[Federal Register Volume 59, Number 201 (Wednesday, October 19, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-25814]
[[Page Unknown]]
[Federal Register: October 19, 1994]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release Nos. 33-7101; 34-34831; 35-26141; 39-2324; IC-20619) File No.
S7-29-94]
Safe Harbor for Forward-Looking Statements
AGENCY: Securities and Exchange Commission.
ACTION: Concept Release and Notice of Hearing.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
soliciting comment on current practices relating to disclosure of
forward-looking information. In particular, the Commission seeks
comment on whether the safe harbor provisions for forward-looking
statements (set forth in Rule 175 under the Securities Act of 1933
(``Securities Act''), Rule 3b-6 under the Securities Exchange Act of
1934 (``Exchange Act''), Rule 103A under the Public Utility Holding
Company Act of 1935 and Rule 0-11 under the Trust Indenture Act of
1939) are effective in encouraging disclosure of voluntary forward-
looking information and protecting investors or, if not, should be
revised and if revised, how. The Commission also seeks comment on
various changes to the existing safe harbor provisions that have been
suggested by certain commentators. Finally, the Commission is
announcing that public hearings will be held beginning February 13,
1995, to consider these issues.
DATES: Comments should be received on or before January 11, 1995.
Public hearings will begin at 10:00 a.m. on February 13, 1995. Those
who wish to testify at the hearings must notify the Commission in
writing of their intention to appear on or before December 31, 1994.
The written notification should include a brief summary of the proposed
testimony. Those who do not wish to appear at the hearings may submit
written testimony on or before January 11, 1995 for inclusion in the
hearing record. The schedule of appearances, date for submission of
final written testimony by persons who will appear, and an agenda for
the hearings will be announced by the Commission shortly before the
hearings commence.
ADDRESSES: Persons wishing to submit notice of an intent to appear at
the hearings, written comments or testimony should file three copies
thereof with Jonathan G. Katz, Secretary, Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. All written
notice, comments and testimony should refer to File No. S7-9-4. All
written material will be available for public inspection and copying in
the Commission's Public Reference Room, 450 Fifth Street, N.W.,
Washington, D.C. 20549.
FOR FURTHER INFORMATION CONTACT: Kevin C. Bruce or Andrew A. Gerber,
Attorney-Advisers in the Division of Corporation Finance or Amy
Bowerman Freed, Deputy Chief Counsel, Division of Corporation Finance
at (202) 942-2900.
SUPPLEMENTARY INFORMATION:
I. Introduction
Forward-looking information1 occupies a vital role in the
United States securities markets. Investors typically consider
management's forward-looking information important and useful in
evaluating a company's economic prospects and consequently in making
their investment decisions.2 Analysts and other market
participants report that they view consideration of management's own
performance projections, i.e., earnings and revenues, to be critical to
their own forecasts of a company's future performance. As such,
forward-looking information is often considered a critical component of
investment recommendations made by broker-dealers, investment advisers
and other securities professionals.3
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\1\The term ``forward-looking statement'' is defined in current
Rule 175 as limited to the following: (1) A statement containing a
projection of revenues, income (loss), earnings (loss) per share,
capital expenditures, dividends, capital structure or other
financial items; (2) A statement of management's plans and
objectives for future operations; (3) A statement of future economic
performance contained in management's discussion and analysis of
financial condition and results of operations included pursuant to
Item 303 of Regulation S-K or Item 9 of Form 20-F; or (4) Disclosed
statements of the assumptions underlying or relating to any of the
statements described in (1), (2), or (3) above. 17 CFR 230.175.
\2\Advisory Committee on Corporate Disclosure to the Securities
and Exchange Commission, Report to the House Committee on Interstate
and Foreign Commerce, 95th Cong., 1st Session, (Committee Print
1977) [hereinafter the ``Advisory Committee Report'']; Securities
Act Release No. 6084 (Jun. 25, 1979); see also H. Pitt and K.
Groskaufmanis, Securities Law, Nat. L. J. (Aug. 22, 1994) at B4.
\3\Advisory Committee Report, supra note 2, at 351.
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A. Development of Safe Harbor
1. Wheat Commission
Until the early 1970s, the Commission prohibited disclosure of
forward-looking information.4 This policy was based primarily on
the Commission's perception that such information was inherently
unreliable, and that unsophisticated investors would place undue
emphasis on the information in making investment decisions.5
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\4\Securities Act Release No. 5362 (Feb. 2, 1973).
\5\Disclosure to Investors: A Reappraisal of Administrative
Policies Under the 1933 and 1934 Acts (1969) at 94 [hereinafter the
``Wheat Report''].
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Acting on the recommendation of a number of securities
analysts,6 the Commission formed a Disclosure Policy Group (the
``Wheat Commission'') to study a variety of disclosure issues,
including whether projections should be permitted or mandated in
Commission filings.
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\6\Security analysts had suggested that the Commission permit
``controlled'' projections of sales and earnings in prospectuses and
other documents filed with the Commission. Wheat Report, supra note
5, at 95-96.
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While the Wheat Commission's Report to the Commission, published in
1969, recognized that most investment decisions are based essentially
on estimates of future earnings, the Commission determined that the
detriments to investors associated with permitting forward-looking
disclosure weighed against lifting the ban on disclosure of such
information. In the Wheat Commission's view, the heightened litigation
exposure, updating requirements and risk of undue investor reliance on
this information outweighed any countervailing benefits.7
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\7\The Wheat Report stated these findings as follows: From a
management standpoint, projections may change rapidly during a given
year as changes occur in the factors on which they are based.
Inclusion of such changing projections in a prospectus, which might
be used long after it became effective would give rise to
significant problems. It has been the Commission's long-standing
policy not to permit projections and predictions in prospectuses and
reports filed with the Commission. Such documents are designed to
elicit material facts. Their factual character is widely recognized.
Investors and their advisers are at liberty to make their own
projections based on the disclosures resulting from the Commission's
requirements. A real danger exists, in the Study's judgment, that
projections appearing in prospectuses and other documents filed
under securities laws and reviewed by the Commission would be
accorded a greater measure of validity by the unsophisticated than
they would deserve. Wheat Report, supra note 5, at 95-96.
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2. Rulemaking Initiatives
The Commission continued to consider these issues and conducted
hearings in 1972 to determine whether to lift the ban and, instead,
either mandate or permit disclosure of forward-looking information. The
1972 hearings involved fifty-three witnesses and resulted in the
submission of over 200 letters of comment. A significant number of
those letters were from issuers objecting to any suggestion that they
be required to file forward-looking statements with the Commission.
Following those hearings, the Commission elected in 1973 not to require
disclosure of forward-looking information, but announced in a policy
statement its intention to promulgate rules to permit voluntary
disclosure of projections and to protect those projections from civil
antifraud liability.8
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\8\Securities Act Release No. 5362 (Feb. 2, 1973) (``[t]he
Commission has never required a company to publicly disclose its
projections and does not intend to do so now''). The Commission
stated that its decision not to mandate disclosure of forward-
looking statements was based on its desire not to deviate too far
from its historical position of prohibiting such disclosure. Id.
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In 1975, the Commission issued a series of proposals designed to
implement the 1973 policy statement.9 Specifically, the proposals
would have:
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\9\See Securities Act Release No. 5581 (April 28, 1975).
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1. Required the filing of a Form 8-K by any registrant that (a) had
furnished a projection to any person, (b) had reason to believe that
its public projections no longer had a reasonable basis, (c) had
determined to cease issuing projections, or (d) wished to disassociate
itself from a third person's projections;
2. Amended Form 10-K to (a) require inclusion therein of all prior
projections, together with actual and historical results; (b) require
inclusion of projections for future periods that had been previously
filed with the Commission; and (c) limit the filing of projections to
those issuers with Exchange Act reporting histories and budgeting
experience and to those projections that satisfied the requirements of
proposed safe harbor Rules 132 (a proposed predecessor of Rule 175) and
3b-6;
3. Created new Rules 132 and 3b-6, providing a safe harbor ``by
defining circumstances under which a projection would be deemed not to
be an untrue or misleading statement of a material fact or a
manipulative, deceptive, or fraudulent device, contrivance, act or
practice as those terms are used in the various liability provisions of
the federal securities laws''; and
4. Required that all projection information contained in the text
of Form 10-K (but not exhibits) be included in the registrant's annual
report to shareholders.10
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\1\0See id.
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In 1976, these proposed rules were withdrawn by the Commission in
response to opposition from commenters.11 In withdrawing the
proposals, the Commission stated its hope that forward-looking
information and the need for a safe harbor would be among those issues
considered by the newly formed Advisory Committee on Corporate
Disclosure.12
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\1\1See Securities Act Release No. 5699 (Apr. 23, 1976).
\1\2See id. At the same time, the Commission expressed initial
approval of new Division of Corporation Finance guides designed to
encourage the inclusion of projections in Commission filings. These
guides called for: (1) A good faith assessment of the reliability of
the projection; (2) a reasonable basis for that assessment; (3)
outside review of the projections; (4) the use of reasonable ranges;
(5) the use of a reasonable period of projection; (6) the inclusion
of assumptions on which the projection is based; (7) the inclusion
of cautionary language; and (8) disclosure of the accuracy of the
issuer's prior projections. The Commission authorized issuance of
substantially similar final guides in Securities Act Release No.
5992 (Nov. 7, 1978).
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3. Advisory Committee Report
The Advisory Committee on Corporate Disclosure was formed in 1976
to evaluate certain of the Division of Corporation Finance's disclosure
policies--among them the Division's policy on disclosure of forward-
looking information.13 On November 3, 1977, the Advisory Committee
submitted its report to the Commission.14
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\1\3See Exchange Act Release No. 12454 (May 18, 1976).
\1\4Advisory Committee Report, supra note 2.
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In the course of its deliberations, the Advisory Committee had
sought input from all interested persons on the costs and benefits of
forward-looking information.15 The Advisory Committee recommended
in its report that the Commission act to encourage forward-looking
disclosures, and made several specific recommendations regarding the
form and substance of proposed Commission action.
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\1\5Id.; see also Exchange Act Release No. 12454 (May 18, 1976)
(noting public meetings held by the Advisory Committee and case
studies to be conducted by the Advisory Committee of thirty public
companies, financial analysts and investment decision makers).
