation to the most directly comparable GAAP financial measure so that investors understand the non-GAAP financial measure.
Repetition of previously reported non-GAAP financial measure. The Commission should not include in amended Item 10 a requirement that a previously reported non-GAAP financial measurement be presented in future filings. Such a requirement would require needless repetition.
Overly broad requirement. We believe that the Commission should consider whether it is appropriate to require the additional proposed disclosures when the company is disclosing non-GAAP financial measures that are required to be met in financial covenants included in agreements, such as GAAP measures with certain items included or excluded as the result of negotiations between the parties. A company which, in an SEC filing or informal communication, uses numerical disclosures to demonstrate compliance with such covenants to inform investors would be subject to the proposed requirements for additional disclosure.
Selected financial data and summary financial data. We believe it should be clarified that a company may include in selected financial data and summary financial data non-GAAP financial measures in a filing with the Commission as long as the additional required disclosures are set forth.

D. Prohibitions in SEC Filings

Misleading disclosures. We believe that, in general, the prohibitions set forth in Item 10(e)(1)(ii) articulate the Commission's views as to presentations of non-GAAP financial measures that are not appropriate in SEC filings. We are concerned that identification of some of the prohibited presentations suggests that the Commission believes that they are inherently misleading, and therefore, not acceptable in disclosures subject to Regulation G. Therefore, we suggest that the Commission identify any non-GAAP financial measures that it would consider to be misleading separately from non-GAAP financial measures that are simply not permitted in an SEC filing.
Non-GAAP liquidity measures. We believe that the prohibition of non-GAAP financial measures that excludes charges or liabilities that required or will require cash settlement is too limiting for many companies that are trying to provide more information to investors so that they can evaluate the quality of financial performance. For example, we believe it could be useful for companies to describe cash charges that may have related to a natural disaster, debt issuance costs, unusual one-time contract termination payments, unusual litigation judgments or settlements, one-time gains or losses on asset sales, asset write-offs relating to changes in the strategic plans of a company, etc., that occurred in a particular quarter.
We are concerned that the prohibition set forth in Item 10(e)(1)(ii)(C) is not precise enough. The requirement that a non-recurring, infrequent or unusual item not be "reasonably likely to recur" to treat it as non-recurring is likely to preclude any adjustments for such non-recurring, infrequent or unusual items. Given the comparison of results to prior periods and the focus of the MD&A on the predictive nature of financial statements, perhaps the "reasonably likely" requirement could be modified by reference to a prior period, such as to say that such an item has not occurred during the prior year or two, or by reference to a future time period, such as not reasonably likely to recur within the next year or two.
We believe that, rather than outright prohibitions, the Commission should consider whether disclosure might be more appropriate under these circumstances.
Per share measures. Finally, we believe that the prohibition of non-GAAP per share measures is not necessary as long as the required reconciliation is provided.

E. Application to Foreign Private Issuers

Release of Non-GAAP Measure "Outside" the U.S. The application of Regulation G to foreign private issuers should be clarified to facilitate compliance by foreign private issuers and to limit the applicability of the requirement appropriately. As long as the non-GAAP financial measure is not calculated and presented in such a way that U.S. investors believe that the financial measure is based upon U.S. generally accepted accounting principles, Regulation G should not apply to the disclosure. Therefore, we recommend that Section 100(c) of Regulation G be revised to delete Section 100(c)(3), which does not seem to be necessary as long as the foreign private issuer satisfies Section 100(c)(1) and (2). If the Commission believes that a prohibition relating to the dissemination of the announcement is important, Section 100(c)(3) should be revised to provide that the disclosure must have been made solely in the United States. The mere release of the information worldwide (which would include into the U.S.) should not result in application of Regulation G to the disclosure as long as the disclosure presents non-U.S. GAAP based information.
Reconciliation to U.S. GAAP. Should the Commission determine to apply the provisions of Regulation G to foreign private issuers, we recommend that these issuers only be required to reconcile non-GAAP financial measures to the applicable foreign GAAP, but not to U.S. GAAP as long as the foreign private issuer does not represent the financial measure to be based upon U.S. GAAP.
Grammar Suggestions. We recommend that the Commission amend General Instruction C.(e) of Form 20-F to make it a full sentence. All of the other subparts of General Instruction C, except (c), are complete sentences.

