June 30, 1999
Mr. Jonathan G. Katz
Secretary
U. S. Securities and Exchange Commission
Mail Stop 0609
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: The Regulation of Securities Offerings
SEC Release No. 33-7606A
File No. S7-30-98
Dear Mr. Katz:
Charles Schwab & Co., Inc. ("Schwab") is pleased to have the opportunity to submit this letter in response to the request by the Securities and Exchange Commission (the "Commission") for comments on the above-referenced release (the "Release"). Schwab is the second-largest U.S. broker-dealer in terms of active customer accounts, and is the largest broker-dealer in the world in several important market segments, such as electronic brokerage.
Schwab has a strong interest in the issues covered by the Release. As a broker-dealer, we are committed to providing our customers with the greatest possible opportunity to participate in registered securities offerings and to ensuring that they have access to information regarding such offerings in a timely and reliable manner. Schwab participates as a syndicate member in a growing number of registered offerings and is interested in ensuring that the applicable regulatory framework is efficient, workable and adequately protective of our customers’ interests. In addition, our affiliate, Charles Schwab Investment Management, Inc., is an investor in securities on behalf of Schwab’s family of proprietary mutual funds. Finally, The Charles Schwab Corporation, Schwab’s parent company, is both an issuer of securities and a reporting company under the Securities Exchange Act of 1934.
I. Introduction
The Release proposes a comprehensive set of new rules and rule amendments that, if adopted, would significantly alter both the manner in which securities offerings are handled under the Securities Act of 1933 and the timing and content of periodic corporate disclosure under the Exchange Act. It follows several years of study by the Commission and its staff of the current regulatory framework governing securities offerings and capital formation, including the work of the Advisory Committee on the Capital Formation and Regulatory Processes, chaired by former Commissioner Steven Wallman, and the Task Force on Disclosure Simplification. 1
The proposals in the Release fall into five categories: (1) registration system reforms; (2) communications to investors before and during offerings; (3) prospectus delivery reforms; (4) integration of public and private offerings; and (5) periodic reporting requirements under the Exchange Act. The stated goal of these proposals is "to make the registration system more workable for issuers and underwriters and more effective for investors in today’s capital markets." 2 Specifically, the Release seeks to make registered offerings more attractive to issuers by bringing the advantages of offering securities in the private markets – namely timing and disclosure flexibility – to the public markets. 3 It also seeks to make the offering process a time of dialogue between issuers and investors by loosening the restrictions on permissible communications. In this way, the Commission hopes to increase the amount of information available to investors and ensure that investors receive such information before they make their decision to purchase. 4
These goals are laudable, and we fully support them. We particularly support the objective of getting more information to as many investors as possible and opening up the offering process to individual investors. We agree that this can best be achieved through liberalizing the rules regarding communications during the offering process to allow more dialogue between issuers and underwriters and potential investors, particularly through electronic channels. Participants in the offering process should be allowed to take full advantage of the opportunities the Internet and other information technologies offer for increasing the flow of information to individual investors and allowing individuals to more fully participate in securities offerings.
Unfortunately, we do not believe the Release will achieve the Commission’s goals. In fact, our review of the proposals and various analyses of them has convinced us that some of them may well have the opposite effect than was intended, namely, the imposition of greater costs and delays on the offering process, the disruption of certain markets that are currently operating efficiently and without any identified harm to investors, and the restriction of information communicated to individual investors. To be sure, certain aspects of the proposals would be salutory, such as giving seasoned issuers the ability to designate the effective date of their offerings and make offers before the filing of a registration statement, relaxing current restrictions on communications during the offering process, eliminating the requirement to deliver a copy of the final prospectus with confirmations of sale, and integrating public and private offerings. These are outweighed, however, by the negative and, we believe, unintended consequences of the registration system envisioned in the Release.