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First, in recognition that the Commission needed experience with
projections disclosure in order to evaluate the wisdom of establishing
a regulatory framework for such disclosure, the Committee stated that
its recommendations were intended to encourage projections on an
experimental basis. Such voluntary disclosure would enable the
Commission to assess both the usefulness of the information to
investors, and the costs to issuers of providing that
information.16 If forward-looking information disclosures
ultimately were found to be beneficial to investors, the Committee
believed that market forces, rather than a Commission mandate, would
operate effectively to compel issuers to make such disclosures.17
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\1\6Advisory Committee Report, supra note 2, at 353.
\1\7Id. at 354.
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Second, the Committee recommended that the Commission adopt a safe
harbor that would protect forward-looking statements made in good faith
and with a reasonable basis, regardless of whether those statements
were included in documents filed with the Commission. The Committee
recommended that the burden be placed on the person seeking to
establish antifraud liability for the forward-looking statement to show
a lack of good faith or reasonable basis.18
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\1\8Id. at 344.
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Third, the Committee opined that a safe harbor should be available
to all registrants, regardless of size and reporting history. It also
recommended that companies be required to publish cautionary language
along with the projection, to indicate clearly the nature of the
projection and caution investors against ascribing undue weight
thereto.19 The Committee believed that disclosure of assumptions
should be encouraged, but not required.20 Further, the Committee
concluded that companies should be encouraged, but not required, to
compare actual results with earlier projections and to explain any
significant variance.
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\1\9See id.
\2\0Although the Committee recognized the value of assumptions,
it opted against requiring disclosure of assumptions for two
reasons: (a) because of the experimental nature of the program, the
Committee apparently concluded that fewer mandatory disclosure items
were appropriate; and (b) in order to encourage as many issuers to
use the safe harbor rule as possible, the Committee wanted to keep
the rule simple and thus facilitate compliance. Id.
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While the Committee recommended that companies be reminded of their
obligations to keep a published projection from becoming misleading in
light of subsequent events, it urged that no formal requirement to
update projections be imposed. In the Committee's view, companies
should be permitted either to discontinue making projections or to
resume such projections after discontinuation, but should not do so
without a reasonable basis.
The Committee had a different view of mandatory disclosure and
updating in connection with forward-looking information disseminated
during the Securities Act registration process. Specifically, the
Committee expressed its opinion that ``the Commission should require
companies to include such current projections covering the current
period in their registration statements (updated as necessary) filed
under the Securities Act.''21
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\2\1Id. at 361.
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With respect to the type of information that should be disclosed,
the Committee believed that companies should have the flexibility to
choose which items to disclose, but should not be permitted to disclose
only ``favorable'' items. Finally, the Committee recommended that the
Commission permit third-party review of projections, provided that the
third-party reviewer's credentials, extent of review, and relationship
with the issuer were disclosed.22
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\2\2The Committee believed that any such reviewer should be
deemed an expert and should file an appropriate consent with the
registration statement. Id.
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4. Adoption of Safe Harbor Provision
In response to the Advisory Committee Report, the Commission
announced in early 1978 that the Committee's recommended safe harbor
rule would receive formal Commission consideration, along with any
alternatives the Commission deemed appropriate.23 Later that year,
the Commission issued for public comment two versions of a safe harbor
rule for forward-looking information: the Advisory Committee version,
in the same form as the Committee had proposed, and another version
formulated by the Commission.24
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\2\3Securities Act Release No. 5906 (Feb. 15, 1978).
\2\4See Securities Act Release No. 5993 (Nov. 7, 1978).
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As set forth in the Commission's proposing release, the differences
between the two proposals, as well as the questions asked and comments
requested, reflected the Commission's reservations with respect to
certain aspects of the Advisory Committee proposal. First, the
Commission was particularly concerned that the burden of proving a lack
of reasonable basis, which the Committee recommended be imposed on the
plaintiff, ``could be insurmountable.''25 The Commission therefore
proposed an alternative rule that would have placed the burden on the
defendant to prove that a challenged projection was made in good faith
and with a reasonable basis.
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\2\5Id.
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There were several other substantive differences between the two
proposals. Unlike the Advisory Committee's proposal, the Commission's
alternative extended to third-party projections, while concomitantly
restricting safe harbor protection to financial projections and similar
statements, limiting safe harbor protection to statements made about
reporting companies, and excluding statements about investment
companies. Significantly, both proposed safe harbor rules covered all
oral and written forward-looking information, not just when contained
in Commission filings. Neither proposal specifically required inclusion
of current projections in registration statements filed under the
Securities Act, and no mention was made in the release of the reasons
for this omission.
In response to the proposals, the Commission received approximately
90 letters of comment. A majority of commenters expressed a belief that
a rule incorporating aspects of both proposals would provide the best
incentive for projection disclosure.26 Although a few commenters
expressed continuing reservations about the Commission's proposed shift
in policy from prohibiting to encouraging projection disclosure,
virtually all agreed that a safe harbor rule was desirable and
necessary.27 Most commenters agreed that the safe harbor should be
extended to statements made on behalf of the issuer (i.e., by third
party reviewers).
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\2\6Securities Act Release No. 6084 (Jun. 25, 1979).
\2\7Id.
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Several commenters criticized other aspects of the Commission's
alternative proposal, arguing that the burden of proof for establishing
that a projection did not have a reasonable basis or was not made in
good faith should be imposed on the plaintiff,28 and that the
rule's coverage should be extended beyond revenues, earnings, and
``other financial items'' to encompass management's plans and
objectives.29 Commenters argued that the rule's protections should
not be limited to companies with a reporting history.30 Commenters
concurred in the proposal to forego conditioning the rule's
availability on inclusion of the information in Commission filings on
the ground that such a condition could result in a loss of the safe
harbor's protections based on a technical or inadvertent filing
delinquency. Comments on the propriety of projections by investment
companies were mixed.31
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\2\8Id. Placing the burden on corporate defendants to prove that
a projection was prepared with a reasonable basis and disclosed in
good faith was viewed as undermining the Commission's goal of
encouraging projection disclosure, and possibly worse than no rule
at all.
\2\9Id.
\3\0Id. According to the release, commenters argued that
``forecast information may be most valuable regarding companies that
do not have a history of public information.'' Id.
\3\1Id. As the Commission observed, ``some commenters did not
perceive a basis for distinguishing between investment companies and
other issuers . . . . Other commenters believed that the type of
information generated by investment companies would be more
difficult to forecast with reliability and is dependent upon market
factors and responses to market events that are inherently
unpredictable.''
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In 1979, the Commission adopted a safe harbor provision that
generally combined aspects of both proposals.32 Virtually
identical safe harbor provisions were codified in Rule 175 under the
Securities Act and Rule 3b-6 under the Exchange Act.33 These
provisions offered safe harbor protection for specified forward-looking
statements but only where made, reaffirmed, or later published, in
documents filed with the Commission. On this point, the Commission
stated that this ``filing'' requirement would provide investors with
better access to the information and a more reliable framework within
which to evaluate the forward-looking statement, and would enable the
Commission to maintain oversight of the accuracy and completeness of
the disclosure.
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\3\2See Securities Act Release No. 6084 (Jun. 25, 1979).
\3\317 CFR 230.175 (1994), 17 CFR 240.3b-6 (1994).
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Second, the final rule incorporated the Advisory Committee's
recommendation of placing the burden of proof on the plaintiff to show
that the forward-looking information lacked a reasonable basis and was
made otherwise than in good faith. The Commission reasoned that the
liberal discovery procedures available in the federal courts had
permitted plaintiffs to elicit the evidence necessary to sustain this
burden. The Commission stated that it would monitor the operation of
the safe harbor rule to assure that it was not inconsistent with the
pre-eminent statutory goal of investor protection.34
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\3\4Id.
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The safe harbor provision, as adopted, did not require the
publication of assumptions underlying forward-looking statements
covered by the rule. In describing the basis for this decision, the
Commission ``re-emphasize[d] its position on the significance of
assumption disclosures,'' explaining that:
Under certain circumstances the disclosure of underlying assumptions
may be material to an understanding of the projected results. The
Commission also believes that the key assumptions underlying a
forward-looking statement are of such significance that their
disclosure may be necessary in order for such statements to meet the
reasonable basis and good faith standards embodied in the rule.
Because of the potential importance of assumptions to investor
understanding and in order to encourage their disclosure, the rule
as adopted indicates specifically that disclosed assumptions are
also within its scope.35
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\3\5Id.
The Commission made explicit the availability of the safe harbor to
third-party reviewers, both those retained by the company and those
making projections on behalf of management. Also, while not adding any
requirement to update projections, the Commission reiterated its
earlier position that projections protected by the safe harbor must be
corrected when subsequent events or discoveries render them false or
misleading.
Finally, the Commission elected not to extend coverage of the rule
to investment companies registered under the Investment Company Act of
1940. While not rejecting the possibility that projections could be
valuable to shareholders of registered investment companies, the
Commission stated that ``the nature of information reported by
investment companies is sufficiently distinct to warrant separate
consideration.''36
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\3\6Id. The Commission decided not to require that investment
companies provide forward-looking disclosure under the recently-
adopted ``management's discussion of performance'' requirement for
registered open-end investment companies. Securities Act Release No.
6988 (Apr. 6, 1993).
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The safe harbor provision has retained its essential elements,
although the Commission has made several technical modifications since
its adoption.37
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\3\7See Securities Act Release No. 6949 (Jul. 30, 1992);
Securities Act Release No. 6353 (Mar. 3, 1982); Securities Act
Release No. 6304 (Mar. 27, 1981); Securities Act Release No. 6291
(Feb. 17, 1981); and Securities Act Release No. 6288 (Feb. 9, 1981).
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B. Management's Discussion and Analysis Interpretative Release
Since 1979, the Commission has further refined its position on
disclosure of forward-looking information, particularly in the context
of developing and interpreting the management's discussion and analysis
(``MD&A'') requirements applicable to the Form 10-K and other required
filings, as codified in Regulation S-K Item 303.38 These contain a
number of provisions that call for disclosure of prospective
information.39 An instruction to Item 303(a) states that the MD&A
``shall focus specifically on material events and uncertainties known
to management that would cause reported financial information not to be
necessarily indicative of [the] future * * *.''40 In contrast to
this required disclosure of ``presently known data which will impact
upon future operating results,'' registrants are expressly encouraged,
but not required, to supply forward-looking information.41 The
Commission clarified the distinction between ``voluntary'' and
``mandatory'' forward-looking disclosure in a 1989 interpretative
release relating to MD&A:
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\3\8Regulation S-K Item 303, 17 CFR 238.303 (1994).
