Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant's Securities, 49630-49689 [2018-19456]
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Federal Register / Vol. 83, No. 191 / Tuesday, October 2, 2018 / Proposed Rules
SECURITIES AND EXCHANGE
COMMISSION
17 CFR Parts 210, 229, 239, 240, and
249
[Release No. 33–10526; 34–83701; File No.
S7–19–18]
RIN 3235–AM12
Financial Disclosures About
Guarantors and Issuers of Guaranteed
Securities and Affiliates Whose
Securities Collateralize a Registrant’s
Securities
Securities and Exchange
Commission.
ACTION: Proposed rule.
AGENCY:
We are proposing
amendments to the financial disclosure
requirements for guarantors and issuers
of guaranteed securities registered or
being registered, and issuers’ affiliates
whose securities collateralize securities
registered or being registered in
Regulation S–X to improve those
requirements for both investors and
registrants. The proposed changes are
intended to provide investors with
material information given the specific
facts and circumstances, make the
disclosures easier to understand, and
reduce the costs and burdens to
registrants. In addition, by reducing the
costs and burdens of compliance,
issuers may be encouraged to offer
guaranteed or collateralized securities
on a registered basis, thereby affording
investors protection they may not be
provided in offerings conducted on an
unregistered basis. Finally, by making it
less burdensome and less costly for
issuers to include guarantees or pledges
of affiliate securities as collateral when
they structure debt offerings, the
proposed revisions may increase the
number of registered offerings that
include these credit enhancements,
which could result in a lower cost of
capital and an increased level of
investor protection.
DATES: Comments should be received on
or before December 3, 2018.
ADDRESSES: Comments may be
submitted by any of the following
methods:
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SUMMARY:
Electronic Comments
• Use our internet comment form
(https://www.sec.gov/rules/other.shtml);
or
• Send an email to rule-comments@
sec.gov. Please include File Number S7–
19–18 on the subject line.
Paper Comments
• Send paper comments to Brent J.
Fields, Secretary, Securities and
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Exchange Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number S7–19–18. This file number
should be included on the subject line
if email is used. To help us process and
review your comments more efficiently,
please use only one method of
submission. We will post all comments
on our website (https://www.sec.gov/
rules/other.shtml). Comments also are
available for website viewing and
printing in our Public Reference Room,
100 F Street NE, Washington, DC 20549,
on official business days between the
hours of 10:00 a.m. and 3:00 p.m. All
comments received will be posted
without change. Persons submitting
comments are cautioned that we do not
redact or edit personal identifying
information from comment submissions.
You should submit only information
that you wish to make publicly
available.
We or the staff may add studies,
memoranda, or other substantive items
to the comment file during this
rulemaking. A notification of the
inclusion in the comment file of any
such materials will be made available
on our website. To ensure direct
electronic receipt of such notifications,
sign up through the ‘‘Stay Connected’’
option at www.sec.gov to receive
notifications by email.
FOR FURTHER INFORMATION CONTACT:
Jarrett Torno, Assistant Chief
Accountant, at (202) 551–3400, or John
Fieldsend, Special Counsel, at (202)
551–3430, in the Division of
Corporation Finance, 100 F Street NE,
Washington, DC 20549.
SUPPLEMENTARY INFORMATION: The
Commission is proposing to amend
Commission reference
Regulation S–X: 1
Rule 3–10 .......................
Rule 3–16 .......................
Rule 8–01 .......................
Rule 8–03 .......................
Rule 10–01 .....................
Rule 13–01 .....................
Rule13–02 ......................
Regulation S–K: 2
Item 504 .........................
Item 1100 .......................
Item 1112 .......................
Item 1114 .......................
Item 1115 .......................
Securities Act of 1933 (Securities Act): 3
Form F–1 .......................
Form F–3 .......................
CFR citation
(17 CFR)
210.3–10
210.3–16
210.8–01
210.8–03
210.10–01
210.13–01
210.13–02
229.504
229.1100
229.1112
229.1114
229.1115
239.31
239.33
1 17
CFR 210.1–01 through 210.13.02.
CFR 229.10 through 229.1208.
3 15 U.S.C. 77a et seq.
4 15 U.S.C. 78a et seq.
2 17
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Commission reference
Form 1–A .......................
Form 1–K .......................
Form 1–SA .....................
Securities Exchange Act of
1934 (Exchange Act): 4
Rule 12h–5 .....................
Form 20–F .....................
CFR citation
(17 CFR)
239.90
239.91
239.92
240.12h–5
249.220f
Table of Contents
I. Introduction
A. Background
B. Scope of Proposals
II. Rule 3–10 of Regulation S–X
A. Background
B. Overview of the Existing Requirements
C. Parent Company Financial Statements
D. 100% Owned
E. Full and Unconditional Guarantees
F. Exceptions
G. Consolidating Information
H. Securities to Which Rule 3–10 Applies
I. Recently-Acquired Subsidiary Issuers
and Guarantors
J. Exchange Act Reporting Requirements
III. Proposed Amendments to Rule 3–10 and
Partial Relocation to Rule 13–01
A. Overarching Principle
B. Overview of the Proposed Amendments
C. Conditions To Omit the Financial
Statements of a Subsidiary Issuer or
Guarantor
1. Eligibility Conditions
a. Parent Company Financial Statements
Condition
b. Consolidated Subsidiary Condition
c. Debt or Debt-Like Securities Condition
d. Eligible Issuer and Guarantor Structures
Condition
i. Role of Parent Company
(A) Parent Company Obligation Is Not
Limited or Conditional
(B) Parent Company as Issuer or Co-Issuer
(C) Parent Company as Full and
Unconditional Guarantor
ii. Role of Subsidiary Guarantors
(A) Subsidiary Guarantee Release
Provisions
iii. Treatment of Currently Eligible Issuer
and Guarantor Structures Under
Proposed Rule 3–10
(A) Finance Subsidiary Issuer of Securities
Guaranteed by Its Parent Company
(B) Obligated Parent Company and Single
Obligated Subsidiary
(C) Obligated Parent Company and
Multiple Obligated Subsidiaries
2. Disclosure Requirements
a. Financial Disclosures
i. Level of Detail
ii. Presentation on a Combined Basis
iii. Periods to Present
b. Non-Financial Disclosures
c. When Disclosure Is Required
d. Location of Proposed Alternative
Disclosures and Audit Requirement
e. Recently-Acquired Subsidiary Issuers
and Guarantors
f. Continuous Reporting Obligation
D. Application of Proposed Amendments
to Certain Types of Issuers
1. Foreign Private Issuers
2. Smaller Reporting Companies
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3. Offerings Pursuant to Regulation A
4. Issuers of Asset-Backed Securities—
Third Party Financial Statements
IV. Rule 3–16 of Regulation S–X
V. Proposed Amendments to Rule 3–16 and
Relocation to Rule 13–02
A. Overarching Principle
B. Overview of the Proposed Changes
C. Financial Disclosures
1. Level of Detail
2. Presentation on a Combined Basis
3. Periods to Present
D. Non-Financial Disclosures
E. When Disclosure Is Required
F. Application of Proposed Amendments to
Certain Types of Issuers
1. Foreign Private Issuers
2. Smaller Reporting Companies
3. Offerings Pursuant to Regulation A
VI. General Request for Comment
VII. Economic Analysis
A. Introduction
B. Baseline and Affected Parties
1. Market Participants
2. Market Conditions
C. Anticipated Economic Effects
1. Proposed Amendments to Rule 3–10 and
Partial Relocation to Rule 13–01
a. Eligibility Conditions To Omit Financial
Statements of Subsidiary Issuer or
Guarantor
b. Disclosure Requirements
i. Financial and Non-Financial Disclosures
ii. When Disclosure Is Required
iii. Location of Proposed Alternative
Disclosures and Audit Requirement
iv. Recently Acquired Subsidiary Issuers
and Guarantors
v. Continuous Reporting Obligation
2. Proposed Amendments to Rule 3–16 and
Relocation to Rule 13–02
a. Financial Disclosures
i. Level of Detail
ii. Presentation on a Combined Basis
iii. Periods to Present
b. Non-Financial Disclosures
c. When Disclosure Is Required
D. Anticipated Effects on Efficiency,
Competition, and Capital Formation
E. Consideration of Reasonable
Alternatives
1. Alternative to Proposed Amendments to
Existing Rule 3–10
2. Alternatives Common to Proposed
Amendments to Existing Rule 3–10 and
Existing Rule 3–16
F. Request for Comment
VIII. Paperwork Reduction Act
A. Background
B. Summary of the Proposed Amendments
Impact on Collection of Information
1. Rule 3–10
2. Rule 3–16
C. Burden and Cost Estimates for the
Proposed Amendments
D. Request for Comment
IX. Small Business Regulatory Enforcement
Fairness Act
X. Initial Regulatory Flexibility Act Analysis
A. Reasons for, and Objectives of, the
Proposing Action
B. Legal Basis
C. Small Entities Subject to the Proposed
Rules
D. Reporting, Recordkeeping, and Other
Compliance Requirements
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E. Duplicative, Overlapping, or Conflicting
Federal Rules
F. Significant Alternatives
G. Request for Comment
XI. Statutory Authority
Text of Proposed Rule and Form
Amendments
I. Introduction
A. Background
We are proposing changes to the
disclosure requirements in Rules 3–10
and 3–16 of Regulation S–X to better
align those requirements with the needs
of investors and to simplify and
streamline the disclosure obligations of
registrants. Rule 3–10 requires financial
statements to be filed for all issuers and
guarantors of securities that are
registered or being registered, but also
provides several exceptions to that
requirement. These exceptions are
typically available for individual
subsidiaries of a parent company 5 when
certain conditions are met and the
consolidated financial statements of that
parent company are filed. Rule 3–16
requires a registrant to provide separate
financial statements for each affiliate
whose securities constitute a substantial
portion of the collateral for any class of
registered securities as if the affiliate
were a separate registrant. The changes
we are proposing include amending
both rules and relocating part of Rule 3–
10 and all of Rule 3–16 to new Rules
13–01 and 13–02 in Regulation S–X,
respectively.6 These changes are
intended to provide investors with the
information that is material given the
specific facts and circumstances, make
the disclosures easier to understand,
and reduce the costs and burdens to
registrants.