In our view, further consideration and study should be given to the manner in which the goals espoused by the Commission can be accomplished, including reevaluation of the recommendations of the Advisory Committee. However, because the proposals were conceived and structured as a whole, we do not believe the Commission should adopt any of them individually based on this Release. Rather, should the Commission feel that some of the proposals merit adoption, as is or modified to reflect comments received in response to the Release, it should repropose them for individual comment. 5
II. Registration and Offering Proposals
The Release proposes to replace Forms S-1, S-2 and S-3 with a new Form A and Form B. In general, large seasoned issuers would use Form B, while smaller and less seasoned issuers would use Form A. Form B issuers would be able to make immediate public offerings without the need to register securities ahead of time on a shelf basis. Form B registration statements would not be reviewed by the SEC staff and would become effective at the time designated by the issuer. Some Form A issuers would be allowed to designate the effective date as well. The registration process for initial public offerings would remain substantially unchanged. Certain types of offerings (i.e., offerings of non-convertible investment grade securities and those made solely to QIBs) would be allowed on Form B regardless of the issuer.
Under the proposed system, in Form B offerings, issuers or underwriters would be required to deliver either a "term sheet" or a preliminary prospectus before the investor makes a binding decision to purchase, although no specific time frame is delineated. The term sheet would have to be filed with the Commission before the first sale. In Form A offerings, issuers or underwriters would be required to deliver a Section 10 prospectus to investors either three or seven calendar days before pricing, depending on how seasoned the issuer is. Notice of any material changes or events subsequent to the preparation of the Section 10 prospectus would have to be delivered to investors 24 hours before pricing. A final prospectus, however, would no longer have to be delivered with confirmations of sale following an offering so long as the investor is told where he or she can obtain one.
Current "pre-filing" and "waiting period" restrictions on offers and communications would be removed and new safe harbors and "bright line" tests added. As a result, issuers would be allowed to make public statements more freely before and during an offering without the risk of those statements being considered "gun jumping" or non-conforming prospectuses. All restrictions on communications during an offering would be removed for Form B issuers. Such issuers would be permitted to make both oral and written offers at any time before filing a registration statement. However, communications made during the "offering period" – defined as the period from 15 days before the "first offer" through the completion of the offering – would have to be filed with the Commission either at the time the registration statement is filed or, if used after the registration statement is filed, at or before the time of first use. Communications constituting "offering materials" would be considered part of the registration statement and thus subject to Section 11 liability. Communications constituting "free writing" would be subject to Section 12(a)(2) liability. 6
Some restrictions would remain for Form A issuers, but there would be clearer rules regarding what could be communicated and when. There would be no restriction on communications made more than 30 days before the registration statement is filed, so long as the issuer takes all reasonable steps to ensure that the communications are not republished within 30 days of filing. During the 30-day period before filing, current "quiet period" restrictions would continue to apply, except that two new safe harbors would allow issuers to continue to publish "factual business information" and "regularly released forward-looking information." The latter, and communications containing a mixture of the two, would have to be filed with the Commission. Between filing and effectiveness, Form A issuers could use free-writing without restriction, so long as they filed all such free-writing with the Commission and were in compliance with preliminary prospectus delivery requirements.
The Federal Regulation and Capital Markets Committees of the Securities Industry Association have submitted a comment letter setting forth in detail the flaws in the proposals relating to the registration and offering process. 7 In addition, the SIA commissioned a study by Professor Edwin T. Burton of the economic impact of certain aspects of the proposals, which has also been submitted as comment on the Release. 8 We are in general agreement with the discussion of the proposals in the SIA letter and believe that it provides a thorough and persuasive analysis of why they should not be adopted. 9 We also believe that the economic study raises serious questions as to whether the proposals would harm, rather than benefit, both the markets and investors. At the very least, it demonstrates that the proposals cannot be adopted without additional study and the presentation of affirmative evidence that they will in fact promote efficiency, competition, and capital formation.
Although we will not repeat here the points discussed at length in the SIA letter, we would like to address those proposals which seek to liberalize communications during the offering process. As the Commission is aware, Schwab is an ardent proponent of providing individual investors with equal access to information in the marketplace and equal access to participation in public offerings. We therefore fully support the Commission’s goal of attempting to ensure that individual investors have as much information as possible about proposed offerings before they make their decision to invest, and urge the Commission to continue its efforts to make the offering period a "time of dialogue" between participants and potential investors. However, we share the concern of many others that the approach taken in the Release could unintentionally result in less, rather than more communication with investors during the offering process.
