This Side Of Caution: New Regs. Prompt 8-K Increases

Around this time last year, experts were predicting a dramatic increase in 8-K reporting volume in light of the adoption of amendments to the Securities and Exchange Commission’s Form 8-K rules. As most public company executives know by now, under rules that took effect Aug. 23, 2004, companies are required to report additional events on a reconfigured Form 8-K, and filing deadlines were generally shortened to four business days.

A year later, experts say that 8-K filings have indeed soared, though not quite to the sky high levels that had been anticipated.

Copenhafer

“At one point, we thought the number of 8-K filings might double, but growth has been kind of gradual,” says Dave Copenhafer, director of EDGAR Services at financial printer Bowne & Co. “We thought we’d see greater volume than we are seeing.” According to Copenhafer, a 15-year SEC veteran and pioneer developer of the Commission’s EDGAR system, it’s possible that volume may be increasing gradually as it becomes more clear exactly what types of real-time information—particularly material definitive agreements—must be disclosed, “One factor could be whether there’s a slowness by companies to recognize when an 8-K is required,” he says, “but it’s tough to know if that’s the case.”

During the fiscal year ended Sept. 30, 2003, the SEC received approximately 58,400 Form 8-K reports. At the time the changes were announced, the SEC estimated that— based on 11,800 companies filing on Form 8-K, and an estimated five additional filings per company as a result of the amendments—it would see an additional 59,000 filings per year, or roughly double the number.

However, Bowne reported that the volume of 8-K filings increased 43 percent over the prior eleven months, based on an analysis of EDGAR filing data.

Once the new rules took effect, Copenhafer said the daily number of 8-Ks was “gradually creeping up,” suggesting that issuers “were coming to differing conclusions on what they ought to report.”

The Side Of Caution

Nowlan

Others agree with Copenhafer’s assessment. “Companies may be still trying to iron out exactly what’s required,” said Mark Nowlan, senior vice president of marketing and communications at PR Newswire. Nowlan said his company saw a 38 percent increase in the volume of 8-K filings for the second quarter, versus last year’s second quarter.

Nowlan noted that many of the 8-K filings are related to news releases. “They’re often timed to an event,” he says. “We’re seeing more 8-Ks filed early in the quarter rather than later. Once companies do their earnings for the previous quarter, they’re filing 8-Ks related to announcements timed to coincide with their earnings,” said Nowlan.

Another reason 8-Ks may not have grown quite as much as predicted is due to the fact that “a large percentage of 8-Ks are filed by asset-backed issuers, which generally do not have the same operating characteristics or needs to file 8-K as do operating companies,” noted Copenhafer. Still, he said, “I think there’s a general feeling that companies are trying to err on side of caution in terms of their disclosure.”

Daily 8-K filing data provided to Compliance Week by Bowne & Co. showed a slight steady rise in daily volumes with clear “peaks” generally correlated to 10-Q peak filing days.

PERIODIC PEAKS

Date

8-Ks

July 22

450

July 25

418

July 26

594

July 27

788

July 28

1,025

July 29

662

Aug. 1

540

Aug. 2

636

Aug. 3

588

Aug. 4

698

Aug. 5

458

Aug. 8

434

Aug. 9

566

Source: Bowne & Co. analysis of SEC filings.

Copenhafer noted that the size of the 10-Q peaks appear to be getting larger. “We saw a very large spike about two weeks prior to the last accelerated 10-Q filing deadline on Aug. 9, which was almost entirely due to companies filing 8-Ks related to their earnings releases,” Copenhafer said [see box at left].

“People are probably erring on the side of disclosing more this year because of the new rules,” said Steve Seelig, executive compensation counsel in Watson Wyatt’s Research Information Services. “I think counsel is being conservative in their interpretation and advising clients to disclose when in doubt.”

Decelerated Filing?