\3\9With respect to liquidity, disclosure is required of ``any
known trends or any known demands, commitments, events or
uncertainties that will result in or that are reasonably likely to
result in * * *'' material changes. See Regulation S-K Item
303(a)(1), 17 CFR 229.303(a)(1) (1994). With respect to capital
resources, the disclosure calls for ``any known material trends,
favorable or unfavorable * * *'' Regulation S-K Item 303(a)(2)(ii),
17 CFR 229.303(a)(2)(ii) (1994). With respect to sales, revenue or
income, the Item calls for ``any known trends or uncertainties that
have had or that the registrant reasonably expects will have a
material favorable or unfavorable impact * * *'' Regulation S-K Item
303(a)(3)(ii), 17 CFR 229.303(a)(3)(ii).
\4\0See Regulation S-K Item 303, Instruction 3, 17 CFR 229.303
(1994).
\4\1See Regulation S-K, Item 303, Instruction 7, 17 CFR 229.303
(1994).
Both required disclosure regarding the future impact of presently
known trends, events or uncertainties and optional forward-looking
information may involve some prediction or projection. The
distinction between the two rests with the nature of the prediction
required. Required disclosure is based on currently known trends,
events, and uncertainties that are reasonably expected to have
material effects, such as: a reduction in the registrant's product
prices; erosion in the registrant's market share; changes in
insurance coverage; or the likely non-renewal of a material
contract. In contrast, optional forward-looking disclosure involves
anticipating a future trend or event or anticipating a less
predictable impact of a known event, trend or uncertainty.42
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\4\2Securities Act Release No. 6835 (May 18, 1989).
Thus, the Commission has distinguished between mandatory and voluntary
forward-looking statements for disclosure purposes. Moreover, in the
context of transactions involving an issuer's or affiliate's purchase
of the issuer's shares, or a business combination, forward-looking
information (including projections) may be required pursuant to Rule
10b-5.43
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\4\3Projections might also be contained in documents required to
be filed and discussed pursuant to specific line item requirements.
See Item 4(b) of Form S-4; 17 CFR 239.25; Item 9 of Schedule 13E-3;
17 CFR 240.13e.100
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C. Qualitative Performance
There appears to be increasing interest, on the part of both
registrants and users of their financial reports in the investor and
analyst communities, in enhanced disclosure of information that may
affect corporate performance but is not readily susceptible of
measurement in traditional, quantitative terms.44 Among such
qualitative informational items are workforce training and development,
product and process quality and customer satisfaction. A large
registrant considers one such item--product quality--to be so important
to its profitability that it has chosen to make it a key determinant of
executive compensation.45 Other companies are beginning to
experiment with voluntary disclosure of the utilization of an
intangible asset termed ``intellectual capital,'' or employee
knowledge.46 In this connection, another federal agency has urged
more corporate disclosure of the use of measures of ``high performance
work practices and other nontraditional measures'' of corporate
performance.47
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\4\4See R. Eccles and S. Mavrinac, Improving the Corporate
Disclosure Process (Harvard Business School Working Paper 94-061
(1994) (hereinafter ``Eccles & Mavrinac''); Stewart, Your Company's
Most Valuable Asset: Intellectual Capital, Fortune, October 3, 1994
at 68 (hereinafter ``Stewart'').
\4\5See Chrysler Corporation, 1994 Proxy Statement, filed March
16, 1994.
\4\6See Stewart, supra note 44; (citing Skandia AFS' 1994 Annual
Report to Shareholders). See also 1994 Annual Reports to
Shareholders submitted to the Commission by Dow Chemical Corporation
and National Steel Company.
\4\7Letter from Secretary Robert B. Reich to Chairman Arthur
Levitt (Oct. 3, 1994).
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With respect to the interest of users in this type of ``soft,'' or
nonquantitative, corporate information, a large public pension fund
factors labor-management relations and other aspects of human resource
management into analyses of portfolio company performance in connection
with the fund's investment and voting decisions, based on research
indicating that workplace practices can be linked to corporate
performance.48 Private pension fund fiduciaries are likely to
follow this example, given the Department of Labor's recent issuance of
an interpretive bulletin urging such fiduciaries to monitor more
closely portfolio companies' investment in training and otherwise
developing their workforce.49
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\4\8See IRRC Corporate Governance Highlights, (July/August 1994)
at 15-16 (reporting that the California Public Employees' Retirement
System, the nation's largest public pension fund, announced that it
will consider workplace practices along with financial performance
criteria in connection with the fund's annual corporate governance
review of portfolio companies, based on the positive correlation
found by economist Lilli A. Gordon between ``high-performance
workplace practices'' and enhanced productivity and long-term
financial performance of such companies).
\4\9Department of Labor Interpretive Bulletin 94-2; 59 FR 38860
(July 29, 1994).
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Notwithstanding this growing market interest in access to
qualitative performance information, registrants have expressed
significant concern that disclosure of such information may expose them
to greater litigation risk.50 To the extent that this type of
``soft'' information does not fall within the current safe harbor
definition of ``forward-looking statements,'' however, it would not
receive the protection of Rule 175 or 3b-6.
\5\0See, e.g., Letter from Frank J. Borelli, Treasurer,
Financial Executives Institute to Edmund L. Jenkins, Chairman, AICPA
Special Committee on Financial Reporting, dated Aug. 8, 1994
(objecting to Jenkins Committee proposals for expanded disclosure of
additional forward-looking and qualitative performance information
due in part to litigation exposure). See also Eccles & Mavrinac,
supra note 44; Stewart, supra note 44. The Conference Board has
established a working group headed by Dr. Carolyn Brancato and
comprised of U.S and foreign companies, institutional investors,
analysts, and U.S. regulators. Charged with developing a systemic
approach to disclosure of corporate performance, both on a financial
and non-financial basis, by the spring of 1995, the Group is
exploring ways of: (a) Encouraging companies to report their use of
qualitative performance criteria despite the perceived litigation
risk; and (b) educating institutional investors, analysts and others
as to the utility of such information and its relationship to such
quantitatively measured indicia of corporate performance as
earnings.
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II. Judicial Approaches Toward Liability for Forward-Looking Statements
Contemporaneously with the evolution of the Commission's policy on
disclosure of forward-looking information, the federal courts have
adopted a variety of approaches toward private antifraud claims arising
from such disclosures.51
\5\1The safe harbor provided by Rules 175 and 3b-6 has been
implicated in only a small portion of cases involving forward-
looking statements. See Arazi v. Mullane, 2 F.3d 1456 (7th Cir.
1993); Krim v. BancTexas Group, Inc., 989 F.2d 1435 (5th Cir. 1993);
Roots Partnership v. Lands' End, Inc., 965 F.2d 1411 (7th Cir.
1992); Wielgos v. Commonwealth Edison Co., 892 F.2d 509 (7th Cir.
1989).
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A. Untrue Statement of Fact
The courts first addressed the question of whether predictions or
statements of opinion could ever be considered to be ``facts'' which
could be said to be false or misleading for purposes of liability under
the securities laws. In Marx v. Computer Sciences Corporation,52
the court found that while predictions could properly be characterized
as facts, the failure of a prediction to prove true was not in itself
actionable. Instead, the court looked at the factual representations
which it found were impliedly made in connection with the prediction;
namely that, at the time the prediction was made, it was believed by
its proponent and it had a valid basis.53 If a prediction was not
believed when made or did not have a valid basis, it would constitute
an untrue statement of fact which could then be analyzed in accordance
with the other necessary elements of the action:54 i.e.,
materiality, reliance, scienter, and causation.
\5\2507 F.2d 485 (9th Cir. 1974).
\5\3Id. at 489-90 (``[T]he forecast may be regarded as a
representation that * * * [the issuer's] informed and reasonable
belief was that at the end of the coming period, earnings would be
approximately $1.00. * * * In addition, because such a statement
implies a reasonable method of preparation and a valid basis, we
believe also that it would be `untrue' absent such preparation or
basis.''). Many courts have adopted similar formulations. See In re
Apple Computer Securities Litigation, 886 F.2d 1109, 1113 (9th Cir.
1989) (``A projection or statement of belief contains at least three
implicit factual assertions: (1) that the statement is genuinely
believed, (2) that there is a reasonable basis for that belief, and
(3) that the speaker is not aware of any undisclosed facts tending
to seriously undermine the accuracy of the statement. A projection
or statement of belief may be actionable to the extent that one of
these implied factual assertions is inaccurate.'' (citing Marx));
Isquith v. Middle South Utilities, Inc., 847 F.2d 186, 203-04 (5th
Cir. 1988) (``Most often, whether liability is imposed depends on
whether the predictive statement was `false' when it was made. The
answer to this inquiry, however, does not turn on whether the
prediction in fact proved to be wrong; instead, falsity is
determined by examining the nature of the prediction--with the
emphasis on whether the prediction suggested reliability, bespoke
caution, was made in good faith, or had a sound factual or
historical basis.'' (footnote omitted)); Kirby v. Cullinet Software,
Inc., 721 F.Supp. 1444, 1450 (D.Mass. 1989) (``At a minimum, a
prediction must be made in good faith and with a sound historical or
factual basis.'').
Rule 175 and Rule 3b-6 follow a similar path by providing that a
covered statement shall not be deemed to be, inter alia, an untrue
statement of a material fact, unless it is shown that such statement
was made or reaffirmed without a reasonable basis or was disclosed
other than in good faith. Although the Rules use the term
``fraudulent statement'' to refer to such an untrue statement of a
material fact, a separate determination must be made as to whether
the statement, though untrue, is fraudulent or otherwise actionable
under the securities laws. In Wielgos v. Commonwealth Edison Co.,
supra at 513, the court considered the use of the term ``fraudulent
statement'' in the Rules, but easily determined that Rule 175
applies to actions under Sec. 11 of the Securities Act even though
liability under that section does not depend on ``fraud.''