One problem is that the proposed safe harbors and other provisions governing free-writing are retrospective, that is, one counts backwards from the date of "first offer" or date of filing to determine whether prior statements fall within the safe harbors and whether they must be filed as free-writing. Since offering participants are not always certain about when offers or filings will be made, and since they will want to avoid having to delay offerings to bring earlier communications within safe harbors, they may be more cautious in communicating during the time period preceding a potential offering. To the extent they are not, an offering participant could face considerable difficulties in attempting to determine whether prior statements made by it or other participants might be considered illegal offers due to subsequent timing decisions. 10
The "inclusive prospectus" concept proposed in the Release also raises serious policing concerns for issuers and underwriters. Under the current "exclusive prospectus" system, permitted disclosure is limited to what is contained or incorporated by reference in the prospectus, and thus can more easily be controlled and monitored by offering participants. Under the proposed system, issuers and underwriters would be potentially liable for the independent marketing efforts of every other offering participant. The logistical difficulties of monitoring and controlling the communications of other offering participants will make meeting one’s due diligence obligations problematic and could lead to a form of self-censorship by which issuers and lead underwriters severely restrict offering communications. 11
Underlying these concerns is the issue of liability. Offering participants risk being held liable under the civil liability provisions of the Securities Act for the communications of others over which they may have little control, for the inadvertent failure to meet filing requirements, and for the inadvertent failure to qualify for safe harbors due to timing decisions. In our view, these risks are serious enough that they could have a chilling effect on communications, thus resulting in potential investors receiving less rather than more information about offerings.
There has been much debate about whether and to what extent the civil liability provisions of the Securities Act should be reassessed in light of changes both in how securities offerings are handled and in the role gatekeepers play or should be expected to play in this process. These issues were addressed at length in the Advisory Committee report and in many of the comment letters submitted in response to the Commission’s 1996 Securities Act Concept Release. 12While this is not the appropriate forum to fully vet these issues, we believe that until the Commission addresses and resolves the question of what the appropriate liability regime should be for communications made during the offering process, workable reform in this area is not possible. Both Section 11 and Section 12(a)(2) play an important role in ensuring that the investor protection objectives of the Securities Act are met, and we do not advocate that communications be completely exempted from their application. However, we believe that the liability imposed on participants in the offering process should be reasonably related to the actions they can be expected to take to prevent false and misleading information from being disseminated to the public. Thus, one possible approach might be to limit liability for free-writing and other communications not included in the prospectus to the party who prepared or disseminated them. This would eliminate many of the policing and logistical problems with the proposals, while at the same time providing investors with adequate remedies for false and misleading statements.
In sum, we believe that the Internet and the continuing advances in information technology present tremendous opportunities for opening up the offering process to investors and for achieving the goal of giving all investors timely and useful information necessary to make informed investment decisions. To take advantage of these opportunities, however, the current restrictive regulatory system governing communications during the offering process must be reformed and relaxed, which in turn requires a careful reassessment of liability issues. We urge the Commission to pursue its efforts in this regard whether or not it moves forward with the other reforms in the Release.
III. Exchange Act Reporting Proposals
The Release proposes a number of new rules and rule amendments designed to improve Exchange Act disclosure by enhancing the quality and timeliness of information in periodic reports filed by domestic reporting companies. 13 We share the Commission’s goal of ensuring that all investors have access to reliable and useful information at the same time and on the same basis, and fully support those aspects of the proposal that achieve this end without imposing unnecessary or incommensurate costs and burdens on reporting companies. However, we are not persuaded that all of the proposals are necessary or will in fact result in better disclosure. Indeed, we think that some could have the unintended result of degrading the quality of disclosure.
As the Commission is aware, Schwab has been an industry leader in providing retail investors with access to timely and useful information to assist them in making informed investment decisions. In particular, we have seen the advent of the Internet and the growth of online brokerage services as offering an unprecedented opportunity for leveling the playing field for individual investors and giving them the necessary tools to manage their own investments and participate in the markets. Perhaps the greatest such tool is information, and our website and online customer center offer customers a broad array of information resources from which to choose. These include access to company and market news, proprietary and third-party research, and information-based analytical tools. In addition, investors also have access to information through issuer websites, Internet portal and financial forum sites, and the websites of the Commission and various self-regulatory agencies. As a result, we believe that today investors are in a better position than ever before to make informed investment decisions based on reliable and timely market information.