This proposal results from an
ongoing, comprehensive evaluation of
our disclosure requirements.7 As part of
that evaluation, in September 2015, the
Commission issued a Request for
Comment on the Effectiveness of
Financial Disclosures About Entities
5 The identity of the parent company depends on
the particular corporate structure. See additional
discussion in Section II.C, ‘‘Parent Company
Financial Statements Condition.’’
6 Proposed Rules 13–01 and 13–02 would contain
financial and non-financial disclosure requirements
for certain types of securities registered or being
registered that, while material to investors, need not
be included in the audited and unaudited financial
statements.
7 The staff, under its Disclosure Effectiveness
Initiative, is reviewing the disclosure requirements
in Regulations S–K and Regulation S–X and is
considering ways to improve the disclosure regime
for the benefit of both companies and investors. The
goal is to comprehensively review the requirements
and make recommendations on how to update them
to facilitate timely, material disclosure by
companies and shareholders’ access to that
information.
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Other Than the Registrant (‘‘Request for
Comment’’).8 The Request for Comment
sought feedback on, among other things,
the financial disclosure requirements in
Regulation S–X for certain entities other
than the registrant, including the
requirements in Rules 3–10 and 3–16.
More specifically, the Commission
solicited comment on how investors use
the disclosures required by these rules
to make investment decisions; the
challenges that registrants face in
providing the required disclosures; and
potential changes to these requirements
that could enhance the information
provided to investors and promote
efficiency, competition, and capital
formation.
In response, we received
approximately 50 comment letters.9
About half of these comment letters
addressed Rule 3–10,10 and nearly as
many addressed Rule 3–16.11
Additionally, prior to issuing the
Request for Comment, one comment
letter was submitted, in response to the
staff’s Disclosure Effectiveness
Initiative, that addressed Rules 3–10
and 3–16.12 These comments were
8 Release No. 33–9929 (Sept. 25, 2015) [80 FR
59083 (Oct. 1, 2015)].
9 Comments that we received in response to the
Request for Comment are available at https://
www.sec.gov/comments/s7-20-15/s72015.shtml.
References to comment letters in this release refer
to the comments on the Request for Comment
unless otherwise specified.
10 See, e.g., letters from Association of the Bar of
the City of New York (Nov. 30, 2015) (‘‘AB–NYC’’);
Anuradha RK (Nov. 23, 2015) (‘‘Anuradha’’); BDO
USA, LLP (Dec. 7, 2015) (‘‘BDO’’); Cahill Gordon &
Reindel LLP (Nov. 30, 2015) (‘‘Cahill’’); California
Public Employees’ Retirement System (Nov. 30,
2015) (‘‘CalPERS’’); Center for Audit Quality (Nov.
25, 2015) (‘‘CAQ’’); CFA Institute (Mar. 2, 2016)
(‘‘CFA’’); Comcast Corporation (Dec. 11, 2015)
(‘‘Comcast’’); Covenant Review, LLC (Nov. 30, 2015)
(‘‘Covenant’’); Davis Polk & Wardwell LLP (Nov. 30,
2015) (‘‘Davis Polk’’); Deloitte & Touche LLP (Nov.
23, 2015) (‘‘DT’’); Ernst & Young LLP (Nov. 20,
2015) (‘‘EY’’); FedEx Corporation (‘‘Nov. 30, 2015)
(‘‘FedEx’’); General Motors Company (Nov. 30,
2015) (‘‘GM’’); Grant Thornton LLP (Dec. 1, 2015)
(‘‘Grant’’); Headwaters Incorporated (Nov. 30, 2015)
(‘‘Headwaters’’); KPMG LLP (Nov. 30, 2015)
(‘‘KPMG’’); Medtronic plc (Nov. 30, 2015)
(‘‘Medtronic’’); Noble Corporation plc (Dec. 1, 2015)
(‘‘Noble-UK’’); PricewaterhouseCoopers LLP (Nov.
30, 2015) (‘‘PwC’’); RSM US LLP (Nov. 30, 2015)
(‘‘RSM’’); Securities Industry and Financial Markets
Association (Nov. 30, 2015) (‘‘SIFMA’’); Simpson
Thacher & Bartlett LLP (Nov. 30, 2015)
(‘‘Simpson’’); U.S. Chamber of Commerce, Center
for Capital Markets Competitiveness (Nov. 30, 2015)
(‘‘Chamber’’); and WhiteWave Foods Company
(Nov. 30, 2015) (‘‘WhiteWave’’).
11 See, e.g., letters from Anuradha, BDO, Cahill,
CalPERS, CAQ, CFA, Covenant, Davis Polk, DT, EY,
KPMG, PwC, SIFMA, and Chamber.
12 See letter from Disclosure Effectiveness
Working Group of the Federal Regulation of
Securities Committee and the Law and Accounting
Committee of the Business Law Section of the
American Bar Association (Nov. 14, 2014) (‘‘ABACommittees’’), https://www.sec.gov/comments/
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Federal Register / Vol. 83, No. 191 / Tuesday, October 2, 2018 / Proposed Rules
considered carefully in developing these
proposals.
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B. Scope of Proposals
We are proposing changes to the
disclosure requirements contained in
Rules 3–10 and 3–16. These rules
represent a discrete, but important,
subset of the Regulation S–X disclosure
requirements.13 Both rules affect
disclosures made in connection with
registered debt offerings 14 and
subsequent periodic reporting.15 We
believe that revising these rules would
reduce the cost of compliance for
registrants and encourage potential
issuers to conduct registered debt
offerings or private offerings with
registration rights. The proposed
amendments would benefit investors by
simplifying and streamlining the
disclosure provided to them about
registered transactions and improve
transparency in the market to the extent
more offerings are registered.16 In
disclosure-effectiveness/
disclosureeffectiveness.shtml.
13 Until 2000, the disclosure requirements for
guarantors and issuers of guaranteed securities
registered or being registered and those for affiliates
whose securities collateralized securities registered
or being registered were included in the same rule.