\5\4Id. at 490. In the recent case of Rubinstein v. Collins, 20
F.3d 160, 169 (5th Cir. 1994), the court stated this point
succinctly: Simply alleging that the predictive statements at issue
here did not have a reasonable basis--that is, that they were
negligently made--would hardly suffice to state a claim under Rule
10b-5. As we have consistently held, scienter is an element of such
a claim. * * * Plaintiffs have satisfied the pleading requirements
for scienter. They have claimed that the defendants either knew--or
were recklessly indifferent to--the fact that the predictive
statements did not have a reasonable basis. (Footnotes omitted.)
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B. Materiality and Reliance
Some courts have disposed of cases involving forward-looking
statements without reaching the issue of these implied factual
assertions by examining another element of the claim--materiality or,
as described in some cases, reliance. Most of these cases have been
decided on the basis of the ``bespeaks caution'' doctrine,55 which
has been described as follows:
\5\5Seven circuit courts have applied the bespeaks caution
doctrine in analyzing forward-looking statements (although the Sixth
Circuit, after applying the doctrine in one case, stepped back
somewhat in a subsequent decision). See In re Worlds of Wonder Sec.
Litig.,--F.3d --, 1994 WL 501261 (9th Cir. 1994); Rubinstein v.
Collins, 20 F.3d 160 (5th Cir. 1994); In re Donald J. Trump Casino
Sec. litig., 7 F.3d 357 (3d Cir. 1993); Luce v. Edelstein, 802 F.2d
49 (2d Cir. 1986); Romani v. Shearson Lehman Hutton, 929 F.2d 875
(1st Cir. 1991); Moorhead v. Merrill Lynch, Pierce, Fenner & Smith,
Inc., 949 F.2d 243 (8th Cir. 1991). The Sixth Circuit adopted the
doctrine in Sinay v. Lamson & Sessions Co., 948 F.2d 1037 (6th Cir.
1991), but revised its application of the doctrine in Mayer v.
Mylod, 988 F.2d 635 (6th Cir. 1993). See generally Donald C.
Langevoort, Disclosures that ``Bespeak Caution,'' 49 Bus. Law. 481
(February 1994).
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The essence of the doctrine is that where an offering statement,
such as a prospectus, accompanies statements of its future
forecasts, projections and expectations with adequate cautionary
language, those statements are not actionable as securities
fraud.56
---------------------------------------------------------------------------
\5\6In re Donald J. Trump Casino Sec. Litig., 793 F.Supp. 543,
549 (D.N.J. 1992), aff'd, 7 F.3d 357 (3d Cir. 1993).
Under the bespeaks caution doctrine, cautionary language, as a part
of the ``total mix'' of information, may render a predictive statement
immaterial as a matter of law,57 or make it unreasonable for an
investor to rely upon a predictive statement.58 Recently, some
courts have warned, however, that cautionary language, in and of
itself, is not necessarily sufficient.59 ``To suffice, the
cautionary statements must be substantive and tailored to the specific
future projections, estimates or opinions in the prospectus which the
plaintiffs challenge.''60
---------------------------------------------------------------------------
\5\7See In re Donald J. Trump Sec. Litig., supra at 371
(``[C]autionary language, if sufficient, renders the alleged
omissions or misrepresentations immaterial as a matter of law.'');
In re Worlds of Wonder Sec. Litig., supra; Rubinstein v. Collins,
supra.
\5\8Rubinstein v. Collins, supra at 167 (cautionary language
affects ``the reasonableness of the reliance on and the materiality
of [the] projections.'' (footnotes omitted)).
\5\9See Rubinstein v. Collins, supra at 167-68; In re Donald J.
Trump Casino Sec. Litig., supra at 371-72.
\6\0In re Donald J. Trump Casino Sec. Litig., supra at 371-72.
---------------------------------------------------------------------------
Some courts have taken a more extreme position, determining that,
even without cautionary language, some predictions are not material.
For example, referring to ``soft,'' ``puffing'' statements, upon which
no reasonable investor would rely, the Court of Appeals for the Fourth
Circuit stated that, ``projections of future performance not worded as
guarantees are generally not actionable under the federal securities
laws.''61
---------------------------------------------------------------------------
\6\1Raab v. General Physics Corp., 4 F.3d 286, 290 (4th Cir.
1993) (quoting Krim v. BancTexas Group, Inc., 989 F.2d 1435, 1446
(5th Cir. 1993)). In Malone v. Microdyne Corp., 26 F.3d 471, 479-0
(4th Cir. 1994), the Court of Appeals relied on Raab in finding that
a forward-looking statement was not actionable because the
``statement obviously did not constitute a guarantee and was
certainly not specific enough to perpetrate a fraud on the market.''
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III. Criticisms of the Commission's Safe Harbor
Some have suggested that companies that make voluntary disclosure
of forward-looking information subject themselves to a significantly
increased risk of securities antifraud class actions.62 Recent
surveys suggest that this threat of mass shareholder litigation,
whether real or perceived, has had a chilling effect on disclosure of
forward-looking information.63
---------------------------------------------------------------------------
\6\2 U. Gupta & B. Bowers, Small Fast-Growth Firms Feel Chill of
Shareholder Suits, Wall St. J., April 5, 1994 at B2. See generally
Staff Sen. Subcommittee on Securities of the Committee on Banking,
Housing and Urban Affairs, Report on Private Securities Litigation,
(1994) (``Senate Staff Report'').
\6\3National Venture Capital Association, The Impact of
Securities Fraud Suits on Entrepreneurial Companies (Jan. 1994);
National Investors Relations Institute, Corporate Survey on
Shareholder Litigation Effects (Feb. 1994); American Stock Exchange
CEO Survey, Securities Litigation and Stock Option Accounting 1
(Apr. 1994).
---------------------------------------------------------------------------
Contrary to the Commission's original intent, the safe harbor is
currently invoked on a very limited basis in a litigation
context.64 Some critics of the current safe harbor provisions
cite, among other things, the following as weaknesses of the safe
harbor:
---------------------------------------------------------------------------
\6\4See Louis Loss and Joel Seligman, Securities Regulation,
622-39 (1992); Barondes, The Bespeaks Caution Doctrine: Revisiting
the Application of Federal Securities Law to Opinions and Estimates,
J.Corp. L. 243, 247 (1994).
--the protections of the safe harbor are too narrow because they are
limited to filed documents, resulting in selective disclosure made
outside Commission documents;65
---------------------------------------------------------------------------
\6\5See American Stock Exchange Survey, CEOs Would Release More
Financial Information If Litigation Albatross Were Removed (1994);
See generally S. Marino and R. Marino, An Empirical Study of Recent
Securities Class Action Settlements Involving Accountants,
Attorneys, or Underwriters, Sec. Reg. L. J. (1994) at 115; V.
O'Brien and R. Hodges, A Study of Class Action Securities Fraud
Cases 1988-1993 (working draft 1994); J. Macey and G. Miller, The
Plaintiffs' Attorney's Role in Class Action and Derivative
Litigation: Economic Analysis and Recommendations for Reform, 58 U.
Chicago L. Rev. 1 (1991).
---------------------------------------------------------------------------
--the provisions of the safe harbor are not applied by the courts in
a manner that results in quick and inexpensive dismissals of
frivolous lawsuits;66
---------------------------------------------------------------------------
\6\6Senate Staff Report, supra note 62.
---------------------------------------------------------------------------
--there is a great deal of confusion over the nature and scope of
any duty to correct or update projections once they are made;67
and
---------------------------------------------------------------------------
\6\7Manns, Duty to Correct: A Suggested Framework, 46 Md. L.
Rev. 1250 (1987).
---------------------------------------------------------------------------
--the safe harbor language is silent as to when a company may be
liable for statements made by third parties.
A. Suggested Underinclusiveness of Current Safe Harbor
Some critics argue that the current safe harbor is ineffective
largely because it is too narrow, in that it only covers statements
made in documents filed with the Commission.68 They contend that,
due to this underinclusiveness, the safe harbor provides no comfort in
most situations involving disclosure of forward-looking information.
While acknowledging concern that the problem of selective disclosure
prompted the Commission to adopt such a limitation in 1979,69
these critics contend that this very limitation has created the
unintended by-product of fostering such selective disclosure.
---------------------------------------------------------------------------
\6\8See, e.g., M. Seeley, In I.P.O.'s, the More Data the Better,
New York Times Forum, April 26, 1992. The majority of litigated
cases appear to arise out of non-filed forward-looking statements
further undercutting the utility of the safe harbor.
\6\9See Advisory Committee Report, supra note 2.
---------------------------------------------------------------------------
Many public companies complain that they face increasing analyst
and institutional demands for immediate access to predictive
information. Some issuers argue that, solely to gain the benefits of
the safe harbor through reaffirmation of oral responses to recurring
marketplace inquiries in Commission documents, they would be put to the
impossible task of memorializing every analyst discussion. Given the
informal and often unpredictable nature of communications between
issuers and analysts, the provision in the safe harbor requiring
Commission filing of forward-looking information is viewed as both
counterproductive and highly impractical.
B. Judicial Application
Another complaint commonly raised is that the provisions of the
existing safe harbor do not influence the standards that courts apply
in securities fraud cases. The safe harbor is infrequently raised by
defendants, perhaps because it compels judicial examination of
reasonableness and good faith, which raise factual issues that often
preclude early, prediscovery dismissal. Thus, critics state that the
safe harbor is ineffective in ensuring the quick and inexpensive
dismissal of frivolous private lawsuits. These critics argue that,
unless the courts vigorously apply a higher pleading threshold
sufficient to sustain a motion to dismiss based on the allegations of a
class-action complaint, the mere threat of litigation will continue
both to discourage management from making forward-looking disclosure
and cause those companies that nonetheless provide such disclosure to
incur significant costs in defense of nonmeritorious litigation. Those
urging reform thus maintain that, in order for a safe harbor
effectively to encourage forward-looking disclosure, it must add
protection over and above those afforded by judicial doctrines
developed under what are characterized as the ``housekeeping''
provisions of the Federal Rules of Civil Procedure--Rules 9(b) and
12(b)(6).70
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\7\0In deciding motions under Rule 12(b)(6) of the Federal Rules
of Civil Procedure, at least one commentator has noted that courts
apply different standards of materiality. See Sullivan, Materiality
of Predictive Information After Basic: A Proposed Two-Part Test of
Materiality, 1990 U. Ill. L. Rev. 207 (1990). For motions decided
under Rule 9(b) of the Federal Rules of Civil Procedure, some courts
have imposed a high burden on plaintiffs, requiring them to allege
specific facts that give rise to an inference of fraudulent intent.