We do not see current Exchange Act disclosure as being systematically or generally deficient or in need of significant reform. We believe that most companies take their reporting obligations seriously and are conscientious about providing accurate and reliable disclosure. This is not to say that disclosure cannot be improved or that some companies may not be paying sufficient attention to the quality of their disclosures. Problems do exist and need to be addressed. Two of the most significant in our view are selective disclosure and questionable accounting practices. We know the Commission has been focusing on both these problems and encourage it to continue to do so. However, we believe these problems are better addressed and more effectively remedied through rule-making or enforcement actions directed at the precise conduct in issue, rather than through generalized rule-making that imposes additional burdens on compliant companies without eliminating the true deficiencies in the current system.
Proposals to Increase the Amount of Information in Reports
The Release contains two proposals that would increase the amount and type of information disclosed in reports. First, it proposes to extend risk factor disclosure from Securities Act registration statements to registration statements and periodic reports filed under the Exchange Act. Specifically, a company would be required to include in its annual report on Form 10-K "an itemization of the most significant factors with respect to [its] business, operations, industry or financial position that may have a negative impact on its future financial performance" and a brief explanation of how each such risk affects it. 14 Material changes in risk factors and risk factors not included in a company’s most recent periodic report would have to be disclosed in quarterly reports on Form 10-Q. These risk factor disclosures would be subject to the Commission’s plain English requirements. 15 Second, it proposes to expand the categories of information that must be reported on Form 8-K to include material modifications to the rights of security holders, the departure of a President, CEO, CFO or COO (and perhaps key personnel and the top five most highly compensated employees), material defaults on senior securities, changes in company name, and certain actions by the company’s independent auditors.
We support both of these proposals and believe they will be of benefit to investors and others. We would make only a few comments. First, with respect to the disclosure of risk factors, we believe the Commission should provide more guidance as to what should be disclosed so that the disclosure does not turn into boilerplate or unnecessarily expose companies to litigation risk based on after-the-fact second-guessing. As proposed, companies would be required to disclose significant factors that "may have a negative impact" on future financial performance. We think the required disclosure should be limited to those factors that could have a material negative impact on future performance. Materiality is a concept that companies and the courts have experience with, and would enable companies to better assess what should be disclosed and courts to better determine whether a company has met its obligations in the event of subsequent litigation. Otherwise, we are concerned that companies might list every conceivable risk that could possibly have a negative impact, whether that impact is material or not, simply to protect themselves from potential liability.
Second, with respect to the matters that must be reported on Form 8-K, although we do not object to requiring companies to report the departure of a President, CEO, COO or CFO, we believe they should not be required to state the reasons for the departure. The reasons for an officer’s departure are often personal or may involve sensitive internal personnel issues. The mandatory reporting requirement could thus result in the disclosure of private or confidential information with little benefit to investors. We think it better to allow individual companies to decide whether the reason for a particular executive’s departure is material.
We also do not believe that the Commission should extend the proposal to require companies to report the departure of any of their five most highly compensated employees or key personnel who make significant contributions to the company, as suggested in the Release. The former category is not a sufficiently reliable indicia of the importance of the individual’s departure, and the latter is far too subjective to make a requirement. Again, we believe it should be left to each company to determine when the departure of anyone other than the President, CEO, CFO or COO is a significant enough event to be reported.
Extension of Plain English to All Exchange Act Reports
The Release requests comment on whether all Exchange Act reports should be in plain English. We enthusiastically support such a requirement. The Commission’s plain English initiatives have to date been successful and of significant benefit to investors. Schwab recently completed rewriting its proxy statement in plain English, and it has since become a model for other companies who wish to undertake similar projects. Extending plain English requirements to Exchange Act reports makes sense and is feasible. Of course, the requirement should be implemented on a realistic time frame to allow companies to manage and perfect the difficult drafting issues it entails.
Reporting of Selected Financial Information on Form 8-K
The Release proposes to require all domestic reporting companies to report selected financial data on Form 8-K on the earlier of the date they issue an earnings press release or 30 days after the end of their fiscal quarter or 60 days after the end of their fiscal year. 16 The Form 8-K report would include the financial data required by Item 301 of Regulation S-K for both the most recently completed fiscal quarter and interim period or year, plus comparative data for the same periods of the prior year. The Commission’s rationale for making this proposal is its concern that the current practice of reporting financial results through the issuance of press releases may result in uneven and non-uniform disclosure. 17 As an alternative to requiring summary financial data to be reported on Form 8-K, the Commission requests comment as to whether it should accelerate the due dates for Form 10-K to 60 days from the close of the fiscal year and for Form 10-Q to 30 days from the close of the quarter. 18
Although we believe that quality information should be disclosed to all investors at the same time, we are not convinced that this proposal is necessary to achieve that goal or that it will have the effect the Commission desires. Indeed, we think it will simply impose an additional regulatory burden on reporting companies without conferring any real benefit on investors. Accordingly, we recommend that it not be adopted.