The Commission separated those disclosure
requirements in 2000 because of the significant
change made to the structure and substance of the
disclosure requirements for guarantors and issuers
of guaranteed securities registered or being
registered. See Financial Statements and Periodic
Reports for Related Issuers and Guarantors, Release
No. 33–7878 (Aug. 4, 2000) [65 FR 51691 (Aug. 24,
2000)] (‘‘2000 Release’’). The Commission kept
these new disclosure requirements in Rule 3–10
and moved the disclosure requirements for affiliates
whose securities collateralize securities registered
or being registered to new Rule 3–16. The substance
of the requirements moved to Rule 3–16 were
unchanged. See Separate Financial Statements
Required by Regulation S–X, Release No. 33–6359
(Nov. 6, 1981) [46 FR 56171 (Nov. 16, 1981)].
14 In practice, pledges of affiliate securities as
collateral are almost always for debt securities.
However, the requirements of Rule 3–16 are
applicable to any security registered or being
registered, whether or not in the form of debt.
15 The proposed amendments will not affect the
presentation of registrants’ consolidated financial
statements prepared in accordance with U.S. GAAP
or International Financial Reporting Standards
(‘‘IFRS’’) as issued by the International Accounting
Standards Board in registration statements and
Exchange Act periodic reports, such as Form 10–
K. The proposed amendments are focused on the
supplemental information about subsidiary issuers
and guarantors as well as affiliates whose securities
are pledged as collateral.
16 In a recent report to Congress, the
Commission’s Division of Economic Risk Analysis
determined that capital raising activity in the
registered debt market was approximately $1.3
trillion in 2016. See U.S. Sec. & Exch. Comm’n, Div.
of Econ. & Risk Analysis, Access to Capital and
Market Liquidity 96 (Aug. 2017) [hereinafter Access
to Capital and Market Liquidity Report], https://
www.sec.gov/files/access-to-capital-and-marketliquidity-study-2017.pdf. In 2016, debt offerings
under Securities Act Rule 144A raised
approximately $562.8 billion, based on staff
analysis of data from the SDC Platinum (Thomson
Reuters) database.
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addition, if the proposed changes
reduce the burden associated with
providing guarantees or pledges of
affiliate securities as collateral,17
investors may benefit from access to
more registered offerings that are
structured to include such
enhancements and, accordingly, the
additional protections that come with
Section 11 liability for disclosures made
in those offerings.
II. Rule 3–10 of Regulation S–X
A. Background
A guarantee of a debt or debt-like
security (‘‘debt security’’) 18 is a separate
security under the Securities Act 19 and,
as a result, offers and sales of these
guarantees 20 must be either registered
or exempt from registration. If the offer
and sale is registered, the issuer of the
debt security and the guarantor 21 must
each file its own audited annual and
unaudited interim 22 financial
statements required by Regulation S–X.
Additionally, the offer and sale of the
securities pursuant to a Securities Act
registration statement causes the issuer
and guarantor to become subject to
reporting under Section 15(d) of the
Exchange Act.23 Reporting under
Section 15(d) requires filing periodic
reports that include audited annual and
unaudited interim financial statements
for at least the fiscal year in which the
related Securities Act registration
statement became effective.24
17 Currently, registrants often structure debt
agreements to release affiliate securities pledged as
collateral if the disclosure requirements of Rule 3–
16 would be triggered, thereby depriving investors
of that collateral protection. See additional
discussion below. Registrants may cease structuring
offerings to release such collateral if disclosure
burdens are reduced by the proposed amendments,
which would benefit investors.
18 Rule 3–10 exceptions are available to issuers
and guarantors of guaranteed securities that are
‘‘debt or debt-like.’’ The 2000 Release stated, in
part, ‘‘[t]he characteristics that identify a guaranteed
security as debt or debt-like for this purpose are: the
issuer has a contractual obligation to pay a fixed
sum at a fixed time; and where the obligation to
make such payments is cumulative, a set amount
of interest must be paid.’’ See Section III.A.4 of the
2000 Release and additional discussion in Section
II.H, ‘‘Securities to which Rule 3–10 Applies.’’
19 See Section 2(a)(1) of the Securities Act.
20 These securities, while separately identified in
the Securities Act, are typically purchased by
investors together with the related debt security and
are held together while outstanding.
21 The issuer and guarantor structures
contemplated by Rule 3–10 can comprise multiple
issuers and multiple guarantors. For example, a
parent can co-issue a security with one of its
subsidiaries that several of its other subsidiaries
guarantee.
22 A foreign private issuer need only provide
interim period disclosure in certain registration
statements.
23 See 15 U.S.C. 78o(d).
24 The duty to file under Section 15(d) is
automatically suspended as to any fiscal year, other
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When the Commission amended Rule
3–10 in 2000, it recognized that ‘‘[t]here
are circumstances, however, where full
Securities Act and Exchange Act
disclosure by both the issuer and the
guarantors may not be useful to an
investment decision and, therefore, may
not be necessary.’’ 25 Common examples
are when: (1) A parent company offers
its own securities that its subsidiary
guarantees; and (2) a subsidiary offers
securities that its parent company fully
and unconditionally guarantees. In
these and similar situations, in which a
parent company and one or more of its
subsidiaries serve as issuers and/or
guarantors of guaranteed securities, we
believe the disclosure requirements
generally have been guided by an
overarching principle: The consolidated
financial statements of the parent
company are the principal source of
information for investors when
evaluating the debt security and its
guarantee together.26 This principle is
grounded in the idea that the
investment is in the consolidated
enterprise when: (1) The parent
company is fully obligated as either
issuer or full and unconditional
guarantor of the security; 27 (2) the
parent company controls each
subsidiary issuer and guarantor,
including having the ability to direct all
debt-paying activities; 28 and (3) the
financial information of each subsidiary
issuer and guarantor is included as part
of the consolidated financial statements
of the parent company.29 In these
than the fiscal year within which the registration
statement became effective, if, at the beginning of
such fiscal year, the securities of each class to
which the registration statement relates are held of
record by less than 300 persons. See Section
15(d)(1) of the Exchange Act.
25 See Section I of the 2000 Release.
26 Parent company consolidated financial
statements must be filed in all instances where the
omission of financial statements of subsidiary
issuers and guarantors are permitted under existing
Rule 3–10. See paragraph (4) in each of Rules 3–
10(b)–(f).
27 Typically, all of a parent company’s
subsidiaries support the parent company’s debtpaying ability. However, in the event of default, the
holders of debt without the benefit of guarantees are
comparatively disadvantaged. In the event of
default, a holder of a debt security issued by a
parent company can make claims for payment
directly against the issuer and guarantors. The
assets of non-issuer and non-guarantor subsidiaries
typically would be accessible only by the holder
indirectly through a bankruptcy proceeding. In such
a proceeding, without a direct guarantee, the claims
of the holder would be structurally subordinate to
the claims of other creditors, including trade
creditors of the non-issuer and non-guarantor
subsidiaries.
28 Debt-paying activities typically include, but are
not limited to, the use of the subsidiary issuer’s and
guarantor’s assets and the timing and amount of
distributions.
29 A parent company that prepares its financial
statements in accordance with U.S. Generally
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circumstances, we believe full
Securities Act and Exchange Act
disclosures for each subsidiary issuer
and guarantor are generally not material
for an investor to make an informed
investment decision about a guaranteed
security. Instead, we believe
information included in the
consolidated disclosures about the
parent company, as supplemented with
details about the issuers and guarantors,
is sufficient. These disclosures help an
investor understand how the
consolidated entities within the
enterprise support the obligation.
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B. Overview of the Existing
Requirements
Rule 3–10(a) states the general rule
that every issuer of a registered security
that is guaranteed and every guarantor
of a registered security must file the
financial statements required for a
registrant by Regulation S–X. The rule
also sets forth five exceptions to this
general rule.30 Each exception specifies
conditions that must be met, including,
in each case, that the parent company
provide certain disclosures
(‘‘Alternative Disclosures’’). If the
conditions are met, separate financial
statements of each qualifying subsidiary
issuer and guarantor may be omitted.