F. Application to Small Business Issuers

We agree with the Commission's proposal to require small business issuers to comply with the proposed rule. Non-GAAP financial measures should be understandable by investors in both small and large companies.

G. Safe Harbors and Related Matters

We recommend that the Commission add to Regulation G its view articulated in Footnote 31 to the Proposing Release that non-compliance with Regulation G will not affect the availability to registrants of the use of the short forms for registration under the Securities Act and the use by stockholders of Rule 144.

III. Filing of Earnings Releases- Item 1.04 of Regulation S-K

Neither Sec. 401(b) nor Sec. 409 of the Sarbanes-Oxley Act compel "filing" of earnings releases and similar communications. Accordingly, while we support the submission of earnings releases on Form 8-K pursuant to item 9 of that form or any successor items, we question whether a "filing" requirement is either "necessary" or "useful" for the protection of investors and the public interest, particularly in view of the acceleration of the period for filing Forms 10-K and 10-Q.

Sec. 409 of Sarbanes-Oxley and section 13(1) of the Exchange Act only require public disclosure of the required information "on a rapid and current basis." Those statutory provisions do not require a "filing" of that disclosure with the Commission. Earnings releases, by their very nature, are "rapid and current" and, if submitted via EDGAR, would be widely and immediately disseminated. This would be seem to satisfy the statutory provisions without the need for a "filing" requirement.

Moreover, we believe that these proposals are overly prescriptive and inconsistent with the Commission's past practices with respect to informal communications.

A. Definitions

If this proposal is adopted, we believe that the terms used in proposed Item 1.04 of Form 8-K discussed below must be clarified to assure compliance and simplify the burdens of compliance.

"Person acting on behalf of". In proposed Item 1.04(a) of Form 8-K, the term "any person acting on ...behalf [of the registrant]" is not defined. In order to facilitate compliance and avoid inadvertent violations of the requirements of Item 1.04, we believe that the term should be defined. We believe that an acceptable definition would be that used in Item 101(c) of Regulation FD, appropriately modified.
"Public Announcement". In proposed Item 104(a) of Form 8-K, the term "any public announcement or release" is not defined. The language of proposed Item 1.04(b)(1) suggests that "oral" or "telephonic" disclosure would constitute a "public announcement or release." We believe that this should be clarified to avoid a scope that is broader than Regulation FD.
"Within 48 hours". In proposed Item 1.04(b)(1), we suggest that the Commission clarify that the "information referred to in that item must be provided within 48 hours "after" the "presentation" referred to in that Item, not before that presentation.
"Presentation". In proposed Items 1.04(b)(2), (3) and (4), we suggest that the Commission make clear that the "presentation" referred to in those Items is the "presentation" referred to in Item 1.04(b)(1).
"Similar Means". In Item 1.04(b), the Commission should clarify whether the phrase or "similar means" modifies only "web cast" or all of the means of communication referred to in that item.

B. Scope

We believe that the scope of proposed Item 1.04 is much broader than is necessary or useful to protect investors or the public interest or to satisfy the requirements of Sec. 409 of the Sarbanes-Oxley Act, particularly as it relates to oral and telephonic communications.

Sec. 409 of the Sarbanes-Oxley Act added section 13(l) Real Time Issuer Disclosure to the Securities Exchange Act. That section provides that issuers shall disclose to the public "on a rapid and current basis" such additional information containing material changes in financial condition or operations of the issuer as the Commission, by rule, deems is "necessary" or "useful" for the protection of investors and the public interest.

We believe that requiring earnings releases to be "submitted" to the Commission would be "useful."

