NITS, GRITS, AND SOFT INFORMATION
`IN SEC FILINGS
`
`CARL W. SCHNEIDERt
`
`The corporate image created by a prospectus, proxy statement, or
`other Securities and Exchange Commission (SEC) filing may be likened
`to a shadow-it tells something about the subject's gross outline but
`in a flat, lifeless, and sometimes distorted form. Many commentators,
`including SEC Chairman William J. Casey,' have suggested that SEC
`disclosure filings should be more lifelike representations, devoting
`greater attention to economic realities and the nitty-gritty of the
`business, and including certain types of forward-looking information,
`rather than boilerplate phrases and standard disclaimers which could
`fit almost any filing.
`Historically, certain types of information, highly relevant to in-
`vestment decisions-referred to herein as "soft" information-have
`been largely excluded from SEC filings, primarily because of the Com-
`mission's policy. Recently, however, the SEC, analysts and other mar-
`ket professionals, the courts, and investors have shown interest in
`the expanded use of such information in these documents. Conse-
`quently its greater use seems to be inevitable.
`This Article will consider several categories of soft information
`traditionally excluded from filings and will examine some of the policy
`implications of this practice. Since its basic theme is to suggest a
`shift in attitude to allow, and possibly even require, more soft in-
`formation in SEC filings, the policies that should control the use of
`such information will also be explored.
`
`I.
`
`IDENTIFICATION OF SOFT INFORMATION
`
`The content of SEC filings has traditionally been confined to
`what may be called "hard" information, meaning statements concern-
`ing objectively verifiable historical events or situations-commonly
`
`tA.B. 1953, Cornell University; LL.B. 1956, University of Pennsylvania, Member,
`Pennsylvania Bar.
`An abbreviated version of this Article was presented as an address to the 1972
`Annual Meeting of the American Bar Association in San Francisco on August 15, 1972.
`A transcript will appear in the January, 1973, issue of Busitzess Lawyer.
`' See, e.g., Addresses by SEC Chairman Casey: New York Financial Writers Associa-
`tion, June 7, 1971, in 105 BNA SEC. REG. & L. REP. F-1 (June 9, 1971); American
`Bankers Association, Mar. 17, 1972, reported in 144 BNA SEC. REG. & L. REP. A-7
`(Mar. 22, 1972); Conference on Financial Reporting, May 19, 1972, reported in 153
`BNA SEC. REG. & L. REP. A-5 (May 24, 1972).
`
`CELLTRION - EXHIBIT 1078
`
`

`

`SOFT INFORMATION IN SEC FILINGS
`
`called "facts" 2 in SEC parlance-as distinguished from opinions, pre-
`dictions, or subjective evaluations. Although a comprehensive defini-
`tion of soft information is not readily apparent, several non-exclusive
`and non-exhaustive categories can be identified: (1) forward-looking
`statements concerning the future, such as projections, forecasts, pre-
`dictions, and statements concerning plans and expectations; (2) state-
`ments concerning past or present situations when the maker of the
`statement lacks the data necessary to prove its accuracy-for ex-
`ample, information on a company's historical share of the market,
`when it does not have access to precise statistics concerning its com-
`petitors; (3)
`information based primarily on subjective evaluations-
`for example, representations concerning the competence or integrity
`of management, the relative efficiency of a manufacturing operation,
`or the appraised value of assets; (4) statements of motive, purpose,
`or intention, since it is frequently easier to verify objectively what
`was done than to determine why it was done-for example, explana-
`(5)
`tion of the reasons for which an auditor has been discharged;'
`statements involving qualifying words, such as "excellent,"
`"inge-
`nious," "efficient" and "imaginative," for which there are no generally
`accepted objective standards of measurement in most contexts.4
`
`2 The SEC has given particular stress to the difference between "fact" and other
`types of information in setting forth guidelines for public disclosure of an issuer "in
`registration." See SEC Securities Act Release Nos. 5180 (Aug. 16, 1971), 5009 (Oct. 7,
`1969), 3844 (Oct. 8, 1957); SEC, DiscLosuRE TO INVESTORS: A REAPPRAiS
`or FEDERAL
`AnmxiST rv m
`Poric s UNDER TH
`'33 AND '34 AcTS 95-96 (1969)
`[hereinafter cited
`as WNHAT REPORT].