Only one of the five exceptions can
apply to any particular offering and the
subsequent Exchange Act reporting.
Two primary conditions, included in
each of the exceptions, must be satisfied
for a subsidiary issuer or guarantor to be
eligible to omit its separate financial
statements:
• Each subsidiary issuer and
guarantor must be ‘‘100% owned’’ by
the parent company; and
• each guarantee must be ‘‘full and
unconditional.’’
The form and content of the
Alternative Disclosures are determined
based on the facts and circumstances
and can range from a brief narrative to
highly-detailed condensed
consolidating financial information
(‘‘Consolidating Information’’).
Subsidiary issuers and guarantors that
are permitted to omit their separate
financial statements under Rule 3–10
are also automatically exempt from
Exchange Act reporting under Exchange
Act Rule 12h–5. The parent company,
however, must continue to provide the
Accepted Accounting Principles (‘‘U.S. GAAP’’),
would apply Accounting Standards Codification
(‘‘ASC’’) 810, Consolidation, in determining
whether to consolidate a subsidiary issuer or
guarantor. A parent company that qualifies as a
foreign private issuer and prepares its financial
statements in accordance with IFRS would apply
IFRS 10, Consolidated Financial Statements.
30 See Rules 3–10(b)–(f) of Regulation S–X. See
Section II.F, ‘‘Exceptions,’’ below.
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Alternative Disclosures for as long as
the guaranteed securities are
outstanding.31
Recently acquired subsidiary issuers
and guarantors are addressed separately
within Rule 3–10. Rule 3–10(g) 32
requires the Securities Act registration
statement of a parent company filed in
connection with issuing guaranteed debt
securities to include one year of
audited, and, if applicable, unaudited
interim pre-acquisition financial
statements for recently-acquired
subsidiary issuers and guarantors that
are significant and have not been
reflected in the parent company’s
audited results for at least nine months
of the most recent fiscal year.
C. Parent Company Financial
Statements
Each of the exceptions in Rule 3–10
requires the parent company to file its
financial statements, but Rule 3–10 does
not address when an issuer or guarantor
is, in fact, the ‘‘parent company’’
because, as noted in the 2000 Release,
the identity of the parent company will
vary based on the particular corporate
structure.33 The 2000 Release identified
three conditions that must be met before
an entity can be considered the ‘‘parent
company’’ for purposes of Rule 3–10,
including that the entity owns 100% of
each subsidiary issuer or guarantor
directly or indirectly.34
D. 100% Owned
Rule 3–10(h)(1) defines a subsidiary
as ‘‘100% owned’’ if all of its
outstanding voting shares are owned,
either directly or indirectly, by its
parent company. A subsidiary not in
corporate form is ‘‘100% owned’’ if the
sum of all interests are owned, either
directly or indirectly, by its parent
company, except that the following are
not included in the sum of all interests
owned: (1) Securities that are
guaranteed by its parent, and, if
applicable, other 100%-owned
subsidiaries of its parent; and (2)
securities that guarantee securities
issued by its parent and, if applicable,
other 100%-owned subsidiaries of its
31 See Section III.C.1 of the 2000 Release and
additional discussion in Section II.J, ‘‘Exchange Act
Reporting Requirements.’’
32 Rule 3–10(g) of Regulation S–X.
33 See Section III.A.6. of the 2000 Release.
34 The three conditions for an entity to be
considered the ‘‘parent company’’ are that the
entity: (1) Is an issuer or guarantor of the subject
securities; (2) is an Exchange Act reporting
company, or will become one as a result of the
subject Securities Act registration statement; and (3)
owns 100% of each subsidiary issuer or guarantor
directly or indirectly. See id. A number of examples
illustrating when an entity is or is not the parent
company were included in an appendix to the 2000
Release. See id. at Appendix C.
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parent.35 This condition was adopted so
the risks associated with an investment
in the parent company and its
subsidiary would be ‘‘identical.’’ 36 A
subsidiary issuer or guarantor with any
third party ownership interest would
fail to meet this condition and not be
eligible for an exception in Rule 3–10.
This condition would also not be met if
a subsidiary issued securities
convertible into its voting securities to
someone other than the parent
company.37
E. Full and Unconditional Guarantees
Rule 3–10(h)(2) defines a guarantee as
‘‘full and unconditional’’ if, when an
issuer of a guaranteed security has failed
to make a scheduled payment, the
guarantor is obligated to make the
scheduled payment immediately and, if
the guarantor does not, any holder of the
guaranteed security may immediately
bring suit directly against the guarantor
for payment of all amounts due and
payable. There can be no conditions,
beyond the issuer’s failure to pay, to the
guarantor’s payment obligation.38 The
condition that all guarantees be ‘‘full
and unconditional’’ was adopted to
limit the availability of Alternative
Disclosures to situations where the
35 The 2000 Release states that ‘‘[u]nincorporated
entities operate differently than corporations. For
example, in a limited liability corporation, the
ability to vote can be separated from the ability to
manage the financial affairs of the entity.’’ See
Section III.A.1.a.ii of the 2000 Release. In
recognition of such differences, separate definitions
of 100% owned were included in existing Rule 3–
10(h)(1) for corporate and non-corporate entities.
36 See Section III.A.1.a.i.(A) of the 2000 Release.
37 See id.
38 For example, a guarantee is not full and
unconditional if it is not operative until some time
after default or if the amount the guarantor is
obligated to pay differs from the amount the issuer
must pay. As the payment obligation does not fall
uniformly across the issuer and related guarantors
before enforceability of the guarantee, each party in
that structure must provide separate financial
statements. See Section III.A.1.b.i. of the 2000
Release. However, a guarantee can meet the full and
unconditional condition if it has a fraudulent
conveyance ‘‘savings clause,’’ such as the guarantee
being limited to the maximum amount that can be
guaranteed without constituting a fraudulent
conveyance or fraudulent transfer under applicable
insolvency laws, or if the guarantee is enforceable
to the fullest extent of the law. See Section
III.A.1.b.ii. of the 2000 Release. Additionally, a
guarantee can be full and unconditional even if it
has different subordination terms than the
guaranteed securities. For example, a parent
company’s guarantee can be full and unconditional
if the subsidiary’s debt obligation ranks senior to all
of its other debt and the parent company’s
guarantee ranks junior to other debt obligations of
the parent company. While different subordination
terms may mean the guaranteed security holders
have different rights in the priority of payment with
respect to the issuer and guarantor, both the issuer
and guarantor remain fully liable to holders for all
amounts due under the guaranteed security. See
Section III.A.1.b.iii. of the 2000 Release.
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payment obligations of the issuer and
guarantor are essentially identical.39
F. Exceptions
Each of the five exceptions in the
existing rule contains conditions that, if
satisfied, permit registrants to omit
separate financial statements of the
subject subsidiary issuers and
guarantors. These five exceptions are:
(1) A finance subsidiary 40 issues
securities that its parent company
guarantees; 41
(2) an operating subsidiary issues
securities that its parent company
guarantees; 42
(3) a subsidiary issues securities that
its parent company and one or more
other subsidiaries of its parent company
guarantee; 43
(4) a parent company issues securities
that one of its subsidiaries guarantees; 44
or
(5) a parent company issues securities
that more than one of its subsidiaries
guarantees.45
In addition to the two primary
conditions discussed above, depending
on which exception is applicable,
additional conditions must be satisfied,
including providing Alternative
Disclosures in the footnotes to the
parent company’s consolidated financial
statements. In most cases, the
Alternative Disclosures consist of
Consolidating Information. However,
there are three situations in which the
Alternative Disclosures consist of a brief
narrative.46 These three situations are:
• The subsidiary is a finance
subsidiary, and the parent company is
the only guarantor of the securities;
• the parent company of the
subsidiary issuer has no independent
39 See
Section III.A.1.b of the 2000 Release.
3–10(h)(7) of Regulation S–X (‘‘A
subsidiary is a finance subsidiary if it has no assets,
operations, revenues or cash flows other than those
related to the issuance, administration and
repayment of the security being registered and any
other securities guaranteed by its parent
company.’’).
