Thomas A. Cole (Sidley & Austin), (Jan. 31, 1989)INQUIRY LETTERSIDLEY & AUSTIN ONE FIRST NATIONAL PLAZA CHICAGO, ILLINOIS 60603 December 29, 1988
Director, Division of Corporation Finance Securities and Exchange Commission Room 3000- Mail Stop 3-1 450 5th Street, N.W. Washington, D.C. 20549
I am writing, however, to bring to your attention the fact that issuers and their counsel have received a bit of a mixed message from the Staff about one small but important aspect of environmental disclosure--namely, the proper interpretation of the word "sanctions" for purposes of S-K Item 103, Instruction 5.C. Many practitioners are aware of a letter written to Amax which interpreted the regulation to the effect that (i) "sanctions" include Superfund clean-up cost and (ii) there can be no netting of insurance or contributions from other "potentially responsible parties" in quantifying amounts to be disclosed. Notwithstanding the Amax letter, I personally have been advised by a Staff member that the position of the Division is not as "categorical" as the Amax letter sounds. I am also writing to make the argument for why the Amax interpretation is inappropriate as a matter of both disclosure policy and regulatory interpretation. I also respectfully suggest that the Staff should clarify its position on this point before we get too much further into the "annual report season". As a matter of disclosure policy, the Amax interpretation could, it seems to me, trigger a flood of disclosure which does more to obfuscate than clarify the position of individual issuers. For example, if the interpretation were followed by every "PRP" in the Stringfellow, California Superfund site, each would disclose the full amount of the clean-up cost of that site, which I suspect far exceeds the net worth of many of the affected issuers. The result could very well be that analysts and securities holders would largely ignore the disclosures. From a regulatory interpretation standpoint the position in the Amax does not seem supportable. According to Rel. No. 33-6315, "fines" were given a relatively low threshold because they are "more indicative of possible illegality and conduct contrary to public policy". In most cases, Superfund clean-up liability has resulted from behavior which was completely legal at the time it was engaged in. Another basis for giving a lower threshold to fines might have been that they are also much more easily quantified than capital expenditures. As evidenced by the Rule 175 safe harbor for publishing projections, the SEC is well aware of the perils of predicting the future. Predicting Superfund clean-up costs is at least as difficult as trying to project revenues and earnings. Among the imponderables include the following: what will be the timing of the expenditures; what will be the then applicable EPA "action levels"; what manner of clean-up would ultimately be required (e.g., monitoring; encapsulation; incineration); what technology will be available at the time? It is my belief that the Amax interpretation is, in fact, tantamount to the adoption of a new rule. It does not appear to me that the SEC needs a new rule on this point. As I indicated above, issuers are already giving closer scrutiny to the quality of their environmental disclosure under existing requirements. It may be appropriate for the Staff to conduct an analysis of the disclosures made in the Form 10-Ks for the year ended December 31, 1988 before embarking upon a new round of rule-making. I would like to have the opportunity to discuss this with you, and if you have no objection will call you after the first of the year. Sincerely,
INQUIRY LETTERSIDLEY & AUSTIN ONE FIRST NATIONAL PLAZA CHICAGO, ILLINOIS 60606 January 31, 1989
Director, Division of Corporation Finance Securities and Exchange Commission Room 3000 - Mail Stop 3-1 450 5th Street, N.W. Washington, D.C. 20549
Sincerely,
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