`3 See Schneider, Developments in 1934 Act Reporting, PLI 3D INST. ONr SEC. REG.
`110-11 (1972). In certain instances, motive must be disclosed. Cochran v. Channing Corp.,
`211 F. Supp. 239 (S.D.N.Y. 1962)
`(anti-fraud rules could be violated by failure to
`disclose motive for cut in company's dividend rate). But see Lester v. Preco Indus.,
`Inc., 282 F. Supp. 459 (S.D.N.Y. 1965)
`(allegation that at time of registration officers
`intended to mismanage corporate funds not sufficient to bring action under anti-fraud
`rules).
`For an example of an attempt to examine motive, see Wall St. J., Nov. 24, 1972,
`at 4, col. 3: "Asked to explain the resignation [of Lybrand, Ross Bros. & Montgomery
`as auditors for International Controls Corp.], an officer replied 'There isn't any one
`specific reason. In general, it related to our feeling that the auditor-client relationship
`we desire to maintain can't be so any longer.' Pressed for specifics, [he] declined to
`list them . . . 2'
`Compensating balance arrangements also fall within this category of soft informa-
`tion. "Lack of disclosure [of compensating balance arrangements] has been justified
`on the grounds that such arrangements were generally unwritten, informal and not
`subject to precise quantification. None of these reasons are sufficient to support a
`policy of nondisclosure of a phenomenon which is recognized to be real and significant."
`Draft guidelines circulated by the SEC, discussed at 180 BNA SEC. REG. & L. REP.
`A-10 (Dec. 6, 1972), and reprinted in id. J-1.
`4In preparing a prospectus for a manufacturer of office copying machines, manage-
`ment blithely described the copies produced as "permanent" in discussing the product
`with the underwriters. This was in an era when many such devices made copies which
`faded on exposure to sunlight. But what does the word "permanent" mean in relation
`to a piece of paper, when even Dead Sea scrolls turn brittle around the edges after a
`few thousand years? Although the businessmen seemed to know what a "permanent"
`copy was, the lawyers were not certain. The prospectus adopted the circumlocution that
`the copies would resist deterioration and fading as well as any normal printed matter,
`
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`"Hard" and "soft" must be recognized as highly relative concepts
`suggesting no sharp dividing line. Many apparently hard statements
`have soft cores and vice versa. Audited historical financial statements
`are normally considered to be a classic type of hard information. Ac-
`counting is not an exact science, however, and many subjective evalua-
`tions and other types of soft information must be considered in order to
`prepare audited financials.5 On the other hand, many types of soft in-
`formation contain an element of "fact." Thus, statements about a man's
`excellent reputation for integrity and creativity are normally considered
`to be too soft for inclusion in a prospectus, although existence of a repu-
`tation has been considered a "fact" which can be proven in court under
`traditional rules of evidence.6 Similarly, the existence of a plan for the
`future may be treated for various purposes as a "fact," even though the
`plan may be very indefinite and subject to many contingencies which
`often cannot be controlled.
`The dividing line between hard and soft information is sometimes
`bridged by casting statements in terms of beliefs, opinions, or expecta-
`tions.7 Thus, the statement that a company believes itself to be the
`
`whatever that may mean. See Prospectus, Magnefax Corp., SEC Reg. File No. 2-17,943
`(May 31, 1961).
`5Soft information in financials relates to such matters as: the establishment of
`reserves for bad debts, litigation, and tax audits; judgments concerning the degree of
`profitability and extent of completion of open contracts when using percentage of com-
`pletion accounting; judgments concerning useful lives of assets (based on factors of
`wear and also obsolescence) in calculating depreciation; and valuing intangible assets,
`such as patents or good will of an acquired business. Litton Industries has been questioned
`for preparing earning statements improperly based upon estimates of a recovery on a
`$450 million claim against the government. See 162 BNA SEc. REG. & L. REP. A-10
`(July 26, 1972). Chairman Casey has recently commented on this area:
`It seems vital to me that [accountants] correct the impression that accounting is
`something which produces exact measurements-that it is a scale on which a
`business can be weighed to get an exact and precise answer as to its performance
`and the degree of its progress in any particular period and its value. It seems to
`me that there is a need for greater public understanding that the accounting
`process relies on and produces estimates.