41 See Rule 3–10(b) of Regulation S–X.
42 See Rule 3–10(c) of Regulation S–X.
43 See Rule 3–10(d) of Regulation S–X.
44 See Rule 3–10(e) of Regulation S–X.
45 See Rule 3–10(f) of Regulation S–X.
46 The content of the brief narrative is specified
within each of the exceptions based on the
applicable facts and circumstances. For example, if
the conditions are met, Rule 3–10(b)(4) of
Regulation S–X specifies that the narrative
disclosure to be included in a footnote to the parent
company’s consolidated financial statements must
state, if true, ‘‘that the issuer is a 100%-owned
finance subsidiary of the parent company and the
parent company has fully and unconditionally
guaranteed the securities.’’ It also requires the
footnote to include ‘‘the narrative disclosures
specified in paragraphs (i)(9) and (i)(10) of this
section.’’
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assets or operations,47 the parent
company guarantees the securities, no
subsidiary of the parent company
guarantees the securities, and any
subsidiaries of the parent company
other than the issuer are minor; 48 and
• the parent company issuer has no
independent assets or operations and all
of the parent company’s subsidiaries,
other than minor subsidiaries, guarantee
the securities.
G. Consolidating Information
When the brief narrative disclosure is
not permitted, Rule 3–10 requires the
inclusion of Consolidating Information
in the financial statements.
Consolidating Information is detailed
financial information consisting of a
columnar footnote presentation of each
category of parent and subsidiaries as
issuer, co-issuers, guarantor(s), or nonguarantor(s) that sums to the
consolidated amounts. The presentation
must include all major captions of the
balance sheet, income statement, and
cash flow statement that are required to
be shown separately in interim financial
statements prepared under 17 CFR
210.10–1 (‘‘Article 10’’ of Regulation
S–X’’).49 In order to distinguish the
assets, liabilities, operations, and cash
flows of the entities that are legally
obligated to make payments under the
guarantee from those that are not, the
columnar presentation must show: (1) A
parent company’s investments in all
consolidated subsidiaries based upon its
proportionate share of their net assets; 50
and (2) subsidiary issuer and guarantor
investments in certain consolidated
subsidiaries using the equity method of
accounting.51
47 Rule 3–10(h)(5) of Regulation S–X (‘‘A parent
company has no independent assets or operations
if each of its total assets, revenues, income from
continuing operations before income taxes, and
cash flows from operating activities (excluding
amounts related to its investment in its
consolidated subsidiaries) is less than 3% of the
corresponding consolidated amount.’’).
48 Rule 3–10(h)(6) of Regulation S–X (‘‘A
subsidiary is minor if each of its total assets,
stockholders’ equity, revenues, income from
continuing operations before income taxes, and
cash flows from operating activities is less than 3%
of the parent company’s corresponding
consolidated amount.’’).
49 Rule 10–01(a) of Regulation S–X.
50 See Rule 3–10(i)(3) of Regulation S–X.
51 See Rule 3–10(i)(5) of Regulations S–X.
Investments in the following subsidiaries are
required to be presented under the equity method
within Consolidating Information: non-guarantor
subsidiaries; subsidary issuers or subsidiary
guarantors that are not 100% owned and/or whose
guarantee is not full and unconditional; subsidiary
guarantors whose guarantee is not joint and several
with the guarantees of other subsidiaries; and
subsidiary guarantors with differences in domestic
or foreign laws that affect the enforceability of the
guarantees. The equity method is used primarily to
ensure that a subsidiary guarantor does not
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Consolidating Information must be
provided as of, and for, the same
periods as the parent company’s
consolidated financial statements and
must be audited for the same periods
that the parent company financial
statements are required to be audited.52
In addition to requiring disclosures
about restricted net assets,53 as well as
certain types of restrictions on the
ability of the parent company or any
guarantor to obtain funds from their
subsidiaries,54 the instructions specify
that the disclosure may not omit
information about each guarantor that
would be material for investors to
evaluate the sufficiency of the
guarantee, and that the disclosure must
include sufficient information so as to
make the financial information
presented not misleading.
H. Securities to Which Rule 3–10
Applies
The exceptions to the general rule in
existing Rules 3–10(b) through (f) are
available only to issuers and guarantors
of debt securities.55 In the 2000 Release,
the Commission explained the
circumstances under which a
guaranteed security should be
considered ‘‘debt or debt-like’’ and
described certain characteristics of such
a security. Generally, the substance of
the security’s obligation will dictate
eligibility for Rule 3–10 rather than the
form or title of the security. The
characteristics that identify a guaranteed
security as debt or debt-like are: (1) The
issuer has a contractual obligation to
pay a fixed sum at a fixed time; and (2)
where the obligation to make such
payments is cumulative, a set amount of
interest must be paid.56
I. Recently-Acquired Subsidiary Issuers
and Guarantors
If a parent company acquires a new
subsidiary issuer or guarantor that
otherwise qualifies for one of the
consolidate, within this presentation, its own nonguarantor subsidiary. The equity method of
accounting is described in ASC 323. Investments—
Equity Method and Joint Ventures, for registrants
that apply U.S. GAAP and in International
Accounting Standards (‘‘IAS’’) 28, Investments in
Association and Joint Ventures, for foreign private
issuers that apply IFRS.
52 Rule 3–10(i)(2) of Regulation S–X.
53 Rule 3–10(i)(10) of Regulation S–X.
54 Rule 3–10(i)(9) of Regulation S–X.
55 The 2000 Release states that ‘‘modified
financial information permitted by paragraphs (b)–
(f) will be available only for guaranteed debt and
debt-like instruments.’’ See Section III.4.b.i. of the
2000 Release. As discussed below, we are proposing
to state this requirement in the rule for clarity.
56 The Commission provided implementation
guidance for certain types of securities such as
preferred securities, trust preferred securities, and
convertible debt or debt-like securities. See Section
III.4.b.i and ii of the 2000 Release.
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exceptions in Rules 3–10(c) through (f),
the parent company may be required to
provide one year of audited preacquisition financial statements of the
newly-acquired issuer or guarantor and,
if applicable, unaudited interim
financial statements. This requirement
is triggered when: (1) A parent company
acquires the new subsidiary during or
subsequent to one of the periods for
which financial statements are
presented in a Securities Act
registration statement filed in
connection with the offer and sale of the
debt securities; (2) the subsidiary is
deemed significant; and (3) the
subsidiary is not reflected in the audited
consolidated results of the parent
company for at least nine months of the
most recent fiscal year.57 A subsidiary is
significant if its net book value or
purchase price, whichever is greater, is
20 percent or more of the principal
amount of the securities being
registered.58 The financial statements of
the recently-acquired subsidiary must
conform to the requirements of
Regulation S–X because, as an issuer of
a security or provider of a guaranty, it
is an issuer. These include the
requirement that an audit be performed
in accordance with the standards of the
Public Company Accounting Oversight
Board (‘‘PCAOB’’) by an auditor
registered with the PCAOB.59
J. Exchange Act Reporting Requirements
Issuers and guarantors availing
themselves of an exception that allows
for the Alternative Disclosures in lieu of
separate financial statements are exempt
from Exchange Act reporting by
Exchange Act Rule 12h–5. The parent
company, however, must continue to
provide the Alternative Disclosures for
as long as the guaranteed securities are
outstanding.60 This obligation continues
57 Rule
3–10(g)(1) of Regulation S–X.
3–10(g)(1)(ii) of Regulation S–X.
certain circumstances, pre-acquisition
financial statements of a recently-acquired
subsidiary that were previously provided by a
parent company may not meet the requirements of
Rule 3–10(g). For example, a parent company may
provide on Form 8–K pre-acquisition financial
statements of a subsidiary required by 17 CFR
210.3–05 (‘‘Rule 3–05 of Regulation S–X’’) that may
be audited in accordance with U.S. generally
accepted auditing standards or audited by an
auditor not registered with the PCAOB. If the parent
company later files a registration statement for the
offer and sale of its securities that are guaranteed
by that same recently acquired subsidiary, those
previously filed pre-acquisition financial statements
would not meet the requirements of Rule 3–10(g).