Some companies have been critical of the revised 8-K rules, as the accelerated deadline has forced executives and disclosure committees to scrutinize disclosure obligations for a larger array of contracts and agreements. In addition, as Compliance Week has covered in the past, some have argued that the new rules have resulted in “over-disclosure,” wherein companies flood shareholders with minor announcements that to not materially impact financial statements.

And since “definitive material agreements” generally include information about executive compensation, some say companies are flooding the market with minor perks—from apartment rentals to automobile allowances—that comprise small components of pay packages, thereby increasing noise in the market. In fact a Compliance Week analysis of 8-Ks filed since January 1, 2005, shows that nearly 13 percent were specifically related to compensation agreements. And if you add compensation-related information that was included in other types of 8-Ks—for example, 8-Ks that included information about offer letters or board retainers—the overall percentage of comp.-related 8-Ks increases.

But others argue that there's little downside to over-informing the market. “Any time that there are more disclosure from companies with regard to changes in executive compensation plans, it’s a benefit to shareholders,” said Seelig.

The accelerated 8-K rules have also raised questions about ongoing regulatory compliance issues. For example, with the move toward more continuous reporting under the revised 8-K filing rules, some argue that the final phase of the SEC’s plans to accelerate the reporting deadlines for periodic reports may not be needed.

COMMON TYPES

Type

8-Ks

Examples

Mergers

17.64%

Purchase and sale, asset purchase, etc.

Contracts

16.62%

Supply, service agreements, MOUs, etc.

Compensation

12.93%

Stock awards, trading plans, etc.

Financial

12.12%

Credits, loans, financing packages, etc.

Employment

11.89%

Offer letters, agreements, etc.

Insurance

7.20%

Insurance, reinsurance, etc.

Separation

5.87%

Separation agreements, severances, etc.

Joint Venture

5.29%

Partnerships, JVs, etc.

Unknown

5.26%

Uncharacterized 8-Ks

Legal

4.75%

Settlements, misc. contacts, etc.

Directors

0.43%

BoD issues: indemnity, retainer fees, etc.

Source: Compliance Week analysis of SEC filings.

“Because the 8-K filing rules get so much material out so quickly to investors,” asks Copenhafer, “is the second phase of accelerated 10-K and 10-Q reporting really necessary?”

In late 2004, the SEC postponed the third and final phase of the accelerating filing requirements to give all companies more time to cope with the internal control provisions of Sarbanes-Oxley. Currently, companies have 75 days following the end of their fiscal year to file annual reports and 40 days following the end of each quarter to file quarterly reports. That schedule will ultimately “accelerate” to 60 days and 35 days for annual and quarterly reports, respectively.

“There’s some awareness that even the most communicative companies are under a tremendous burden caused by all of the new regulations,” said Nowlan. “We’ve seen companies whose entire infrastructure has been turned upside down to make sure every pricing decision, every legal decision, every technology decision is reviewed to comply with SOX—it requires a tremendous amount of resources.”

Wander

Indeed, that seems to be a question the SEC is addressing. In addition to the November 2004 delay of the final “phase-in” period, the SEC Advisory Committee on Smaller Public Companies has recommended that the Commission scrap or postpone for smaller companies the final phase-in. “We’re suggesting that those dates should stay at the same place that they are now,” Committee co-chair Herbert Wander told Compliance Week. A SEC spokesman confirmed that the Committee is recommending that smaller companies “should not be subject to further acceleration of the due date of periodic reports required under the Securities Exchange Act of 1934.”

“Even though companies may have gotten their 404 programs in reasonable shape, it’s a substantial stretching of resources,” says Copenhafer at Bowne. “What is another round of acceleration going to do? There’s some recognition that it could be very tough—the issue is, is it worth it?”

Copenhafer even admits that the issue could impact companies like his, which process corporate reports for disclosure to regulators and shareholders in print and electronic formats. That’s because if the final phase of the acceleration project is implemented next year as planned, the annual reporting filing deadline for public companies will coincide with mutual funds’ annual reporting deadlines. “Our resources will be stretched as well,” he said.