`Accountants have encouraged the public to think of accounting as an exact
`science by producing a single number result and limiting accountants' respon-
`sibility to a single, segregated section of reports to shareholders, when the essence
`of the accrual system of accounting is estimation and prediction of future events.
`Address by SEC Chairman Casey, American Institute of Certified Public Accountants,
`Oct. 2, 1972, at 6-7 (emphasis added).
`6 C. McCoReunx, EviDEN CE § 44 (2d ed. W. Cleary 1972). Traditional rules of
`evidence sometimes distinguished between reputation and character. A man's character
`is said to be too subjective or elusive an attribute to be a proper subject of evidence,
`although his reputation is an objective, provable fact.
`Reputation, of course, differs somewhat from an opinion held by a particular indi-
`vidual. Id. Thus, a particular individual may hold another person in low regard, although
`the holder of the opinion may recognize that the subject of the opinion has an excellent
`reputation.
`7Chairman Casey made a similar point in a recent speech regarding the Commission's
`reconsideration of its policy on forecasts:
`Then, there is the question of whether we can really justify the prohibition of
`forecasts which are carefully prepared, relied on for budgeting and planning
`purposes, based on comprehensive data and reasonable assumptions and well
`articulated and regularly supplemented to reflect supervening developments and
`
`

`

`SOFT INFORMATION IN SEC FILINGS
`
`largest producer of a product purports to be a statement of a "fact"-
`that is, the fact about the belief held-even though the subject of the
`belief may be soft information, if the company does not have precise
`information about its competitors.
`The Commission has been particularly ingenious in turning soft
`representations into hard ones (one might call them pseudo-hard) by
`using the "implied representation" technique. This approach is em-
`ployed extensively by the SEC in broker-dealer administrative pro-
`ceedings, typically when a salesman has made a very optimistic forecast
`expressed in terms of his opinion or belief. The Commission holds that
`every expression of opinion contains an implied representation of "fact"
`-namely,
`the fact that the opinion has an adequate basis. If the Com-
`mission discerns no adequate basis for the opinion, it finds a misrepre-
`sentation in this implied factual representation.8
`The dividing line may be especially blurred when dealing with the
`future, depending on whether the statement is an affirmative representa-
`tion about what will occur or a statement about a present plan or expec-
`tation for the future. The relative hardness of a statement should turn
`less on its form (for example, a statement concerning what will happen
`as opposed to a statement of present expectation) and more on the un-
`derlying substance. If a company has a firm agreement to buy a prop-
`erty, with closing scheduled ten days after the effective date of its
`prospectus, and all closing preconditions have been satisfied, a statement
`that the company "will" (or presently proposes to) purchase the prop-
`erty may be considered reasonably hard, and, therefore, acceptable for
`prospectus inclusion under current practice. But a statement that the
`company will (or even the softer statement that it presently expects or
`proposes to) open one hundred additional branches over the next five
`years, when no further locations have been selected, would be too soft
`for inclusion in a prospectus under prevailing standards.
`
`PREVAIING PRACTICES OF ExcLusIos
`II.
`There has been something of a "conspiracy of silence" in excluding
`soft information from SEC filings. The Commission and private parties
`preparing SEC filings, each for their own reasons, have generally (with
`revisions in estimates. If we do prohibit forecasts which a company makes and
`circulates, are we subjecting the company to statutory liability for failure to
`disclose a material fact? The forecast is an estimate but its existence and the
`articulated judgment it represents is a fact.
`Address by SEC Chairman Casey, Financial Executives Institute, Oct. 18, 1972, at 16-17
`(emphasis added).
`8 Cohen & Rabin, Broker-Dealer Selling Practice Standards, 29 LAw & CoNTraMw.
`POa. 691, 704-05 (1964). The Commission has gone so far as to establish conclusively
`that certain types of opinions may never be adequately based in fact, such as opinions
`that there will be a very sharp rise in the market price of a speculative security.
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`some exceptions) excluded soft information from such filings. Although
`the prevailing attitude on soft information has emerged primarily in
`contexts concerning registration statements filed under the 1933 Act,'
`the same approach is normally applied (with some exceptions) on a
`fairly uniform basis to other types of filings-proxy statements and
`periodic reports for example.