Contrary to the view expressed in the Release, we believe that the current practice, whereby companies release earnings and other financial information shortly after the close of the reporting period followed by the filing of a Form 10-Q or 10-K under current deadlines, is working well and is not in need of reform. Earnings information disclosed through press releases reaches a far greater number of investors in a far shorter time than information filed with the Commission. Investors do not need to subscribe to a news service to obtain this information; it is almost universally available through normal commercial media outlets, Internet portal services, company websites, and online brokerage websites such as Schwab’s. Indeed, the release of such information is among the most eagerly anticipated news in the financial arena and, in our experience, is almost instantaneously disseminated to the markets and the public. In addition, we believe that the quality of financial information disclosed in press releases is in most cases good. As a result, we believe that high-quality financial information is currently being disclosed quickly and effectively to investors.
While the proposed filing requirement would confer few, if any, benefits on investors, it would impose additional costs and burdens on companies and could result in less information being disclosed in as timely a manner as is currently the case. Schwab, like most companies, issues a press release containing quarterly financial data and other information within fifteen business days after the close of a fiscal quarter. Schwab’s release contains more information than is required by Item 301 of Regulation S-K. Both the wording of the release and the financial information contained therein are reviewed by senior management and Schwab’s outside auditors before the release is disseminated, and Schwab goes to considerable effort to meet its goal of releasing this information as quickly as possible to the investing public. Were Schwab required to file this same information on Form 8-K and still meet its goal of disseminating it to the market within fifteen business days of the close of the quarter, it would be forced to incur additional cost and commitment of employee and management time. 19 While Schwab and many others would incur these additional costs rather than delay getting information to the public, other companies with fewer resources might choose to disclose only the bare minimum information required by Item 301 or take the full 30 days to file. Thus, a proposal designed to improve the quality and timeliness of financial disclosure could result in such disclosure being reduced or delayed.
For the same reason, the alternative of accelerating the due dates for Form 10-K and Form 10-Q would simply increase costs and burdens on reporting companies and could result in poorer quality disclosure as companies press to file in two-thirds the time currently allowed. 20 We believe that the widespread practice of early press release disclosure, which ensures that core information reaches the market quickly, obviates any concerns about staleness of Form 10-Q and Form 10-K information under the current 45 and 90 day filing deadlines.
In our opinion, the primary cause of uneven and non-uniform disclosure is not the practice of disseminating information through press releases, but the two problems mentioned above: selective disclosure and questionable accounting practices. Neither would be addressed or remedied by this proposal. We encourage the Commission to aggressively address these problems through specific rule-making (i.e., rules making it a violation of the securities laws to selectively disclose material information to analysts or large institutional investors before issuing a press release), or through individual enforcement actions.
Signature and Certification Proposals
The Release proposes three changes with respect to the signature requirements on registration statements and periodic reports filed under the Exchange Act. 21 First, it would mandate that all persons required to sign such reports certify that they have read the report and that to their knowledge the report contains no material misstatements or omissions. Second, it would expand the number of persons required to sign certain reports, including those filed on Form 10-Q, to include principal executive officers and a majority of the board of directors. Finally, it would require the person signing Forms 6-K and 8-K to certify that he or she has provided a copy of the report to the registrant’s board of directors. 22
The rationale behind these proposals is the Commission’s belief that they will improve the quality of Exchange Act disclosure by requiring management to take a more active role in the disclosure process and to acknowledge more responsibility for such disclosure. The Commission is concerned that the directors and senior management of some companies pay less attention to periodic disclosure than to disclosure in Securities Act filings and that they often sign blank signature pages without having seen or read the report. The Commission believes the new certification and signature requirements will discourage this practice.