However, we do not believe that Item 1.04 should extend to "oral" or limited telephonic or similar dissemination of earnings information. The Commission should rely on Regulation FD to police such communications.

We are particularly concerned that, if Item 1.04 covers more informal communications, such as oral and limited telephonic communications, by anyone "acting on behalf of" an issuer, there must be a provision, as in Regulation FD, for a deferred filing when a responsible company official discovers a communication subject to Item 1.04. We believe that the Commission should add such a deferred filing provision, if it determines to adopt Item 1.04 with the proposed coverage.

We further believe that earnings releases that are required to be filed under cover of Form 8-K pursuant to proposed Item 1.04 should not be subject to the more stringent disclosure requirements of Item 10(e) of Regulation S-K or Item 10(h) of Regulation S-B. Rather, earnings releases should be submitted under Item 9 of Form 8-K or any successor Item of that form.

If the Commission should determine to apply these Items of Regulation S-K to filings pursuant to proposed Item 1.04 (See Proposing Release, II.C), it should clarify whether they apply to the requirement to "briefly identify" the earnings release or the earnings release itself, which would be required to be filed as an exhibit to the report. We do not believe that the former would be useful and the latter would subject all earnings releases to this Item and make much of the coverage of Regulation G superfluous, unless the issuer could satisfy the stringent requirements of Item 1.04(b) of Form 8-K. Moreover, it would require rewriting of earnings releases or making them subject to the prohibitions of Item 10(e) (ii) (A) through (F) of Regulation S-K or Item 10(h)(ii) (A) through (F) of Regulation S-B, which are not applicable, under proposed Regulation G, to non-GAAP financial measures used in earnings releases. It is troubling to envision an earnings release that complies with proposed Regulation G that must be rewritten to comply with Item 1.04 and those Items of Regulations S-K or S-B. The Commission should not through the device of requiring filing of earnings releases be over-prescriptive regarding informal communications by companies. If it is the Commission's intent to prohibit the communication of non-GAAP financial measures that do not comply with Items 10(e) or 10(h), although not required by Sarbanes-Oxley, it should propose to do so directly, subject to notice and comment procedures.

Should the Commission determine to require that earnings releases must be filed, we suggest the following:

That issuers be permitted to furnish earnings releases pursuant to Item 9 of Form 8-K or any successor item, rather than "file" them;
That such "furnished" earnings releases may not be incorporated by reference in Securities Act registration statements or proxy statements to satisfy a required disclosure obligation unless supplemented with the additional required information so that non-compliant information is superseded in a subsequent filing.
In any case, any filed or submitted earnings release should be deemed superceded by the subsequent periodic report filing.
As the Subcommittee on Disclosure and Continuous Reporting of the Committee on Federal Regulation of Securities stated in its comment letter dated June 4, 2002, on the Commission's proposals for Acceleration of Periodic Report Filing Dates and Disclosure concerning Website Access to Reports (Release Nos. 33-8089; 34-45741 -- File No. S7-08-02, furnishing of earnings reports would have the following benefits:
It would recognize the importance of the current informal disclosure system that operates effectively to inform the marketplace.
It would enhance the attention and level of care companies bring to those disclosures because they know they will become part of the formal reporting system.
It would bring those disclosures into the formal disclosure system where they are available electronically on a widespread basis.
It would allow market forces to dictate the timing and content of this disclosure and obviate the need to differentiate among public reporting companies based on their perceived ability or inability to meet more current disclosure requirements.

We would not require the earnings press release itself to be included, inasmuch as it often includes extraneous comments of the chief executive or financial officer that companies should not be obligated to submit under EDGAR. We would not specify which earnings metrics would be subject to this disclosure mandate, instead preferring to leave it to the registrants to determine, based on market forces, the information they believed would best portray the operations for the reported period. We would require, however, that the financial data be at least as detailed as that contained in the press release.