`
`A. The Traditional SEC Position
`The Commission has been motivated by a desire to protect in-
`vestors against questionable selling literature, as well as to aid in the
`enforcement of statutory liabilities.10 SEC filings, especially 1933 Act
`prospectuses, traditionally have been considered to be among the most
`accurate and reliable (although not necessarily the most useful) sources
`of information available to investors. The Commission tries to confine
`these documents to hard information to assure a continued high degree
`of reliability. Moreover, since it is generally more difficult to prove an
`inaccuracy in soft information, the limitation of filings to hard informa-
`tion makes it easier to establish accountability for inadequate dis-
`closures.
`Furthermore, according to the traditional SEC view, the inclusion
`of soft information in filings would clothe such information with an
`unduly high aura of credibility. Investors assume, with a great deal of
`justification, that information appearing in SEC filings has been pre-
`pared with considerable care, tending to assure its accuracy.'- There-
`fore, under the SEC's approach, if soft information appeared in a
`prospectus, the public would incorrectly assume an unwarranted degree
`of reliability-that a prediction or projection would almost certainly be
`fulfilled, or that any statement made is subject to verification by ob-
`jective evidence.
`The bootstrap element in this logic is apparent. If the public as-
`sumes that filed information is completely verifiable by objective data,
`
`[hereinafter cited as 1933
`
`9 Securities Act of 1933, 15 U.S.C. §§ 77a et seq. (1970)
`Act].
`1OFor two excellent and rather critical expositions of the traditional SEC position,
`see Kripke, The SEC, the Accountants, Some Myths and Some Realities, 45 N.Y.U.L.
`REv. 1151 (1970) [hereinafter cited as Myths]; Mann, Prospectuses: Unreadable or Just
`Unread?-A Proposal to Reexamine Policies Against Permitting Projections, 40 GEo.
`WAsH. L. REv. 222 (1971) [hereinafter cited as Prospectuses]. A more sympathetic anal-
`ysis of the SEC position appears in Heller, Disclosure Requirements Under Federal
`Securities Regulations, 16 Bus. LAW. 300 (1961). For a judicial exposition of the tradi-
`tional SEC view, see Union Pac. R.R. v. Chicago & N.W. Ry., 226 F. Supp. 400, 408-09
`(ND). Ill. 1964).
`1l Investors may also assume, with some though by no means total justification,
`that the SEC itself has verified the statements in a prospectus, notwithstanding the
`boldface warning on the cover to the contrary. The Staff certainly does make comments
`or requests for supplemental information designed to verify the accuracy and adequacy
`of some disclosures, especially those which have elements of softness.
`
`

`

`1972]
`
`SOFT INFORMATION IN SEC FILINGS
`
`it does so precisely because filings have been confined in the past to
`hard information. This cause and effect cycle could be broken easily,
`however, if a new policy were adopted to permit greater use of soft in-
`formation in filings. Indeed, the Commission's view does not deny either
`the relevance of soft information in making investment decisions, or
`the fact that soft information is used extensively (and quite appropri-
`ately) by investors. Rather, the traditional Staff attitude may be sum-
`marized to the effect that soft information is all right in its place, but
`an SEC filing is not its place.
`The SEC's hostility to soft information is particularly evident in
`its comment letter practice. With insights sometimes suggestive of
`paranoia, the Staff has shown particular zeal for detecting, and request-
`ing the deletion of, implied predictions in seemingly inoffensive lan-
`guage. Also Staff requests for supplemental information (for its own
`use but not for inclusion in filings), apply with disproportionate fre-
`quency, and occasionally with chilling effect, to statements suspected
`of being soft, such as representations about a company's competitive
`position, or about the management's beliefs in that regard.'
`
`B. Acquiescence by Private Parties
`Issuers, underwriters, and their counsel generally have acquiesced
`as a matter of self-protection in the traditional exclusionary policy of
`the SEC regarding soft information. They are not anxious to assume
`needless exposure to potential liability by making soft representations
`which may be difficult to substantiate, especially if a reasonably based
`soft statement (such as a prediction or subjective evaluation) made in
`good faith proves to be incorrect.