We agree with the Commission that there are ways in which corporate practices could be improved to ensure higher quality reporting and disclosure. To the extent regulatory action is necessary and appropriate in this area, however, we believe it is better pursued through consideration of the Blue Ribbon Committee’s recommendations for improving the quality of public companies’ financial management and reporting practices.23 Although we do not necessarily support all of these recommendations, we believe they offer a much more effective solution to the Commission’s concerns than the signature and certification proposals in the Release. We therefore urge the Commission to forego adoption of the current proposals and to focus its efforts on whether and to what extent these recommendations should be implemented.
In our opinion, the proposed signature and certification requirements will simply impose additional burdens on public companies and their directors without leading to any real improvement in the quality of disclosure or corporate practices. We believe that senior management and directors of most companies take their reporting obligations seriously and are conscientious about ensuring that reports are accurate and reliable. To the extent that some do not, we seriously doubt that the new signature and certification requirements will alter their behavior. Directors and officers who currently sign blank signature pages and allow reports to be filed without reading them are not likely to balk at signing a certification without having read or reviewed the report. 24
Rather than improve disclosure, we think the proposals will simply serve to increase the potential liability of directors and thus provide disincentives on outside directors to serve. 25 Directors, particularly outside directors, serve an important role in corporate governance, including ensuring that companies are managed ethically and in compliance with best corporate practices. This role, defined primarily by state law, is mainly one of oversight which allows directors to a significant degree to rely upon and delegate responsibility to management. As it is, conscientious outside directors already devote considerable time and attention to their responsibilities and are subject to significant litigation risk as a result of the plaintiff bar’s practice of naming them in lawsuits, often for the purpose of tapping into a company’s D & O insurance. Proposals such as these, which seek to regulate how directors fulfill their corporate governance obligations and further increase liability and exposure to litigation, risk discouraging committed and qualified persons from serving as outside directors and thus diminishing the quality of internal oversight over management.
Acceleration of Form 8-K Filing Deadlines
The Commission proposes to accelerate the deadlines for filing the Form 8-K from fifteen to five calendar days and from five to one business days, depending on the information being disclosed. 26 Although we are not averse to some acceleration of current Form 8-K filing deadlines, we believe those proposed in the Release may be unduly short. Most companies will strive to disclose material events as quickly as possible regardless of the time allowed by the rules, and in many instances would be able to meet the proposed new deadlines. However, reportable events are not always anticipated sufficiently in advance, thus making it difficult for companies to prepare complete and accurate reports within these time frames in every instance. Thus, if the Commission is going to shorten the filing deadlines, we believe it should allow five business days for all reportable events, a time frame which should allow companies adequate time when circumstances require. Should experience show that companies are delaying disclosure until the last permissible moment or otherwise abusing the five-business-day deadline, the Commission can always revisit the issue.
IV. Conclusion
In conclusion, Schwab supports the Commission’s goal of improving the registration system for both industry participants and investors and of ensuring that investors receive timely and accurate information about securities offerings and issuers. Unfortunately, we do not believe that some of the regulatory reforms proposed by the Release will achieve these goals. We believe that the Commission should give further thought and consideration as to how best to accomplish its objective of streamlining and modernizing the regulatory framework governing securities offerings. Schwab would be happy to provide any additional information or assistance the Commission might find helpful in this endeavor.
Very truly yours,
Richard S. Dangerfield
Vice President and
Associate General Counsel
Charles Schwab & Co., Inc.