Romani v. Shearson Lehman Hutton, 929 F.2d 875 (1st Cir. 1991); see
also DiLeo v. Ernst & Young, 901 F.2d 624 (7th Cir. 1990). Other
courts appear to have been more lenient. In re Glenfed, 11 F.3d 849
(9th Cir. 1993) (``plaintiff must allege facts that would give rise
to an inference that the defendant did not believe the statements or
knew of their falsity'').
---------------------------------------------------------------------------
A related criticism is that courts are inconsistent in applying the
safe harbor when it is implicated in the litigation. The courts do not
always refer to the safe harbor when it is implicated.71 One court
refused to permit the use of the safe harbor because the earnings
forecast in question had been presented ``as a fact certain rather than
as a `projection' or `forward-looking statement.'''72 In this
regard, commenters assert that the Commission should provide greater
guidance to the judiciary with respect to the appropriate application
of the safe harbor.
---------------------------------------------------------------------------
\7\1The courts seldom refer to the safe harbor unless it is
raised by the defendant. Examples of cases in which the safe harbor
was implicated but not referenced include Mayer v. Mylod, 988 F.2d
635 (6th Cir. 1993), Romani v. Shearson Lehman Hutton, 929 F.2d 875
(1st Cir. 1991), and In re Control Data Corp., 933 F.2d 616 (8th
Cir. 1991).
\7\2Allyn Corp. v. Hartford National Corp., 1982 WL 1301
(D.Conn. 1982).
---------------------------------------------------------------------------
C. Duty To Correct or Update
A further criticism of the Commission's existing safe harbor is
that the rule has created confusion over whether and when there is a
duty to correct or update projections once they are made. A recent
article suggests that issuers are often advised by their counsel to
refrain from making forward-looking statements in Commission filings,
or even from speaking to analysts, because they fear that by doing so
they will ``assume'' a duty to update their forward-looking statements
as and when the facts and circumstances surrounding their original
statements change.73 Furthermore, the paucity of caselaw in this
area has left issuers without comfort or certainty as to when and if
there is any duty to update or correct.74 Commentators have
questioned how long a forward-looking statement will be considered
current and how far in the future, if at all, an issuer must continue
to update.75
---------------------------------------------------------------------------
\7\3See H. Pitt and K. Groskaufmanis, Selective Disclosure can
be Perilous, Nat'l. L. J. (Apr. 18, 1994) at B4.
\7\4The First Circuit has stated that the duty to update is
triggered if a statement having a forward intent or implication,
upon which investors are expected to rely, has been made. Backman v.
Polaroid, 910 F.2d 17 (1st Cir. 1990) (en banc). The Ninth Circuit
stated that an accurate announcement of past events did not carry
with it the duty to disclose whether past trends would continue. In
re Convergent Technologies Securities Litigation, 948 F.2d 507 (9th
Cir. 1991). See generally Schneider, Update on the Duty to Update:
Did Polaroid Produce the Instant Movie After All?, 23 Rev. of Sec. &
Commodities Reg. 83 (May 9, 1990).
\7\5See generally, C. Schneider, Soft Disclosure: Thrust and
Parries When Bad News Follows Optimistic Statements, 26 Rev. Sec. &
Comm. Reg. 5 (1993); R. Rosenblum, An Issuer's Duty Under Rule 10b-5
To Correct and Update Materially Misleading Statements, 40 Cath.
Univ. L. Rev. 289 (1991).
---------------------------------------------------------------------------
D. Entanglement and Endorsement
Another concern voiced by companies is whether to make forward-
looking disclosures to securities analysts and institutional investors,
whether in the context of initial public offering ``roadshows'' or
otherwise, and the corresponding liability for any forward-looking
statements included in the analysts' reports or statements. Companies
complain that a better balance must be struck between the incentives
and disincentives of disclosure to analysts.76 The New York Stock
Exchange, the American Stock Exchange, and the National Association of
Securities Dealers encourage listed or quoted corporations to seek out
formal and informal contact with analysts to facilitate the accurate
pricing of their securities.77 The Commission also encourages such
communications as a complement to disclosure under the Exchange
Act.78
---------------------------------------------------------------------------
\76\ See generally A. Berkeley & M. Smith, Corporate Disclosure:
Potential Pitfalls, Securities & Commodities Regulation (June 26,
1991).
\77\See New York Stock Exchange Manual, Sec. 202.02; American
Stock Exchange Guide Sec. 402; and National Association of
Securities Dealers Investor Relations Guide, Cultivating the
Investment Community, at 18.
\78\Securities Act Release No. 6504 (Jan. 13, 1984).
---------------------------------------------------------------------------
The foregoing regulatory incentives must be viewed in light of
potential issuer liabilities. While courts appear generally to impose
no duty on a corporation to review or comment on analysts' reports, a
corporation may become sufficiently entangled with the analysts'
statements, by reviewing or correcting drafts of reports or otherwise,
so as to assume a duty to correct or update the analyst's
statements.79 Another risk arises from selective disclosures that
may be characterized as tipping.80 As a result of these risks,
frequently perceived to outweigh the benefits, some corporations have
gone so far as to announce that they will not speak to analysts about
future earnings projections.81
---------------------------------------------------------------------------
\7\9Elkind v. Liggett & Myers, 635 F.2d 156, 163 (2d Cir. 1980).
Commentators have suggested that even a management response that an
analyst's estimates are ``too high,'' ``too low'' or ``in the
ballpark'' can give rise to liability by suggesting that management
bore some type of responsibility for the estimate; see generally
Potential Pitfalls, supra note 76.
\8\0See Securities and Exchange Commission v. Stevens, Lit. Rel.
No. 12813 (March 19, 1991); Elkind, supra. See generally M. Goldman,
K. Schuelke, J. Danforth and S. Thau, Disclosures to Financial
Analysts (PLI September-October 1993).
\8\1See, e.g., J. Coffee, Disclosures to Analysts are Risky,
Nat'l L.J. (Feb. 1, 1993).
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IV. Alternatives to Current Safe Harbor Provision
The Commission generally is examining the current effectiveness of
its safe harbors as codified in Rules 175 and 3b-6. Some commentators
and groups have submitted proposals to amend the safe harbor. The
Commission is considering these proposals and the issues that each
proposal raises, as well as its own experience in interpreting and
administering the safe harbor. Where specific proposed regulatory text
has been provided by these commentators or groups, that text is
attached in the appendix to this release.82
---------------------------------------------------------------------------
\8\2The transmittal letters pursuant to which some of these
proposals were submitted to the Commission are included in the
public file (S7-29-94).
---------------------------------------------------------------------------
A. ``Seasoned Issuer'' Proposal
The ``Seasoned Issuer'' Proposal, suggested by the Association of
Publicly Traded Companies (``APTC''), would provide a safe harbor
precluding private actions for oral and written forward-looking
statements with respect to securities quoted on the NASDAQ Stock Market
or listed on a national securities exchange. It would apply only to
secondary trading transactions and would not modify the Commission's
enforcement authority. The proposed safe harbor would be available to
issuers subject to the reporting requirements of sections 13 or 15(d)
of the Exchange Act that have timely filed all reports required to be
filed within the six months prior to the making of the statement. The
proposed safe harbor would not be available to penny stock issuers. It
also excludes issuers that had been convicted of securities law
violations or issuers that had been the subject of any securities
related injunction within the previous five years.
The term ``forward-looking statement'' is defined in the proposed
safe harbor to include any economic projection, statement of
management's plans and objectives for future operations, statement of
future performance and assumptions underlying the foregoing.
B. Business Judgment Rule Proposal
Commissioner Beese has proposed a safe harbor provision patterned
after the state-law ``business judgment rule.''83 In the pattern
of that rule, the safe harbor would establish a principle of judicial
non-intervention. As such, the safe harbor would protect directors and
officers from judicial review of shareholder antifraud claims when
forward-looking statements are made unless a plaintiff can establish a
conflict, a lack of good faith, or a failure of honest and reasonable
belief.
---------------------------------------------------------------------------
\8\3See, e.g., Paramount Communications Inc, v. QVC Network,
Inc., 637 A.2d 34, 46 n.17 (1994); Cede & Co. v. Technicolor, Inc.,
634 A.2d 345 (1993).
---------------------------------------------------------------------------
The safe harbor would cover oral or written forward-looking
information, whether or not made or reaffirmed in Commission filings.
Liability still could be imposed on directors or officers who make
fraudulent statements, intentionally misstate facts, or fail to
disclose material information when required.
To ensure that an officer or director was meeting his duties under
the business judgment rule, a company would be encouraged to keep a
projection binder reflecting the data underlying the projections. In
the event that a private lawsuit was filed, the company would proffer
the binder to the court. The burden then would shift to the plaintiffs
to show why the projections lacked a proper factual basis at the time
they were made. If unable to meet this burden, the case would be
dismissed without any discovery.84
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\8\4The Association for Investment Management and Research
(``AIMR'') has expressed support for Commissioner Beese's proposal.
See Letter from Michael S. Caccesse, Senior Vice President and
General Counsel, AIMR, to Catherine Dixon dated October 7, 1994.
---------------------------------------------------------------------------
C. ``Heightened Definition'' Proposal
The ``Heightened Definition'' Proposal, put forth jointly by the
Business Roundtable and the National Association of Manufacturers,
would apply to all forward-looking statements and reaffirmations
thereof, by or on behalf of a registrant or an outside reviewer
retained by the registrant, whether or not filed with the Commission.
The proposed safe harbor would apply to the same information as is
protected by the current safe harbor but would expressly extend to both
qualitative and quantitative statements of management's plans and
objectives for future operations, including plans for the development
and delivery of new products or services.
The provision would apply to all statements of reporting issuers
that have timely filed their most recent annual report. As provided
under the existing rule, non-reporting issuers also could rely on the
safe harbor, but only if the forward-looking statement were made in a
solicitation of interest document submitted under Securities Act Rule
254, in a registration statement or Regulation A Offering Circular
filed under the Securities Act, or in a registration statement filed
under the Exchange Act.