`Since securities are sold primarily through oral sales efforts, with
`supplemental information often being supplied to dealers through under-
`writers' memoranda which are not filed with the SEC,"3 there has been
`relatively little pressure by issuers and underwriters to allow (or re-
`1 2 In one situation in the author's experience, the initial filing set forth management's
`broadly stated beliefs about the company's industry position. This belief was based
`primarily on the accumulated feel for the industry acquired by the executives over
`many years of personal contracts. Management's more specific beliefs, expressed privately
`to the underwriters in preparing the registration statement, could have been erroneous
`by a wide margin, and still the much more general statement in the prospectus would
`have been completely accurate. Despite the absence of objective data, counsel and
`underwriters were completely satisfied with the statement made in the initial filing.
`On review, however, the Staff raised so many questions about the basis for management's
`belief, that the statement was finally modified rather than risk further delay by prolonged
`discussions. Cf. Chris-Craft Indus., Inc. v. Bangor Punta Corp., 426 F.2d 569 (2d Cir.
`1970)
`(disclosure of "fact" of anticipated price per share considered improper), dis-
`(C. Schneider, J.
`cussed in SEC, CoxsEQUENcEs or CoiuoRATz ACQISITION S 172-77
`Bauman & H. Wander eds. 1971).
`1 3 Such documents may be supplied supplementally to the SEC (SEC Securities Act
`Release No. 4936, U 42 (Dec. 9, 1968)), but they are not "filed" or subject to the
`liabilities which attach to deficient filings as such.
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`[Vol. 121:254
`
`quire) more soft information in prospectuses. A prospectus is a some-
`what schizophrenic document, which might serve either a selling or
`liability-prevention function. Faced with the enormous potential li-
`abilities for a deficient filing, most private parties have opted to stress
`the preventive function, treating the prospectus as an insurance policy. 4
`They can take comfort in the knowledge that the prospectus contains
`only statements that are demonstrably provable by objective evidence
`already at hand.
`Additionally, preparation of a filing in accordance with the tradi-
`tional formula can reduce the delay and trauma inherent in the pro-
`cessing procedure. A pragmatic adjustment to these realities by those
`who prepare filings has ingrained habits very deeply, and consequently
`the traditional approach has become a generally accepted pattern. One
`actively engaged in the securities business can easily forget how stylized
`and stilted this genre of literature appears to the uninitiated.
`
`C. Exceptions to the Practice of Exclusion
`Exceptions exist to the general policy of excluding soft information.
`One may detect a wide variety of relatively soft statements in many
`filings. For example, the application of proceeds section of prospectuses
`and certain data in Form S-11 (the form for various types of real estate
`offerings)," expressly require forward-looking information. The intro-
`ductory statement in a prospectus, which describes so-called risk factors
`and speculative aspects, tends to develop some soft areas.1 Further-
`more, there has apparently been a slight shift in the Commission's atti-
`tude recently, resulting in more toleration of soft information in filings
`when it is particularly material and useful to investors.17 For instance,
`
`14 See text accompanying notes 30-31 infra.
`15 See SEC Form S-11, Item 6(b), calling for future estimates of cash flow and
`taxable income in certain cases.
`16SEC Securities Act Release No. 4936, Guide No. 6 (Dec. 9, 1968), as amended,
`SEC Securities Act Release No. 5278, Guide No. 6 (July 26, 1972).
`17The Commission's recent suggestions regarding prospectuses of broker-dealers
`which offer their own securities publicly may well reflect this trend. See SEC Securities
`Act Release No. 5222 (Jan. 3, 1972). These suggestions expressly call for various types
`of soft information. The guidelines as a whole convey the impression that more soft
`information than has been typical would not only be tolerated, but would be required
`in prospectuses of broker-dealers.
`For example, the Commission suggests discussion concerning the competitive impact
`on the issuer-which might well be favorable-of developments such as access of financial
`institutions and broker-dealers to various market places, the impact of NASDAQ and
`other automated quotation systems, revision of commission rate structures, trends toward
`industry practices, and pending
`public ownership, antitrust implications of present
`proposals for industry change. Id. ff 5. These topics represent highly sensitive and unclear
`areas, in a state of flux with numerous unknowns. The Commission historically has
`neither expected nor required discussions of comparable imponderables which face issuers
`in other industries. The Commission's intimate familiarity with the brokerage business
`no doubt gives it confidence that it can exercise some independent judgment in processing
`broker-dealer filings, a factor which probably increases its willingness to deal with soft
`information concerning this particular industry.