The parent company would then be required to file
pre-acquisition financial statements of that recently
acquired subsidiary guarantor audited in
accordance with the standards of the PCAOB by an
auditor registered with the PCAOB, or request prefiling relief from the staff.
60 See Section III.C.1 of the 2000 Release and Rule
3–10(a).
58 Rule
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even if the subsidiary issuers and
guarantors could have suspended their
reporting obligations under 17 CFR
240.12h–3 (‘‘Rule 12h–3’’) or Section
15(d) of the Exchange Act,61 had they
chosen not to avail themselves of a Rule
3–10 exception and reported separately
from the parent company.
A subsidiary issuer or guarantor that
initially meets the requirements but
subsequently ceases to satisfy Rule 12h–
5 must begin separately reporting under
the Exchange Act. It must present the
financial statements required by
Regulation S–X in a separate periodic
report at the time the next report is due
and may no longer rely on its parent
company’s provision of Alternative
Disclosures in the parent company’s
periodic reports.
III. Proposed Amendments to Rule 3–10
and Partial Relocation to Rule 13–01
A. Overarching Principle
We believe that investors in
guaranteed securities would be best
served by continuing to adhere to the
overarching principle upon which
existing Rule 3–10 is based, namely that
investors in guaranteed debt securities
rely primarily on the consolidated
financial statements of the parent
company and supplemental details
about the subsidiary issuers and
guarantors when making investment
decisions.62 Although the existing rules
provide investors with information
about issuers of guaranteed debt and
guarantors of those securities, our
experience since the adoption of these
rules in 2000 suggests the requirements
could be improved for the benefit of
both investors and registrants while
adhering to the overarching principle. In
this regard, the existing rules impose
certain eligibility restrictions and
disclosure requirements that may
require unnecessary detail, thereby
shifting investor focus away from the
consolidated enterprise towards
individual entities or groups of entities
and may pose undue compliance
burdens for registrants. For example, a
parent company is not eligible, under
the existing rule, to provide the
Alternative Disclosures if a subsidiary
issuer or guarantor is 99% instead of
100% owned by its parent company. As
another example, the use of a brief
narrative instead of Consolidating
Information is not available if the total
assets of either the parent company or
non-issuer and non-guarantor
subsidiaries of the parent company
exceed 3% of the parent company’s
61 See
62 See
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49635
consolidated total assets. In both cases,
slight variations from the conditions set
forth in the rule lead to substantially
different disclosure outcomes despite
the investments being substantially the
same. More broadly, the volume of the
Consolidating Information and level of
detail required can undermine the
overarching principle. Consolidating
Information typically occupies multiple
pages of a parent company’s financial
statements, is composed of detailed
information that may not be material for
investors in making an investment
decision, and could distract from the
financial information of the obligated
entities that is most likely to be
material. In addition, according to one
commenter, debt agreements are often
structured to either meet or avoid the
requirements of Rule 3–10, which may
result in a guarantor structure that is
less beneficial to investors.63 Another
commenter stated that the ‘‘burdensome
requirements’’ of the existing rule
‘‘[lead] to issuers electing to do more
unregistered as opposed to registered
deals.’’ 64 We are proposing
amendments to address the challenges
posed by the current rules in an effort
to improve the disclosures to investors,
encourage more registered offerings, and
facilitate debt structures where the
provision of guarantees is less
burdensome.
B. Overview of the Proposed
Amendments
Under the proposed amendments, the
rules would continue to permit the
omission of separate financial
statements of subsidiary issuers and
guarantors when certain conditions are
met and the parent company provides
supplemental financial and nonfinancial disclosure about the subsidiary
issuers and/or guarantors and the
guarantees (‘‘Proposed Alternative
Disclosures’’). Similar to the existing
rule, proposed Rule 3–10 would provide
the conditions that must be met in order
to omit separate subsidiary issuer or
guarantor financial statements.
Proposed Rule 13–01 would specify the
disclosure requirements for the
accompanying Proposed Alternative
Disclosures. The proposed amendments
would:
• Replace the condition that a
subsidiary issuer or guarantor be 100%
owned by the parent company with a
condition that it be consolidated in the
parent company’s consolidated financial
statements;
• replace Consolidating Information
with summarized financial information,
63 See
64 See
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as defined in 17 CFR 210.1–02,65
(‘‘Summarized Financial Information’’)
of the issuers and guarantors (together,
‘‘Obligor Group’’), which may be
presented on a combined basis, and
reduce the number of periods presented;
• expand the qualitative disclosures
about the guarantees and the issuers and
guarantors;
• eliminate quantitative thresholds
for disclosure and require disclosure of
additional information that would be
material to holders of the guaranteed
security;
• permit the Proposed Alternative
Disclosures to be provided outside the
footnotes to the parent company’s
audited annual and unaudited interim
consolidated financial statements in the
registration statement covering the offer
and sale of the subject securities and
any related prospectus, and in certain
Exchange Act reports filed shortly
thereafter;
• require that the Proposed
Alternative Disclosures be included in
the footnotes to the parent company’s
consolidated financial statements for
annual and quarterly reports beginning
with the annual report for the fiscal year
during which the first bona fide sale of
the subject securities is completed;
• eliminate the requirement to
provide pre-acquisition financial
statements of recently-acquired
subsidiary issuers and guarantors; and
• require the Proposed Alternative
Disclosures for as long as the issuers
and guarantors have an Exchange Act
reporting obligation with respect to the
guaranteed securities rather than for so
long as the guaranteed securities are
outstanding.
The proposed amendments would
simplify and streamline the rule
structure in several ways. Most
significantly, under proposed Rules 3–
10(a) and 3–10(a)(1) there would be only
a single set of eligibility criteria that
would apply to all issuer and guarantor
structures instead of having separate
sets of criteria in each of the five
exceptions in existing Rules 3–10(b)
through (f). Similarly, the requirements
for the Proposed Alternative Disclosures
would be included in a single location
within proposed Rule 13–01, rather than
spread among the multiple paragraphs
of existing Rule 3–10. We believe these
changes would simplify the rule
structure and facilitate compliance.
Request for Comment
1. Would the proposed amendments
to existing Rule 3–10 result in an
increase in the number of registered
debt offerings that include guarantees?
65 Rule
1–02(bb)(1) of Regulation S–X.
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Why or why not? How would increasing
the number of registered debt offerings
that include guarantees affect investors
and issuers?
2. What factors do issuers consider
when deciding whether to engage in a
registered debt offering or an offering in
the private market? Do issuers structure
registered debt offerings to not include
guarantees because of concerns about
compliance with existing Rule 3–10? If
so, what are the specific concerns? Are
issuers choosing to engage in private
debt offerings that include guarantees? If
so, what exemptions or safe harbors are
issuers using? If these issuers are relying
on 17 CFR 230.144A (‘‘Rule 144A’’), do
these offerings typically include
registration rights, or are they offered
pursuant to Rule 144A without
registration rights? Why or why not?
3. To what type of investors are
issuers of registered debt offerings
selling or marketing their securities—
Qualified Institutional Buyers (‘‘QIBs’’),
other institutional investors, or retail
investors? What is the typical investor
break down in this regard?
4. What factors do issuers consider in
determining whether to structure a debt
offering to include guarantees, and how
are they considered?
5. How do investors use the
Alternative Disclosures under existing
Rule 3–10? For example, how do retail
investors, institutional investors, or
third parties, such as financial analysts,
use the information? How would these
investors use the Proposed Alternative
Disclosures?
6. Would the proposed amendments
to existing Rule 3–10 improve the
disclosures provided to investors? If so,
how? Are there other changes to the rule
that we should consider that would
improve disclosures to investors? If so,
what are they and how would they
improve disclosure?
7. Would the proposed amendments
to existing Rule 3–10 make the rule less
burdensome and, thereby, encourage
issuers to structure debt offerings to
include guarantees? Are there other
changes to the rule that we should
consider that would reduce compliance
burdens for issuers but continue to
provide the material information
investors need to make informed
investment decisions?
8. Would the proposed amendments
to existing Rule 3–10 remove
disclosures that investors or financial
analysts rely on? If so, which
disclosures? Would the removal of such
disclosures have an effect on investor
participation in registered debt offerings
that include guarantees?