As earnings data that would be included in the Form 8-K under our alternative would of necessity be subjected to less scrutiny and analysis than the information included in the Form 10-Q, the earnings data, like the financial information and MD&A in Part I of the Form 10-Q, should not be deemed to be "filed" for purposes of Section 18 of the Exchange Act. We suggest that such information be allowed to be filed or furnished under Item 9 of Form 8-K and that the information be deemed to be automatically superseded upon the filing of the Form 10-K or the Form 10-Q.

This alternative would get the released earnings into the Exchange Act disclosure system sooner and it would enhance the quality of this information because registrants would know that the information will become part of the formal reporting system. In addition, because earnings releases typically contain an explanation of the reported results, the alternative we suggest would get summary information into the reporting system, which SEC officials have indicated would be advantageous to investors.

In addition, should the Commission determine to apply Items 10(e) and 10(h) to Item 1.04 filings, it should provide on the face of Item 1.04 or in the instructions to Form 8-K that Items 10(e) and 10(h) apply. We suspect that very few registrants would be aware that Item 10(e) or Item 10(h) apply to current reports on Form 8-K. Indeed, the currently applicable instruction to Form 8-K, General Instruction C, does not refer to Item 10 of Regulation S-K or S-B.

C. Relationship to Regulation FD (proposed Items 1.04 and 6.01 of Form 8-K)

In the Proposing Release, II.C, the Commission states that: "[t]oday, these types of announcements are subject to Regulation FD." [footnote omitted] See also, footnote 44 to the Proposing Release.² The Commission goes on to state, however, that, unlike Regulation FD, information filed under proposed Item 1.04 of Form 8-K "always would be considered filed for liability purposes." [footnote omitted] We question the necessity of this approach, which is not required under Sec. 401(b) of Sarbanes-Oxley.³

D. Relationship to Proposed Regulation G

Proposed Regulation G would not impose the prohibitions under Subitems 10(e) and 10(h) to communications of non-GAAP financial measures not included or required to be included in reports filed with the Commission. We believe that similar treatment should be afforded earnings releases and similar communications required to be filed submitted under Item 9 of Form 8-K as we have suggested.

E. Application to Foreign Private Issuers

As proposed, Item 1.04 would not apply to foreign private issuers, since they are not required to file reports on Form 8-K and no corresponding amendment to Form 6-K was proposed. (We also do not believe that Forms 6-K furnished to the Commission are subject to Item 10 of Regulation S-K or S-B.)

We do not believe that proposed Item 1.04 should apply to foreign private issuers. Foreign private issuers currently are required to furnish earnings releases to the Commission under cover of Form 6-K. Since November 4, 2002, foreign private issuers have been required to submit these reports through the Commission's EDGAR system and, thus, they are immediately available upon acceptance in that system. Moreover, earnings releases of foreign private issuers could be subject to the provisions of proposed Regulation G.

Also, foreign private issuers are not subject to Regulation FD. Subjecting them to proposed Item 1.04, at least as presently drafted, would have the essential effect, in some circumstances, to a back door application of Regulation FD, which would be inconsistent with the Commission's determination to exclude foreign private issuers from the coverage of that Regulation.

F. Safe Harbors and Related Matters

We do not understand why the Commission's proposal does not to permit a submission under current Item 9 (proposed Item 6.01) of Form 8-K that satisfies Regulation FD to satisfy Item 1.04 also, thereby avoiding making the submission subject to liability under section 18 of the Exchange Act. The earnings release itself or other public communication would be subject to the anti-fraud provisions of the Exchange Act and the Commission's enforcement authority thereunder would not be diminished no matter what item the information were filed under. Moreover, since section 18 liability is seldom, if ever, successfully pursued, subjecting a registrant to `liability" under that section does not seem to warrant imposing confusing and duplicative filing requirements on the registrant.