`
`

`

`19721
`
`SOFT INFORMATION IN SEC FILINGS
`
`the Staff is reconsidering its traditional prohibition of financial projec-
`tions in filings.38 Such a shift in attitude is clearly consistent with Chair-
`man Casey's call for more economic reality."2
`As a matter of practice, the Commission has been more tolerant of
`soft information in filings concerned with acquisitions (mergers, ex-
`change offers, and so forth), tender offers, and proxy contests.2 ° In these
`situations an investor most clearly needs "fair," as contrasted with
`"conservative," disclosure. When an investment decision involves a
`the alternate
`choice between two securities (or two managements),
`choice may seem to be relatively better than it really is, if an overly
`conservative presentation makes one security (or management) appear
`worse than it in fact is. Furthermore, in an adversary situation, such
`as a proxy contest or disputed tender, each contestant can raise ap-
`propriate challenges to the soft information offered by the other, thus
`tending to assure that investors will not be misled.
`Furthermore, the SEC has adopted a double standard, depending
`on whether soft information is favorable or adverse. It has considered
`
`is See SEC Exchange Act Release No. 9844 (Nov. 1, 1972). A recent proposal for
`more disclosures regarding substantial write-offs and charges against income would also
`call for a great deal of predictive information. SEC Securities Act Release No. 5313
`(Oct. 2, 1972).
`1 0 Chairman Casey drew particular attention to the economic realities relating to
`compensating balance arrangements for bank loans. Address by SEC Chairman Casey,
`American Bankers Association, Mar. 17, 1972, reported in 144 BNA SEC. REG. & L. REP.
`A-7 (Mar. 22, 1972). He stated that disclosure could not be avoided merely because there
`was no written contractual commitment. In many cases, disclosure of non-contractual
`compensating balance arrangements would be relatively soft, since the arrangements
`may be vague. Although Chairman Casey indicated that the Commission has "not yet
`required this form of disclosure for companies under our 1933 Act powers," Staff com-
`ment letters recently have been requesting disclosure of compensating balance arrange-
`ments. Id.
`Chairman Casey has urged public companies to give more evaluation and forward-
`looking information in annual reports to shareholders. Address by SEC Chairman
`Casey, American Society of Corporate Securities Annual Meeting, June 6, 1972, reported
`in 156 BNA SEC. REG. & L. REP. A-19 (June 14, 1972). The Commission has been pressing
`to have disclosures in Form 10-K reports to the SEC and disclosures in annual reports
`to shareholders become more equivalent. Id. SEC Exchange Act Release No. 9672 (July
`26, 1972). The result inevitably may be Form 10-K reports which come closer to the
`style of disclosure used in annual shareholders reports, including soft information.
`2 0 Indeed, in at least one situation, traditional roles were reversed and the Com-
`mission insisted on the inclusion of long term financial projections in an acquisition
`proxy statement. The issuer vigorously resisted on the grounds that the particular
`projections, under the assumptions prescribed by the Commission, did not represent a
`realistic forecast of the future, and that the public might give undue predictive signifi-
`cance to the projections, notwithstanding disclaimers, simply because they appeared in
`an SEC filing. The projections requested by the Staff made no allowance for the economic
`reality motivating the transaction-the expectation that significant economies would result
`from the combination of two similar businesses.
`A significant amount of the litigation challenging the adequacy of disclosure under
`the anti-fraud rules relates to alleged deficiencies in relatively soft information, typically
`future plans, in connection with acquisitions. See, e.g., Kohn v. American Metal Climax,
`Inc., 458 F.2d 255 (3d Cir.), cert. denied, 93 S. Ct. 120 (1972); Susquehanna Corp. v.
`Pan American Sulphur Co., 423 F.2d 1075 (5th Cir. 1970); Feit v. Leasco Data Process-
`ing Equip. Corp., 332 F. Supp. 544 (E.D.N.Y. 1971); Gerstle v. Gamble-Skogmo, Inc.,
`298 F. Supp. 66 (E.D.N.Y. 1969); Mills v. Sarjem Corp., 133 F. Supp. 753 (D.N.J.
`1955); Speed v. Transamerica Corp., 99 F. Supp. 808 (D. Del. 1951), aff'd, 235 F.2d
`369, 373 (3d Cir. 1956).
