Subject: Comments on S7-5-98 Date: 5/13/98 3:28 PM letter with comments follows, original + 2 copies in the mail. Thank you Bacon & Woodrow St Olaf House London SE1 2PE UK Tel: +44 171 357 7171 Fax + 44 171 716 7411 email: alan.judes@bandw.co.uk |---------------------------------------> | | | | | | | Mr Jonathan G Katz | | Secretary | | Securities and Exchange Commission | | 450 5th Street NW | | Washington DC | | 20549 | | USA | | | | | |---------------------------------------> >----------------------------------------| | | | | | | | 13 May 1998 | | | | Our ref: g:\judith\letters\953katz.doc | | | | | >----------------------------------------| Dear Mr Katz Proposed amendment to Rule 701 - File No S7-5-98 Bacon & Woodrow is a UK based consulting firm that advises corporations on the design and implementation of their employee stock plans. Many large corporations recognise the importance of their overseas employees and wish to include all their employees in their plan offerings. The most common type of all employee plan that is extended globally is the sharesave plan which combines a stock option with a savings plan. When such a corporation has a small number of employees resident in the United States then Rule 701 as presently formulated initially helps, but increases in employee numbers subsequently prevent the introduction of such plans because of the $5m limit. The fixed $5m limit We therefore welcome the proposed rule change that would effectively remove the fixed $5m limit. We suggest further simplification in abolishing the 15% of assets formula. Asset values can be measured in many different ways, for example cost versus market value and it is much easier to understand and enforce the 15% of outstanding securities formula. If you are looking for a reasonable limit to Rule 701 then a limit on percentage of securities should be adequate for this purpose. We see no need for a fixed monetary limit in the new rule. Sales versus Offers We support the change to apply the limit to sales of securities to employees. This will simplify matters for corporations. Disclosure We support the general requirement that disclosure is necessary, and indeed communication is vital for a compensatory stock option plan to succeed and obtain employee enthusiasm. There are two aspects that give us some concern. The first is minor. Plan rules are not, regrettably, written in plain English and a full set of plan rules would not be looked at nor read by 99% of the employees. We suggest that instead a summary of the material terms of the plan be required with employees being offered a full set of plan rules on request. The second aspect gives us a major concern. The financial statements required to be furnished by Part F/S of Form 1-A must be prepared in accordance with US generally accepted accounting principles. In their 1996-97 Report and Accounts, British Airways, which produces net income and shareholder equity statements under US GAAP, noted significant differences between UK GAAP and US GAAP as follows: deferred taxation, goodwill, property and fleet valuation, purchase accounting, forward exchange contracts, dividends, foreign currency translation, gains in sale and leaseback transactions, pension costs, capitalised operating leases, associated undertakings and provision for diminution in value of investment. This shows the size of the task. This will most probably be an unacceptable burden in terms of time and cost to a UK corporation that simply wishes to extend its stock plans to all its US employees, and, as a result, the additional flexibility arising from changes of Rule 701 limits will not be used. We suggest that where the shares of the corporation are listed on a recognised stock exchange such as London, Paris, Sydney or Frankfurt then the financial statements of the corporation as filed with that stock exchange be considered adequate for the purposes of Part F/S of Form 1-A. Timescale for disclosure For the exercise of employee stock options we consider that more guidance would be of assistance as to what is considered a reasonable period of time prior to date of exercise. UK companies typically report twice a year, with interim results showing the position after six months of their financial year have elapsed being available by the end of month eight and with final results showing the complete year being available within three months of the end of the year. An alternative to a 180 day framework is a requirement that all employee option holders be furnished with the same interim and annual financial statements that are given to the home country stock exchange and shareholders. Transition to new rules There will be companies who have relied on the present Rule 701 in respect of option grants which may have many years to run. The new rules should make it clear whether additional disclosure is required in respect of such existing option grants. Form 701 The advantages for filing form 701 are that it enables the SEC to see that the 15% limit of share capital has been applied, and it provides a database for the SEC to call for documents to ensure that adequate disclosures are being made. From the corporation?s perspective it provides confirmation that the reliance on Rule 701 has been communicated to the SEC. We suggest that it be reintroduced for these reasons. Thank you for the opportunity to comment and also for sending me a copy of Form 1-A. Yours sincerely for Bacon & Woodrow Alan M Judes