cc: The Honorable Arthur Levitt, Chairman
The Honorable Norman S. Johnson, Commissioner
The Honorable Isaac C. Hunt, Jr., Commissioner
The Honorable Paul R. Carey, Commissioner
The Honorable Laura S. Unger, Commissioner
Brian J. Lane, Director, Division of Corporate Finance
Anita T. Klein, Senior Special Counsel, Division of Corporate Finance
-[1]- See March 1996 Report of The Task Force on Disclosure Simplification; July 1996 Report of the Advisory Committee on the Capital Formation and Regulatory Processes. -[2]- Release at 26. -[3]- Id. at 11. -[4]- Id. at 15. -[5]- For example, we would endorse the reproposal of the provisions eliminating the requirement to physically deliver a copy of the final prospectus with confirmations of sale (albeit without their being coupled with the proposed preliminary prospectus delivery requirements), so long as the final prospectus does not differ materially from the preliminary prospectus. We would also endorse those provisions relating to the integration of private and public offerings. -[6]- Section 11 liability would also attach to any free-writing that was part of a document containing offering information, if the document is not filed with the Commission. -[7]- See letter dated May 12, 1999, from Lee B. Spencer, Jr., Patricia A. Maher and Bradley J. Gans to Jonathan Katz (the "SIA letter"). -[8]- See An Analysis of the Economic Impact of Timing Delays Contained in the "Aircraft Carrier" Proposal by Edwin T. Burton and Lawrence E. Kochard, dated May 15, 1999. The study focuses primarily on the effects of the proposed preliminary prospectus and term sheet delivery requirements. -[9]- The SIA letter also contains discussion of various reforms that the Committees believe should be adopted, albeit not through the Release but through separately promulgated rule proposals. We do not necessarily agree with all of these suggestions and reserve the opportunity to set forth our positions in response to whatever specific rule proposals might be published for comment in the future. -[10]- This problem is exacerbated by the fact that Form B issuers must file all offering information and free-writing used by them or by others acting on their behalf during the "offering period," which is defined as beginning 15 days before the "first offer." The Release does not define the term "first offer" or provide any guidance as to what might constitute a first offer. Given the broad statutory definition of offer, issuers could face considerable difficulty in complying with their filing obligations. In addition, Form A issuers and underwriters may engage in free-writing during the waiting period only if they are in compliance with prospectus delivery requirements. Inadvertent failure to comply with such requirements could thus result in what were thought to be permissible communications being considered illegal offers. -[11]- These policing concerns are made more problematic by the fact that offering participants must ensure that statements made more than 30 days before filing are not republished during the 30-day pre-filing period. This would include removing information from web sites and obtaining assurances that interviews and press releases are not published during that time. In addition, various electronic communications, such as electronic road show scrolling text, e-mails, and chat room dialogues will be considered free-writing. It is difficult to see how participants in an offering could adequately monitor communications of this nature made by others. -[12]- Securities Act Release No. 7314 (July 31, 1996). -[13]- Many of these proposals track those recommended by the Advisory Committee in its 1996 report. The Advisory Committee’s recommendations were premised on the fact that, because the company registration system would rely almost exclusively on 1934 Act reporting to meet the disclosure goals of the 1933 Act, the content and quality of such reports should be enhanced. The Commission believes that these enhancements will provide investors with "a more current and fuller stream of information" about reporting companies and thus should be adopted notwithstanding its decision not to implement the company registration system. See Release at 225 n.496. -[14]- Release at 228. -[15]- Id. at 229. See proposed Exchange Act Rule 12b-24. -[16]- Release at 234-36. -[17]- Id. at 234. According to the Release, the Commission believes that this practice may not result in all investors being informed of the same information at the same time, since not all investors subscribe to news services carrying such releases. It further is concerned that companies differ in the type and extent of information they disclose in their press releases, and that some may actually disclose only the positive aspects of their financial performance. -[18]- Release at 236-38. -[19]- The additional time and effort required would result primarily from the Edgar filing process. -[20]- The burden would be exacerbated by the fact that, under the current proposals, more information would be required in the annual and quarterly reports. -[21]- Release at 246-49. -[22]- The Release also requests comment on the Advisory Committee’s recommendation that reporting companies be required to file, as an exhibit to Form 10-K, a management report to the audit committee of their board of directors. Specifically, it asks whether requiring the preparation and filing of such a report would enhance the quality of Exchange Act reports. We believe it will not. Whatever marginal benefits such a report might have, they would not outweigh the additional costs and expense it would entail or the potential liabilities created by the filing requirement. We thus recommend that it not be required. -[23]- See Report and Recommendations of the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees. -[24]- In addition, most director due diligence is accomplished primarily by talking with and questioning management and the company’s outside auditors, rather than by the reading of reports. This is particularly true with respect to financial information, which makes up the bulk of 10-Q reporting. Thus, simply requiring directors to read the reports accomplishes little in terms of increasing director oversight of reporting obligations. -[25]- For example, the certification states that the director is not aware of any "material misstatements or omissions" in the report, a standard that is different, and perhaps more stringent, than that imposed by the antifraud rules of the Exchange Act. A director could thus be exposed to greater liability if he or she signs the report than might otherwise be the case. -[26]- Id. at 238-246.