9. What effects do registered debt
offerings have on the covenants
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contained in the related indentures? Do
private debt offerings typically contain
more or fewer covenants in the related
indentures? Why or why not? Would an
issuer’s offering of debt contain more
covenants if offered privately than if
offered publicly? Why or why not? What
effects would the proposed rules have
on the covenants contained in the
related indentures?
10. Are there alternative approaches
to disclosures about guarantors and
guarantees that would benefit investors?
If so, what are they and why? How
would investors use the disclosures
under these alternative approaches?
C. Conditions To Omit the Financial
Statements of a Subsidiary Issuer or
Guarantor
Under the proposed rules, the
financial statements of a subsidiary
issuer or guarantor could be omitted if
the eligibility conditions contained in
proposed Rules 3–10(a) and 3–10(a)(1)
are met and the Proposed Alternative
Disclosures specified in proposed Rule
13–01 are provided in the filing, as
required by proposed Rule 3–10(a)(2).
As proposed, the eligibility conditions
would be that:
• The consolidated financial
statements of the parent company have
been filed;
• the subsidiary issuer or guarantor is
a consolidated subsidiary of the parent
company;
• the guaranteed security is a debt
security; and
• one of the following eligible issuer
and guarantor structures is applicable:
Æ The parent company issues the
security or co-issues the security, jointly
and severally, with one or more of its
consolidated subsidiaries; or
Æ a consolidated subsidiary issues the
security or co-issues the security with
one or more other consolidated
subsidiaries of the parent company, and
the security is guaranteed fully and
unconditionally by the parent company.
1. Eligibility Conditions
a. Parent Company Financial Statements
Condition
Proposed Rule 3–10 would continue
to require the filing of the parent
company’s consolidated financial
statements. Additionally, under the
proposed amendments, ‘‘parent
company’’ would still be defined as in
the 2000 Release, with one change. The
first two conditions would continue to
be that the entity is: (1) An issuer or
guarantor of the securities; and (2) an
Exchange Act reporting company, or
will become one as a result of the
subject Securities Act registration
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statement. However, the third condition,
that the entity owns, directly or
indirectly, 100% of each subsidiary
issuer and guarantor, would no longer
be required for an entity to be
considered the parent company.66
Instead, the third condition would be
that the entity consolidates each
subsidiary issuer and guarantor in its
consolidated financial statements.67 For
clarity, the definition of ‘‘parent
company’’ would be included in
proposed Rule 3–10(b)(1), stating that
the parent company is the entity that
meets the three aforementioned
conditions.
Consistent with the note to existing
Rule 3–10(a)(2), the financial statements
of an entity that is not an issuer or
guarantor of the registered security
could not be substituted for those of the
parent company. For example, it would
not be appropriate to file, in substitution
for the financial statements of the parent
company, financial statements of an
entity that files Exchange Act reports
but is not an issuer or guarantor of the
securities being registered even if the
financial statements of that entity are
virtually identical to those of the parent
company, because the security holders
cannot enforce payment of the
obligation against that particular entity.
Because we have included the
definition of parent company in
proposed Rule 3–10(b)(1), which clearly
states that the parent company must be
an issuer or guarantor of the guaranteed
security, we do not believe the note to
existing Rule 3–10(a)(2) is necessary and
have removed it from the proposed rule.
Request for Comment
11. Is the proposed definition of
‘‘parent company’’ included in
proposed Rule 3–10(b)(1) sufficiently
clear? Why or why not? Are there other
modifications to the proposed definition
of ‘‘parent company’’ that would be
appropriate? If so, what are they and
why should they be included?
12. Are there other definitions of
‘‘parent company’’ that may differ from
our proposed definition? If so, which
definitions and what are the similarities
or differences? How would any such
differences affect issuers’ ability to
apply our rule? Should we make any
modifications to the proposed definition
of ‘‘parent company’’ in light of those
other definitions?
13. Should the proposed rule include
a requirement similar to the note to
existing Rule 3–10(a)(2) that the
financial statements of an entity that is
66 See
Section III.A.6. of the 2000 Release.
Section III.C.1.b, ‘‘Consolidated
Subsidiary,’’ below.
67 See
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not an issuer or guarantor of the
registered security could not be
substituted for those of the parent
company, or does the proposed
definition of ‘‘parent company’’ render
such a requirement unnecessary?
b. Consolidated Subsidiary Condition
The 2000 Release states that the
Commission was adopting the existing
rule’s definition of 100% owned
‘‘because it assures investors in the
guaranteed securities that there is no
competing common equity interest in
the assets or revenues of the subsidiary.
This allows investors to evaluate the
creditworthiness of the parent and
subsidiary as a single, indivisible
business.’’ 68 The Commission
explained that the risks associated with
an investment in a parent company and
its subsidiary issuers and/or guarantors
would need to be identical to justify the
use of the Alternative Disclosures in
lieu of separate financial statements of
each of those subsidiaries, and if a third
party holds an interest in a subsidiary,
those risks are not identical.69
A number of commenters suggested
that existing Rule 3–10’s 100%-owned
condition be replaced,70 suggesting
various alternative conditions.71 One
commenter recommended permitting
guarantor subsidiaries to be majorityowned instead of 100% owned,
explaining that any risks associated
with a minority investor could be
addressed through disclosure,72 and
another stated that ‘‘as long as a
registrant controls the subsidiary, a
third party minority equity interest in
the subsidiary’s assets and earnings
would not affect the subsidiary’s
creditworthiness from a debt holder’s
perspective.’’ 73 One commenter
recommended retaining the
requirement.74
We continue to believe that a
subsidiary issuer or guarantor should be
controlled by the parent company and
consolidated into the financial
statements of the parent company to be
eligible to omit its financial statements.
68 See
Section III.A.1.a.i.(A) of the 2000 Release.
id.
70 See, e.g., letters from ABA-Committees, AB–
NYC, Chamber, Comcast, EY, and SIFMA.
71 For example, some commenters recommended
permitting subsidiary issuers and guarantors to be
‘‘wholly-owned’’ by the parent company as that
term is defined in Rule 1–02(aa) of Regulation S–
X, which states ‘‘[t]he term wholly owned
subsidiary means a subsidiary substantially all of
whose outstanding voting shares are owned by its
parent and/or the parent’s other wholly owned
subsidiaries.’’ See letters from ABA-Committees,
AB–NYC, and EY.
72 See letter from SIFMA.
73 See letter from Comcast.
74 See letter from CalPERS.
69 See
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49637
However, having considered
commenters’ suggestions and our
experience since the adoption of the
existing rule, it appears that the
existence of non-controlling ownership
interests in the subsidiary issuer or
guarantor does not necessarily mean
that separate financial statements are
warranted.
We note that the existence of noncontrolling interest holders generally
does not alter the fundamental nature of
the investment such that it should be
evaluated similar to multiple
investments in different issuers.
Specifically, we believe that where a
parent company is obligated as issuer or
full and unconditional guarantor of a
guaranteed security and it controls and
includes the subsidiary issuer(s) and
guarantor(s) in its consolidated financial
statements, there is sufficient financial
unity between the parent company and
the related subsidiary with respect to
the guaranteed debt security such that
the consolidated financial statements of
that parent company and the Proposed
Alternative Disclosures would enable
investors to evaluate and sufficiently
assess the risks associated with an
investment in such guaranteed debt
security. In the event of default on the
debt security, there could be
circumstances where non-controlling
interest holders may have the potential
to influence certain matters affecting
payments to holders of the guaranteed
debt security. However, as one
commenter suggested,75 such risks,
when material, can be addressed
through disclosures tailored to those
facts and circumstances 76 rather than
requiring separate financial statements
of the subsidiary issuer or guarantor.
Proposed Rule 3–10(a) would require
the subsidiary issuer or guarantor to be
a consolidated subsidiary of the parent
company pursuant to the relevant
accounting standards already in use.77
This proposed change would eliminate
the distinction between subsidiaries in
corporate form and those in other than
corporate form, applying a consistent
eligibility condition across entities.
