August 26, 2002
Jonathan G. Katz
Secretary
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: File No. S7-22-02
Dear Mr. Katz:
The Association for Financial Professionals (AFP) welcomes the opportunity to comment on the Securities and Exchange Commission's (SEC) Additional Form 8-K Disclosure Requirements and Acceleration of Filing Date. The proposal requires the accelerated disclosure-within two business days-of 16 significant business events on Form 8-K.
AFP agrees that the 16 items should be disclosed on a Form 8-K. However, we are concerned that the two business day filing requirement will decrease the quality of reporting and may not be feasible in all cases. For these reasons, we urge the SEC to extend the filing date to the fifth business day after the day the event occurred.
The membership of AFP includes approximately 14,000 financial executives employed by over 5,000 corporations and other organizations. Our members represent a broad spectrum of financial disciplines; their organizations are drawn generally from the Fortune 1000 and middle-market companies in a wide variety of industries, including manufacturing, retail, energy, financial services, and technology.
Summary of Proposal
Companies would be required to disclose information about 16 events on a Form 8-K. Of the 16, 11 are new requirements, 2 currently are reported on the Forms 10-K annual report and 10-Q quarterly report, and 3 are amendments to current Form 8-K disclosure items. Form 8-Ks would be due within two business days after the event occurred. Companies would receive an automatic two business day extension upon filing a Form 12b-25. Current rules require that companies file the Form 8-K within five business days for some events and 15 calendar days for others. The proposed rule would be effective 60 days after issuance.
New required disclosures include:
The proposed rule also requires disclosure of letters of intent and other nonbinding agreements not made in the ordinary course of business. The proposed rule also asks for comments on the definition of a contingent financial obligation.
AFP's Position on Proposed Rule
Two Business Day Reporting. AFP supports the need to disclose information about the 16 proposed items in the Form 8-K. We have serious concerns that the two business day filing deadline will result in poorer quality of information. The shortened time period could result in additional errors due to a shortage of review time by all the parties involved. Because of the importance of the information and the severity of penalties for reporting errors, companies might choose to disclose only general "boilerplate" information in order to avoid errors. Disclosures with errors and/or general information will not benefit investors.
Also, it may not be feasible to disclose items in two business days because of the complexity of certain events and the requirement to file the Form 8-K electronically through the SEC's EDGAR system. For example, when a company enters into a material agreement outside the ordinary course of business (such as an acquisition), it must disclose a description, identity, rights and obligations of each party, and other items. Typically, several parties need to review the disclosure, including the chief financial officer, top management, internal and external counsel, compliance department, and the external auditor. It is unlikely that companies will be able to get all parties to approve a detailed disclosure within two business days. Further, even for more routine transactions, many companies contract out the EDGAR electronic filing, which often takes one business day, leaving only one day to prepare and approve disclosure documents.
AFP recommends that the SEC allow companies to file the Form 8-K on the fifth business day after the event occurred, and eliminate the automatic Form 12b-25 extension. We believe that this will allow enough time for companies to prepare accurate disclosures that are useful to investors.
Nonbinding Agreements. We also have concerns about the proposed requirement that companies disclose letters of intent and other nonbinding agreements when reporting material agreements outside the normal course of business. This could result in the unnecessary disclosure of sensitive information to competitors and could threaten the transaction. AFP believes that companies should only be required to report agreements that are binding.
Contingent Obligations. For contingent financial obligations, AFP believes that companies should use guidance in Financial Accounting Standards Board (FASB) Statement No. 5, Accounting for Contingencies, in determining whether an event should be disclosed on Form 8-K. This standard requires companies to disclose a financial contingency in their financial statements when the chances of the future triggering event occurring are probable or reasonably possible. Using this well-established standard as the guide for determining Form 8-K contingent financial obligation disclosures will promote consistency and benefit investors.
Summary
AFP agrees that the 16 events listed in the proposed rule should be reported in a Form 8-K. However, AFP urges the SEC to adopt the following recommendations, which will improve the proposed rule. The SEC should require that companies:
We commend the SEC in its continuing efforts to improve the quality of financial reporting by public companies. We appreciate the opportunity to comment on the proposed rules and offer our recommendations to improve the required Form 8-K disclosures. If you have any questions, please contact Gregory Fletcher, AFP's Director of Financial Accounting and Reporting, at (301) 961-8869.
Sincerely,
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Alvin C. Rodack, CCM Associate Treasurer The Ohio State University Chairman AFP Government Relations Committee |
James R. Haddad, CCM Vice President, Corporate Finance Cadence Design Systems, Inc. Chairman AFP Financial Accounting and Investor Relations (FAIR) Task Force |