We also believe that the information provided pursuant to that Item 9 should not be incorporated by reference automatically in registration statements on Form S-3 or other registration forms relying on incorporation. We believe it would be particularly unwise to subject oral or telephonic communications reporting earnings for a completed fiscal period to liability under section 11 of the Securities Act of 1933.

If the Commission should determine to require earnings releases to be filed pursuant to an item of Form 8-K other than Item 9, we recommend that the Commission provide that a late filing will not cause the registrant to lose its eligibility to use Form S-3. This relief would be especially needed where the filing requirement is triggered by an unscheduled disclosure during an analyst conference call taking place beyond the 48 hour period provided for in proposed Item 1.04(b)(1) of Form 8-K.

We further believe that, if the Commission determines to adopt Item 1.04, as proposed, oral and telephonic communications disclosed in filings pursuant to that Item should not be deemed to be admissions as to the materiality of such communications. See General Instructions B.5 to Form 8-K (Regulation FD information).

G. General

We believe that the cross reference to Rel. 33-8706 (see footnote 42 to the Proposing Release) for other possibly applicable requirements of Form 8-K is confusing. The release adopting the proposals for filing of earnings releases and similar communications should be self contained.

We believe that, in this letter, we have responded to the Questions regarding proposed Item 1.04 of Form 8-K in the first, second and fourth bullet points under that caption. We respond below to the other six bullet points.

Third bullet point. We do not believe that proposed Item 1.04 should apply to all material updates to estimates for current or future fiscal periods. We believe that the Commission can rely on Regulation FD to provide the necessary protections to investors.
Fifth bullet point. While we believe that a website posting of the information required by proposed Item 1.04, as we have suggested it be revised would be sufficient to protect investors. We do not object to an additional requirements for submitting that information under Item 9 of Form 8-K.
Sixth bullet point. We do not believe that it is necessary, although it may be useful, to post the information required by Item 1.04 at the time of the original communication. Indeed, such a requirement would pose significant compliance issues, if Item 1.04 is applied to oral and telephonic communications by "anyone acting on behalf of" registrant.
Seventh bullet point. We do not believe that forward-looking information provided pursuant to proposed Item 1.04 should be subject to liability under section 18 of the Exchange or mandatorily incorporated by reference in other filings with the Commission. We would support voluntary incorporation by reference, subject to compliance with Item 10 of Regulations S-K and S-B.
Eighth bullet point. Item 10 should not apply to information not filed with the Commission and should not apply to information filed under proposed Item 1.04.
Ninth bullet point. We have no response to this question.

We appreciate the opportunity to comment on these proposals. Representatives of our Committees are available to discuss our comments with representatives of the Commission, if the Commission believes that such a discussion would assist its consideration of the proposals which are the subject of our letter.

Respectfully Submitted,
/s/ Stanley Keller
____________________________
Stanley Keller, Chair
Committee on Federal Regulation of Securities
/s/ Thomas L. Riesenberg
____________________________
Thomas L. Riesenberg, Chair
Committee on Law and Accounting

cc: Hon. Harvey L. Pitt, Chairman
Hon. Paul Atkins, Commissioner
Hon. Roel Campos, Commissioner
Hon. Cynthia A. Glassman, Commissioner
Hon. Harvey Goldschmid, Commissioner
Alan Beller, Director, Division of Corporation Finance
Jackson Day, Acting Chief Accountant

Drafting Group
Linda L. Griggs, Esq.
N. Adele Hogan, Esq.
Charles Nathan, Esq.
Richard H. Rowe, Esq., Chair

____________________________

¹ References in this letter to "we" and "our" mean the Committees.
² A 1.04 filing would only satisfy Reg FD if filed within the FD time frame.
³ If the Commission's intended purposes are to subject earnings releases to its enforcement powers with respect filings under section 13(a) of the Exchange Act and to liability under the Securities Act and its proxy rules as the result of these releases being incorporated by reference in certain registration statements and proxy statements, it should so state. However, we do not believe that this is required by Sarbanes-Oxley or an appropriate exercise of its rulemaking authority.