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`disclosure of soft information to be mandatory when the information
`creates fairly specific and highly negative inferences, although disclo-
`sures on the same subjects are normally prohibited if the information
`is favorable. It has required negative disclosures, for example, on such
`topics as plant efficiency,2 management integrity,2
`labor relations,'
`pending antitrust negotiations with the Justice Department, 4 antici-
`pated changes in a company's competitive position,25 or trends reflected
`in recent interim earnings,2 6 topics on which favorable disclosures would
`probably be prohibited.
`As another indication of changed attitude, the Commission recently
`proposed various steps to control abuses of hot issues.2 Several of the
`proposals relate to expanded disclosure obligations and, to a significant
`extent, they deal with soft information. Thus, there is a proposal to add
`new disclosure obligations for issuers filing a first 1933 Act registration
`statement who have not conducted bona fide operations for a period of
`at least three years prior to the filing. Their prospectuses would be re-
`quired to: "Describe, if available, the registrant's plan of operation" for
`the immediate future, the disclosure to "include such matters as: (a) If
`available, a budget of anticipated cash expenditures and resources which
`should present on a quarterly basis the principal categories of expenses
`expected to be incurred ... , These proposals reflect Chairman
`
`2 1 Clinton Engines Corp., SEC Securities Act Release No. 4724 (Sept. 28, 1964).
`2 2 Franchard Corp., SEC Securities Act Release No. 4710 (July 31, 1964).
`23 Levitz Furniture Corp., SEC Securities Act Release No. 5295 (Sept. 6, 1972),
`holding that a prospectus should have disclosed "to the extent possible . . . the effects
`of [the union's] organizing campaign and the proposed labor contract terms on registrant's
`business operations, employee relations and income." Id. at 3. But see Prettner v. Aston,
`339 F. Supp. 273, 290-91 (D. Del. 1972)
`(no need to speculate about adverse impact of
`merger on labor relations, where "there had not been a work stoppage or strike in
`similar circumstances in the preceding ten years").
`24The SEC charged ITT with violating the anti-fraud rules for failing to disclose
`material information in a prospectus supplement, regarding a change in the settlement
`posture, the substance of settlement negotiations and subsequent material developments
`in the negotiations between ITT and the Justice Department relative to ITT's alleged
`antitrust violations. SEC v. International Tel. & Tel. Corp. CCH Fan. Sa. L. R t,.
`ff 93,535 (S.D.N.Y. June 20, 1972)
`(consent injunction on complaint described in 157
`BNA SEc. REG. & L. RaP. A-6 (June 21, 1972)). Describing accurately the posture of a
`negotiation which is not yet completed is extremely difficult due to the highly subjective
`nature of the evaluation to be made, the fact that each party may not be stating its
`most conciliatory position to the other, and the possibility that a party's position might be
`jeopardized if it had to make public disclosures which become available to the other
`party about its view of the negotiations.
`2 5 See SEC v. Granco Products, Inc., 236 F. Supp. 968, 971 (S.D.N.Y. 1964); Uni-
`versal Camera Corp., 19 S.E.C. 648, 655-56
`(1945)
`(anticipated problems in transition
`from wartime to peacetime market).
`26 Doman Helicopters, Inc., 41 S.E.C. 431 (1963).
`27 SEC Securities Act Release Nos. 5274-79 (July 26, 1972).
`28 SEC Securities Act Release No. 5276, at 7-8 (July 26, 1972)
`(proposing amend-
`ments for Form S-1). Corresponding changes were proposed in Form S-2 and Exchange
`Act Forms 10 and 10-K.
`
`

`

`SOFT INFORMATION IN SEC FILINGS
`
`Casey's view that disclosures should focus on economic reality.2 9 The
`Chairman has specifically rejected the insurance policy analogy,30 often
`used by securities lawyers,31 as being an appropriate point of orientation
`for a prospectus.
`Whatever objections one may have to the specific proposals, they
`should be welcome insofar as they reflect a breakdown of the Com-
`mission's generally rigid attitude banning soft information. However,
`the hot issue proposals have a very specific orientation. The Commission
`was quite concerned with "new ventures which seem to have little or no
`actual economic viability."3 2 Thus, despite some minor indication to the
`contrary,33 the general theme underlying the several interrelated pro-
`posals seems to be an effort