Liability would be imposed only if a misstatement or omission is
material, made or omitted with scienter, and, for private plaintiffs,
relied upon. Materiality would be defined as information that would
significantly alter the total mix of information available. Scienter
would be defined as actual knowledge or intentional omission to state a
material fact. Reliance would be defined as actual knowledge of and
actual reliance on the forward-looking statement in connection with the
purchase or sale of a security. Under the proposal, there would be no
attribution to the issuer of statements made by third parties unless
the issuer expressly endorsed or approved of the statement. Finally, an
issuer would not have a duty to update a forward-looking statement
unless it expressly undertook to do so at the time the statement was
made.
D. ``Bespeaks Caution'' Proposal
Professor John Coffee suggests a safe harbor that would codify a
variant of the ``Bespeaks Caution'' doctrine--articulated in terms of
an investor's inability to rely in an action for fraud upon statements
protected by the safe harbor. Under this proposed safe harbor, which
would be available to reporting companies (except penny-stock issuers),
a forward-looking statement would be protected so long as it were
properly qualified and accompanied by ``clear and specific'' cautionary
language that explains in detail sufficient to inform a reasonable
person of both the approximate level of risk associated with that
statement and the basis therefor. Forward-looking statements made,
either orally or in writing, outside the four corners of a Commission
filing would be covered only if reaffirmed in a filed document or
annual report made publicly available within a reasonable period after
the statement is first disseminated. The suggested safe harbor would
not require that the forward-looking statement have a ``reasonable
basis'' (as under existing Rules 175 and 3b-6) because, according to
Professor Coffee, this requirement often raises factual issues that
cannot easily be resolved at the pre-trial stage.
Professor Coffee's approach also contemplates amendments to the
incorporation-by-reference provisions of the Securities Act
registration forms85 that would exempt qualifying forward-looking
statements made in Exchange Act filings from automatic incorporation by
reference in Securities Act filings, and therefore from potential
liability under the antifraud provisions of the Securities Act.
Existing Rule 175 would remain available where registrants
affirmatively seek inclusion of Exchange Act filings in Securities Act
registration statements.
---------------------------------------------------------------------------
\8\5See, e.g., Item 12 of Forms S-2 and S-3 (17 CFR 239.12-13
(1994)); Items 11-13 of Form S-4 (17 CFR 239.25 (1994)); Item 12 of
Forms F-2 and F-3, (17 CFR 239.32-33 (1994)); Items 11-14 of Form F-
4 (17 CFR 239.36) (1994)).
---------------------------------------------------------------------------
E. ``Fraudulent Intent'' Proposal
Under the ``Fraudulent Intent'' proposal, submitted by Mr. William
Freeman, a forward-looking statement would be protected by the safe
harbor unless it is shown that the statement was made recklessly or
with an actual intent to deceive. In order to demonstrate that a
statement was made recklessly, a plaintiff would be required to
demonstrate that at the time the statement was made, the issuer was
aware of facts that made it highly unlikely that the projection could
be achieved.
F. ``Disimplication'' Theory
Professor Joseph A. Grundfest has suggested that, just as the
courts have implied the existence of a private right of action under
Rule 10b-5, the Commission may disimply such a right of action by
redefining the element of a private Rule 10b-5 claim.86 For
example, Professor Grundfest has suggested that if the Commission
should decide that if ``projections deserve greater protection than is
now afforded by Rule 175, then Rule 10b-5 can be amended to require a
showing of `knowing securities fraud,' demonstrating `actual knowledge
that the [projection] is false,' as a precondition for private recovery
in a Rule 10b-5 action complaining of a falsely optimistic
projection.''87
---------------------------------------------------------------------------
\8\6Grundfest, Disimplying Private Rights of Action Under the
Federal Securities Laws: The Commission's Authority, 107 Harv. L.
Rev. 961 (1994).
\8\7Id. at 1012 (footnotes omitted).
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G. Reasonable Basis In Fact Proposal
The ``Reasonable Basis In Fact'' proposal, suggested by Jonathan
Cuneo on behalf of the National Association of Securities and
Commercial Attorneys (``NASCAT'') protects forward-looking statements,
whether written or oral and whether or not filed with the Commission,
unless it can be shown that the statement was made without a reasonable
basis in fact, was seriously undermined by existing facts, was not
genuinely believed or was made other than in good faith.
The term ``forward-looking statement'' is defined to include any
statement concerning future revenues, income, earnings, capital
expenditures, dividends, products, services or lines of business,
capital structure or other financial items, as well as management's
plans or objectives for the future or the future economic performance
of the corporation. The term also includes statements or assumptions
underlying or relating to the foregoing.
H. ``Opt-In'' Proposal
The ``Opt-In'' proposal, suggested by Harvey Pitt, Karl
Groskaufmanis and Gilbey Strub, would require issuers to make a formal
election to ``opt in[to]'' a specified safe harbor disclosure
regime.88 Issuers opting in would be required to make forward-
looking disclosure for a minimum of four quarters. Before a company may
``opt out'' of the safe harbor disclosure regime, it must provide
notice 30 days before its next periodic report. The notice must detail
the reasons for opting out, and statements therein would not be
protected by the safe harbor. The company would be prohibited from
opting back into the safe harbor disclosure regime for another year.
---------------------------------------------------------------------------
\8\8H. Pitt, K. Groskaufmanis and G. Strub, Securities Law, Nat.
L. J., August 22, 1994, at B4.
---------------------------------------------------------------------------
In order to be protected, the statements must have an adequate
basis in fact, be issued in good faith and be consistent with any
similar forward-looking information used contemporaneously by the
issuer. For an issuer that has ``opted in'' to the safe harbor
disclosure regime, only the Commission would be permitted to bring suit
for projections that are made in bad faith or without a reasonable
basis.
V. Solicitation of Public Comment
The Commission seeks comment on a number of issues. Commenters
should discuss both the continuing effectiveness of the current safe
harbors in accomplishing the primary goal of encouraging broader
dissemination of forward-looking information to the investing public,
and whether the Commission should consider any change to the current
safe harbor. Would one or more of the proposals outlined above, any
combination thereof, or any other proposal commenters may wish to
identify, fulfill this goal more effectively without compromising
investor protection? Do the concerns outlined in Part III above, either
individually or in the aggregate, warrant revisiting and/or revising
the existing safe harbor? Commenters should explain in detail all bases
for their conclusion.
A. Types of Information Covered by a Safe Harbor
Assuming a safe harbor continues to be necessary or appropriate in
the interests of the investing public, commenters should discuss what
types of information should be eligible for safe harbor coverage.
Commenters supporting safe harbor coverage for forward-looking
information should address the reasons justifying a distinction between
forward-looking and historical information (either purely retrospective
or based on estimate or opinion) with respect to the level of
protection afforded to each. Does the fact that the person making the
statements has unique knowledge concerning the basis for forward-
looking statements, support or undercut this distinction? Commenters
may wish to specify whether qualitative information, including but not
limited to the type described above in Part I, is relevant to investors
such that its disclosure should be encouraged. If so, should such
information be included in the safe harbor? Should forward-looking
information that is currently part of required audited financial
information (such as loan-loss reserves, pension liabilities or
contingent environmental liabilities) be included?89 Are there
certain types of forward-looking information that should be per se
excluded from the safe harbor (e.g., such as required audited
information, or the ``known trends and uncertainties'' disclosure
required by the MD&A)?
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\8\9See Regulation S-K Item 101(c)(xii), 17 CFR 229.101(c)(xii);
Industry Guide 3, Summary of Loan Loss Experience, 17 CFR 229.801
(1994).
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Should the safe harbor distinguish between oral and written
statements, between statements filed with the Commission and non-filed
statements, or between Securities Act required statements and others?
Should the Commission require that any oral statement for which safe
harbor coverage is sought be reduced to writing and filed with the
Commission at or around the time that statement is first disseminated?
If not, commenters should describe the legal and/or practical
impediments, if any, to a contemporaneous filing requirement. Are there
certain situations, i.e., an initial public offering, in which safe
harbor protection should be limited to statements made in Commission
filings? Are commenters' views on these questions affected by the type
of forward-looking information under consideration? For example, do
different types of forward-looking information imply different degrees
of reliability, e.g., numerical financial projections as opposed to
general statements of management's outlook? If so, should a broader
safe harbor provide protection for a narrower category of information
than does Rule 175 currently, or would differing safe harbors be
warranted?
B. Voluntary Disclosure
Should the Commission continue its current general policy of
voluntary disclosure of forward-looking information or should some or
all of such information, given its significance, be mandated? If left
voluntary, should any such information used in the offer or sale of
securities by the issuer be required to be included in the prospectus?
Would this be an appropriate solution to the issue of selective
disclosure of key soft information during road shows? If not,
commenters should explain this conclusion and discuss alternative
approaches.
C. Scope of the Safe Harbor
Should the safe harbor be procedurally based or substantively based
or both? For example, should the safe harbor be available only if the
forward-looking information is reviewed by the board Audit Committee,
or some other board level committee or committee of top management or
an outside reviewer, or should the standard be a substantive one
dependent on the reasonableness or other criteria of the information
itself, regardless of the review process, or both?
D. Eligibility for and Conditions To Use of Safe Harbor
Should all issuers be eligible for the safe harbor or only certain
issuers that satisfy specified conditions, such as sufficient reporting
history and/or public float to ensure a market following? What other
conditions might be appropriate? Should issuers be required to opt-in
or opt-out of a safe harbor alone or in combination with the foregoing?
If so, what should the opt-in/opt-out conditions be? Should an issuer
be required to specify that it is seeking the protection of the safe
harbor by making a public filing, or by stating with regard to each
safe harbor-eligible statement (where the issuer chooses the safe
harbor's protection), that the statement is being made subject to the
safe harbor, or by otherwise providing a ``bespeaks caution'' or other
cautionary language? How could this condition be met (or policed) for
oral statements or written statements made outside of Commission
filings? Should the burden of proof be shifted from the plaintiff to
the defendant corporation, generally or with respect to certain types
of disclosures, i.e., written statements outside Commission filings,
oral statements, etc.? Should shareholders be permitted, or required to
vote on the availability of any safe harbor? If so, should shareholders
be permitted to approve or authorize more extensive safe harbors than
those that would otherwise be available at the election of the issuer?
Should the safe harbor require disclosure of key assumptions
because that information is uniquely within the control of the issuer?
If assumptions were required to be disclosed along with the forward-
looking information, how would this affect the judicial treatment of
forward-looking cases? For example, if assumptions were required to be
disclosed, would it make it easier for courts to evaluate motions to
dismiss cases on a procedural motion and/or impose sanctions for the
bringing of frivolous suits? Would this requirement be more or less
effective coupled with any proposed litigation reforms?
Should the safe harbor be unavailable (or provide greater or
absolute protection) if an insider, or specified insiders, traded (or
no insider, or specified insiders, traded) within a specified period
where the insiders(s) avoided a loss or made a gain (or failed to do
so) based on the dissemination and subsequent correction of the
forward-looking statement?
E. Elements of the Safe Harbor
Commenters should outline and discuss each element of an effective
safe harbor. In this connection, should the safe harbor set forth a
separate definition of materiality differing from that otherwise
applicable under Commission rules and case law? Should the safe harbor
impose and/or specify parameters for a duty to update or correct?
Should the safe harbor require that a private plaintiff establish that
he or she actually relied on forward-looking statements? Should a new
definition of scienter be included in the safe harbor, e.g., by
eliminating recklessness as an element of proof? In answering this
question, commenters should discuss separately implied and express
rights of action, as well as Commission and private actions. Should a
safe harbor include judicially developed concepts such as the
``business judgment rule,'' ``bespeaks caution'' doctrine and/or any
other judicial approaches discussed in the release? What treatment
should the safe harbor give to information that the issuer does not
disclose that may be relevant to evaluating the forward-looking
statement?
F. Private Actions
Should the safe harbor distinguish between Commission enforcement
action and private actions? Should the answer to the foregoing question
depend on whether the underlying cause of action is express or implied?
Would the Commission be able to compensate through enhanced enforcement
for any reduction in the number of private suits in this area resulting
from adoption of a particular safe harbor? How would any limitation on
private actions, whether directly imposed or incorporated in a safe
harbor, affect the Commission's longstanding policy of promoting
private actions for fraud as a necessary supplement to Commission
enforcement?
Should private litigants be required to pursue any antifraud claims
arising from statements covered by a safe harbor in a nonjudicial
forum--for example, through arbitration or some other form of alternate
dispute resolution? Some commentators have suggested that a safe harbor
should be adopted that would permit private antifraud actions to
proceed only if the Commission first brings a successful enforcement
action for fraud. Commenters are invited to address the merits of this
suggestion and means of its implementation.
G. Issuer Duties Under the Safe Harbor
Should an issuer be required to update any forward-looking
information? If so, for how long? Should the answer turn on whether
disclosure is mandated by the Commission's disclosure requirements
(i.e., MD&A) or voluntary? Should an issuer be required to compare
projections to actual results to provide information as to the
reliability of the projections? Should an issuer be required to
disclose and/or to file assumptions or the basis for a statement, as
now required for issuers that elect to provide option grant values
calculated under the option pricing models?90
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\9\0See Item 402(c) of Regulation S-K, 17 CFR 229.402(c).
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Should the safe harbor require a registrant to correct forward-
looking information rendered false or misleading after its initial
disclosure? Should this duty extend only to information filed with the
Commission?
Should a duty be imposed on issuers to update and/or correct
forward-looking information disclosed by others? Should the safe harbor
expressly provide that there is no duty to update and/or correct
statements made by others? Should the safe harbor include a duty to
update and/or correct statements only if the issuer becomes
sufficiently ``entangled'' with the third party? If so, should the safe
harbor delineate those acts or omissions that would support a finding
of entanglement?
H. Registered Investment Companies
Is the forward-looking information that might be disclosed by
registered investment companies, i.e., projections of fund performance,
inappropriate for the protection of the safe harbor because it is
contingent on the performance of the securities markets, and therefore
subject to greater uncertainty and frequency of change? Do any other
characteristics of registered investment companies warrant separate
treatment of their forward-looking disclosure for purposes of the safe
harbor or, more generally, should such disclosure by registered
investment companies be afforded any protection under a safe harbor?
Comment also is specifically invited as to whether distinctions should
be made among different kinds of registered investment companies (e.g.,
open-end and closed-end, unit investment trust and management) for the
purpose of encouraging forward-looking disclosure and providing safe
harbor protection? In light of the fact that investment companies,
unlike most other public companies, are not currently required to file
current reports (Form 8-K) or quarterly reports (Form 10-Q), commenters
should address how projections or other forward-looking information by
investment companies would be revised or updated.
I. Multiple Safe Harbors
Some suggest that if private actions were to be reduced or
eliminated, some issuers would be willing to make additional filings
with the Commission, either in connection with current periodic reports
or on a new disclosure form, and be subjected to greater Commission
oversight with lower thresholds for Commission enforcement actions and
greater restrictions on information that can be provided orally. Other
issuers may find these protections unnecessary, but would benefit from
a safe harbor that simply made certain types of antifraud claims more
difficult to prosecute successfully. Would it be reasonable to provide
for or make available different types of safe harbors tailored to the
particularized needs of differently situated issuers? Specifically,
does the need for heightened protections of statements to analysts,
whether oral or written, vary with the size and/or reporting history of
the issuer? Should a different, more rigorous, safe harbor be made
available to companies conducting an initial public offering, than that
made available to companies with reporting histories? For example, are
smaller issuers potentially affected differently than larger issuers so
that different safe harbors should be available? Should the existing
safe harbors in the Trust Indenture Act and the Public Utility Holding
Company Act also be modified and, if so, why?
J. Possible Alternatives or Supplements to a Safe Harbor
Commenters also may wish to discuss whether there are alternatives
to a safe harbor that would accomplish the same goal of promoting
enhanced disclosure of forward-looking information. For example, are
there reforms with regard to the content and/or presentation of soft
information--whether within or outside of Commission filings--that
would obviate the need for a safe harbor or the need to change the
current safe harbor? Are there litigation reforms relating more broadly
to the scope of antifraud liability under the securities laws that
would obviate the need for the safe harbor? For example, could an
issuer be presumed to have no liability for forward-looking statements
otherwise eligible for the safe harbor unless the named plaintiff or
group of plaintiffs represents at least a minimum percentage (say 10%)
of the affected shareholder class? To the extent that the current safe
harbor is strengthened in favor of issuers, should there be concomitant
strengthening of other safeguards for investors? In this regard,
commenters may wish to discuss the practicality of accomplishing any
such reforms, and the likelihood that any such reforms would succeed.
In lieu of or in addition to revising the existing safe harbor, should
the Commission redefine one or more elements of a private Rule 10b-5
claim (e.g., scienter, materiality and reliance)?
VI. Public Hearings
The issues addressed in this release have attracted the interest of
investors, registrants, analysts and other market participants, as well
as lawyers, accountants, federal legislators and academics. In view of
this broad interest, as well as the importance and complexity of these
issues, the Commission intends to authorize public hearings to be
conducted after the close of the comment period. Among other matters,
these hearings will explore the assumptions underlying the different
views expressed by these and other members of the public. Testimony
from witnesses will be elicited about the efficacy and potential
effects of different safe harbor approaches, the costs and benefits of
each approach, the design of any safe harbor and issues that may be
raised by the comment letters. After these hearings, the Commission
will determine whether to propose amendments to the rules regarding
forward-looking information.
The hearings will begin at 10 a.m. on February 13, 1995 at 450
Fifth Street, NW., Washington, DC 20549 room 1C30. The agenda and
format for the hearings, as well as the schedule of witnesses will be
announced in a subsequent release to be issued shortly before the
hearings commence.
Members of the public interested in testifying at the hearing
should notify the Commission in writing of their intention to appear no
later than December 31, 1994. The written notification should include a
brief summary of the individual's intended testimony. Any person who
does not wish to appear at the hearing may submit written testimony to
be included in the hearing record. Such written testimony should be
received by the Commission no later than January 11, 1995.
All written notifications, testimony and comment letters should be
addressed in triplicate to Jonathan Katz, 450 Fifth Street, NW.,
Washington, DC 20549 and should refer to the comment file number of
this release [S7-29-94]. All written submissions and a transcript of
the hearings will be made available for public inspection and copying
in the Commission's Public Reference Room. The hearings will be open to
the public.
Dated: October 13, 1994.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
Appendix--Seasoned Issuer Proposal--Association of Publicly Traded
Companies
(a) A forward-looking statement made by or on behalf of an
issuer, or an omission to state a fact necessary to make the
statement not misleading, shall not serve as the basis for a private
action for damages under the Securities Act of 1933 or the
Securities Exchange Act of 1934 if:
(1) The forward-looking statement is made in connection with a
listed equity security or Nasdaq security for which transaction
reports are required to be made on a mandatory real-time basis
pursuant to an effective transaction reporting plan of an issuer
which has been subject to the requirements of Section 12 or 15(d) of
the Act and has filed all the material required to be filed pursuant
to Sections 13, 14 or 15(d) for a period of six months;
(2) The issuer is not an issuer of penny stock as defined in
Section 3(a)(51)(A) of the Act and Commission regulations;
(3) The issuer has not been convicted within five years prior to
the making of the statement of any felony or misdemeanor in
connection with the purchase or sale of any security or involving
the making of any false filing with the Commission;
(4) The issuer is not subject to any order, judgement or decree
of any court of competent jurisdiction temporarily or preliminarily
restraining or enjoining, or is not subject to any order, judgement
or decree of any court of competent jurisdiction, entered within
five years prior to the making of the statement, permanently
restraining or enjoining the issuer from engaging in or continuing
any conduct or practice in connection with the purchase or sale of
any security or involving the making of any false filing with the
Commission;
(b) The term ``forward-Looking statement'' means:
(1) A statement containing a projection of revenues, income
(loss), earnings (loss) per share, capital expenditures, dividends,
capital structure, growth rates, order rates, margin performance,
price performance, backlog or other financial items whether stated
in quantitative or qualitative terms;
(2) A statement of management's plans and objectives for future
operations;
(3) A statement of future economic, product or business
performance; or
(4) Disclosed statements of the assumptions underlying or
relating to any of the statements described in paragraph (b) (1),
(2) or (3) above.
Heightened Definition Proposal--Business Roundtable and National
Association of Manufacturers
Rule 3b-6. Liability for Certain Statements by Issuers.
Preliminary Note
The Commission has recognized for many years that investors make
decisions about the purchase and sale of securities with the future
in mind. The market value of securities accordingly reflects the
judgments of investors about the future economic performance of an
issuer. Notwithstanding the inherent uncertainty of all statements
about the future, investors regard forward-looking statements by
issuers as an important source of relevant information. Forward-
looking statements therefore make an important contribution to the
efficiency of the U.S. securities markets, and the Commission wishes
to encourage issuers to make such statements. At the same time, the
Commission recognizes that issuers have a justified concern about
becoming involved in litigation arising out of such statements. As
the Supreme Court has observed, ``even a complaint which by
objective standards may have very little success at trial has a
settlement value to the plaintiff out of any proportion to its
prospect of success at trial so long as he may prevent the suit from
being resolved against him by dismissal or summary judgment. The
very pendency of the lawsuit may frustrate or delay normal business
activity of the defendant which is totally unrelated to the
lawsuit.'' Blue Chip Stamps v. Manor Drug Store, 421 U.S. 723, 740
(1975).
In order to encourage the release by issuers of forward-looking
information, the Commission has adopted this ``safe harbor'' rule.
The Commission encourages the courts to apply the rule so as to
implement the Commission's intent, i.e., to provide issuers with
reasonable assurance regarding the standards that will govern their
liability for such information while at the same time assessing
liability where an issuer's conduct falls outside the rule and is
otherwise actionable under the federal securities laws.
(a) General Rule. A statement within the coverage of paragraph
(b) below which is made or alleged to be made by or on behalf of an
issuer or by an outside reviewer retained by the issuer shall not
serve as the basis of a violation of the Act unless (1) it relates
to a misstatement or omission that is material within the meaning of
paragraph (f), (2) it is made or omitted with scienter within the
meaning of paragraph (g) and (3) the person challenging the
statement (other than the Commission) relied on the statement within
the meaning of paragraph (h).
(b) Covered Statements. This rule applies to the following
statements:
(1) A forward-looking statement (as defined in paragraph (c)
below), provided that:
(i) At the time such statements are made or reaffirmed, either
the issuer is subject to the reporting requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 and has complied
with the requirements of Rule 13a-1 or 15d-1 thereunder, if
applicable, to file its most recent annual report on Form 1O-K, Form
1O-KSB, Form 20-F, or Form 40-F; or, if the issuer is not subject to
the reporting requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, the statements are made in a
registration statement filed under the Securities Act of 1933,
offering statement or solicitation of interest written document or
broadcast script under Regulation A, or pursuant to Section 12 (b)
or (g) of the Securities Exchange Act of 1934, and
(ii) The statements are not made by an issuer that is an
investment company registered under the Investment Company Act of
1940; and
(2) Information which relates to (i) the effects of changing
prices on the business enterprise, presented voluntarily or pursuant
to Item 303 of Regulation S-K, or Regulation S-B, or Item 9 of Form
20-F, ``Management's discussion and analysis of financial condition
and results of operations,'' or Item 302 of Regulation S-K,
``Supplementary financial information,'' or Rule 3-20(c) of
Regulation S-X, or (ii) the value of proved oil and gas reserves
(such as a standardized measure of discounted future net cash flows
relating to proved oil and gas reserves as set forth in paragraphs
30-34 of Statement of Financial Accounting Standards No. 69)
presented voluntarily or pursuant to Item 302 of Regulation S-K.
(c) Forward-Looking Statement. For the purpose of this rule, the
term ``forward-looking statement'' shall mean and shall be limited
to:
(1) A statement containing a projection of revenues, income
(loss), earnings (loss) per share, capital expenditures, dividends,
capital structure or other financial items;
(2) A statement of management's plans and objectives for future
operations, whether qualitative or quantitative, including plans for
the development and delivery of new products or services;
(3) A statement of future economic performance; or
(4) Disclosed statements of the assumptions underlying or
related to any of the statements described in paragraph (c)(1), (2),
or (3) above.
(d) Third-Party Statements. A forward-looking statement shall be
deemed not to have been made by or on behalf of an issuer for the
purposes of paragraph (a) if it is made by any person other than the
issuer or outside reviewer retained by the issuer and the issuer has
not expressly and substantially contemporaneously endorsed or
approved the statement. An issuer shall not be deemed to have any
obligation to correct or update any statement made by a third party.
(e) Duty to Update. An issuer shall not be deemed to have any
obligation to update a forward-looking statement made by it unless
it has expressly and substantially contemporaneously undertaken to
update such statement.
(f) Materiality. A forward-looking statement shall be deemed to
be material only if it significantly alters the total mix of
information made available regarding an issuer or its securities.
(g) Scienter. An issuer shall be deemed not to have acted with
scienter with respect to a forward-looking statement unless the
issuer had actual knowledge that the statement was false or
knowingly and intentionally omitted to state a fact for the purpose
of rendering such statement misleading. Evidence that (1) the
issuer's officers, directors or employees traded contemporaneously
in the issuer's securities or were the beneficiaries of compensation
awards (whether or not related to the value of the issuer's
securities) or (2) information tending to cast doubt on a
statement's accuracy was in the possession of the issuer's employees
below the level at which reporting decisions are made (or at such
level but prior to the time such information could reasonably be
expected to have been taken into account in making the statement),
shall not in either case, or in both cases, in and of itself, be
sufficient to support a finding of actual knowledge that a statement
is false or misleading.
(h) Reliance. A forward-looking statement (or a statement
derived therefrom) shall not be deemed to have been relied upon
unless a person claiming such reliance had actual knowledge of and
actually relied on such statement in connection with the purchase or
sale of a security.
Bespeaks Caution Proposal--Professor Coffee
Proposed Rule 10b-22. Liability for Certain Statements by Issuers
(a) A purchaser or seller of securities shall not be entitled to
rely in any action for fraudulent statement (as defined in paragraph
(c) of this rule) upon a statement within the coverage of paragraph
(b) of this rule.
(b) This rule applies to the following statements (with the
burden being on the plaintiff to show that a statement asserted by
an issuer or other defendant to fall within this paragraph does not
in fact so qualify):
(1) A forward-looking statement (as defined in Rule 3b-6 under
the Securities Exchange Act of 1934) made in a document filed with
the Commission, or in an annual report meeting the requirements of
Rules 14a-3 (b) and (c) or 14c-3 (a) and (b) under the Securities
Exchange Act of 1934, a statement reaffirming such forward-looking
statement subsequent to the date the document was filed or the
annual report was made publicly available, or a forward-looking
statement made prior to the date the document was filed or the date
that the annual report was made publicly available if such statement
is reaffirmed in a filed document or in an annual report made
publicly available within a reasonable period after the making of
such forward-looking statement;
(2) Information disclosed in a document filed with the
Commission or in an annual report meeting the requirements of Rules
14a-3 (b) and (c) or 14c-3 (a) and (b) in response to (A) Item 303
of Regulation S-K or Regulation S-B with respect to liquidity,
capital resources, and results of operations to the extent that such
information identifies or describes the likely future impact of
known trends or known demands, commitments, events or uncertainties
or any expected changes with regard thereto, or (B) Item 302 of
Regulation S-K or Rule 3-20(c) of Regulation S-X with regard to the
affects of changing price levels on the business enterprise or the
value of proved oil and gas reserves;
Provided that, in either case--
(i) Such statement contains or is closely accompanied by clear
and specific cautionary language that explains in detail sufficient
to inform a reasonable person of the level of risk associated with,
or inherent in, the statement and that identifies the specific basis
for such statement and for such level of risk;
(ii) At the time such statements are made or reaffirmed, the
issuer is subject to the reporting requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934 and has complied with
the requirements of Rule 13a-l or 15d-l thereunder, as applicable,
to file its most recent annual and quarterly reports on [form
references omitted];
(iii) the statements are not made by or on behalf of an issuer
that (A) is an investment company registered under the Investment
Company Act of 1940, (B) has outstanding a ``penny stock'' (as
defined in section 3(a)(50) of the Securities Exchange Act of 1934),
or (C) would then be disqualified under Rule 262(a) from use of
Regulation A under the Securities Act of 1933.
(c) For the purpose of this rule, the term fraudulent statement
shall mean * * * [same as Rule 175(d)].
Fraudulent Intent Proposal--William Freeman, Esquire
The following language would be substituted into paragraph (a)
of Rules 175 and 3b-6 (new language in boldface italics):
(a) A statement within the coverage of paragraph (b) of this
section which is made by or on behalf of an issuer or by an outside
reviewer retained by an issuer shall be deemed not to be a
fraudulent statement (as defined in paragraph (d) of this section),
unless it is shown that such statement was made or reaffirmed
recklessly or with actual intent to deceive. A forward looking
statement will not be deemed to be made or reaffirmed recklessly
unless it is shown that the issuer was, or had to be, aware of facts
that made it highly unlikely that the projection could be achieved.
Reasonable Basis in Fact--National Association of Securities and
Commercial Law Attorneys (``NASCAT'')
Liability for Certain Statements by Issuers
(a) A statement within the coverage of paragraph (b) of this rule
which is made by or on behalf of an issuer (whether directly or by or
through the means of any other person) or by an outside reviewer
retained by the issuer shall be deemed to not be a fraudulent statement
(as defined in paragraph (d) of this rule), unless it is shown that, at
the time such statement was made or reaffirmed (i) facts seriously
undermining its accuracy existed; (ii) it was not genuinely believed;
(iii) it lacked a reasonable basis in fact; or (iv) it was issued other
than in good faith.
(b) This rule applies to any forward-looking statement (as defined
in paragraph (c) of this rule), whether written or oral.
(c) For the purpose of this rule the term ``forward-looking
statement'' shall mean:
(1) Any statement concerning future revenues, income (loss),
earnings (loss) per share, products, services or lines of business,
capital expenditures, dividends, capital structure or other
financial items;
(2) Any statement of management's plans or objectives for the
future;
(3) Any statement of future economic performance; or
(4) Disclosed statements of the assumptions underlying or
relating to any of the statements described in paragraphs (c) (1),
(2) or (3) above.
(d) For the purpose of this rule the term ``fraudulent statement''
shall mean a statement which is an untrue statement of a material fact,
a statement false or misleading with respect to any material fact, an
omission to state a material fact necessary to make a statement not
misleading, or which constitutes the employment of a manipulative,
deceptive, or fraudulent device, contrivance, scheme, transaction, act,
practice, course of business, or an artifice to defraud, as those terms
are used in the Securities Act of 1933, the Securities Exchange Act of
1934 or the rules or regulations promulgated thereunder.
[FR Doc. 94-25814 Filed 10-18-94; 8:45 am]
BILLING CODE 8010-01-P