Also, certain subsidiary issuers and
guarantors that are currently not eligible
to omit their financial statements under
existing Rule 3–10, such as consolidated
subsidiary issuers or guarantors that
have issued securities convertible into
75 See
letter from SIFMA.
proposed Rules 13–01(a)(3) and (4).
77 For example, a parent company that prepares
its financial statements in accordance with U.S.
GAAP would apply ASC 810, Consolidation, and a
parent company that qualifies as a foreign private
issuer and prepares its financial statements in
accordance with IFRS would apply IFRS 10,
Consolidated Financial Statements.
76 See
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their own voting shares, would be
eligible to omit their financial
statements. The proposed amendments
would instead require the parent
company to provide disclosures that
address the material risks, if any,
associated with non-controlling
interests in the subsidiary issuer or
guarantor, including any risks arising
from securities issued by the subsidiary
that may be convertible into voting
shares and may cause the percentage of
non-controlling interest to increase, and
to separately provide Summarized
Financial Information attributable to
those subsidiaries.
Specifically, proposed Rule 13–
01(a)(3) would require, to the extent
material, a description of any factors
that may affect payments to holders of
the guaranteed security, such as the
rights of a non-controlling interest
holder. In addition, proposed Rule 13–
01(a)(4) would require separate
disclosure of Summarized Financial
Information for subsidiary issuers and
guarantors affected by those factors. For
example, if, through its ability to
exercise significant influence 78 over a
subsidiary guarantor, a non-controlling
interest holder could materially affect
payments to holders of the guaranteed
security, the parent company would be
required to disclose those factors and
the Summarized Financial Information
attributable to that subsidiary guarantor.
Because this disclosure would highlight
the material repayment risks and
financial information associated with
consolidated issuers and guarantors
with non-controlling interests, it may no
longer be necessary to categorically
prohibit such issuers and guarantors
from being eligible to omit their
financial statements under proposed
Rule 3–10.
amozie on DSK3GDR082PROD with PROPOSALS2
Request for Comment
14. Should the proposed rule use
consolidation of the subsidiary issuer or
guarantor under the applicable
accounting standards as an eligibility
condition? If not, what relationship
between the parent company and
subsidiary issuer or guarantor should
the proposed rule use and why?
15. Would using consolidation of the
subsidiary issuer or guarantor under the
applicable accounting standards as an
eligibility condition allow investors or
78 See
ASC 323, Investments—Equity Method and
Joint Ventures. Representation on the board of
directors, participation in policy-making processes,
and extent of ownership by an investor in relation
to the concentration of other shareholdings are
among the ways listed in ASC 323–10–15–6 that
may indicate the ability to exercise significant
influence over operating and financial policies of an
investee.
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financial analysts to adequately
understand the credit risk of such
subsidiary issuer or guarantor? Would
the proposed use of consolidation allow
investors or financial analysts to
adequately understand these credit risks
in lieu of the subsidiary issuer or
guarantor’s financial statements? Why
or why not?
16. Should the proposed condition
that each issuer and guarantor be a
consolidated subsidiary of the parent
company be limited such that it would
not be available to certain types of
entities? If so, what entities and why?
For example, should an entity be
ineligible if it is consolidated in the
parent company’s financial statements
for reasons other than the parent
company holding the majority of voting
interests? 79
17. Should a consolidated subsidiary
that has issued and outstanding debt
that is convertible into its own voting
shares not be eligible to omit its
financial statements under the proposed
rule? Why or why not? Should a
consolidated subsidiary that has issued
and outstanding debt that is convertible
into its own voting shares, which, upon
conversion, would result in the parent
company losing control of that
subsidiary, not be eligible to omit its
financial statements under the proposed
rule? Why or why not? Should a
consolidated subsidiary that has issued
and outstanding debt that is convertible
into its own voting shares, which, upon
conversation, would result in the parent
company owning less than a particular
percentage of the voting shares of that
subsidiary, not be eligible to omit its
financial statements under the proposed
rule? If so, what should that percentage
be and why?
18. Would any entities that meet the
100%-owned condition under existing
Rule 3–10 not meet the proposed
condition that an issuer or guarantor be
a consolidated subsidiary of the parent
company? If so, what are they and why
would they not meet this condition?
c. Debt or Debt-Like Securities
Condition
As discussed above,80 the exceptions
in existing Rules 3–10(b) through (f) are
available only to issuers and guarantors
of debt securities. We continue to
believe the exceptions provided in Rule
3–10 should only be available for
guaranteed debt and guaranteed
preferred securities that have payment
79 Such circumstances may arise when, in
accordance with ASC 810, Consolidation, the entity
is a variable interest entity and the parent company
is its primary beneficiary.
80 See Section II.H, ‘‘Securities to which Rule 3–
10 Applies.’’
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terms that are substantially the same as
debt. In order to provide clarity,
proposed Rule 3–10(a)(1) would state
explicitly that the guaranteed security
must be ‘‘debt or debt-like.’’
For additional clarity, proposed Rule
3–10(b)(2) would specify when a
guaranteed security would be
considered ‘‘debt or debt-like.’’
Consistent with the guidance provided
in the 2000 Release,81 a guaranteed
security would be considered ‘‘debt or
debt-like’’ under the proposed rule if:
• The issuer has a contractual
obligation to pay a fixed sum at a fixed
time; and
• where the obligation to make such
payments is cumulative, a set amount of
interest must be paid.
As is currently the case, the substance
of the security’s obligation will
determine the availability of relief under
Rule 3–10 rather than the form or title
of the security. Accordingly, the
proposed rule would clarify consistent
with the 2000 Release,82 that:
• Neither the form of the security nor
its title will determine whether a
security is debt or debt-like. Instead, the
substance of the obligation created by
the security will be determinative; and
• The phrase ‘‘set amount of interest’’
is not intended to mean ‘‘fixed amount
of interest. ’’ Floating and adjustable
rate securities, as well as indexed
securities, may meet the criteria
specified in paragraph (b)(2)(ii) as long
as the payment obligation is set in the
debt instrument and can be determined
from objective indices or other factors
that are outside the discretion of the
obligor.
Request for Comment
19. Should the proposed rule
expressly state that the guaranteed
security must be ‘‘debt or debt-like’’ and
include a definition of that term? Why
or why not?
20. Should we modify the proposed
definition of ‘‘debt or debt-like’’? If so,
why, and how should it be modified?
21. Should we provide any additional
guidance or instructions to the proposed
definition of ‘‘debt or debt-like’’? If so,
why, and what additional guidance or
instructions would be appropriate?
d. Eligible Issuer and Guarantor
Structures Condition
Under the existing rule, an issuer and
guarantor structure is eligible if it
matches one of the specific issuer and
guarantor structures in Rule 3–10(b)
through (f). If an issuer or guarantor
structure does not match one of those
81 See
82 See
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Section III.A.4 of the 2000 Release.
Section III.A.4.b.i of the 2000 Release.
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49639
specific issuer and guarantor structures,
it is ineligible, and the subsidiary
issuers and guarantors must file separate
financial statements. Eligibility would
still be based on qualifying issuer and
guarantor structures under the proposed
amendments to Rule 3–10. However, the
proposed amendments would simplify
and streamline the existing rule by
replacing the specific issuer and
guarantor structures permitted under
the five exceptions in existing Rules 3–
10(b) through (f) with a broader twocategory framework. Under this
framework, an issuer and guarantor
structure would be eligible if:
• The parent company issues the
security or co-issues the security, jointly
and severally, with one or more of its
consolidated subsidiaries;83 or
• a consolidated subsidiary issues the
security, or co-issues it with one or
more other consolidated subsidiaries of
the parent company, and the security is
guaranteed fully and unconditionally by
the parent company.84
In a change from the existing
exceptions, the status of subsidiary
guarantors would not be specified in the
proposed categories of eligible issuer
and guarantor structures. Although one
or more other subsidiaries of the parent
company may, and we expect often
would, guarantee the security, we
believe the eligibility of an issuer and
guarantor structure should depend on
the role of the parent company.
Accordingly, as discussed further in
Section III.C.1.d.ii, ‘‘Role of Subsidiary
Guarantors’’ below, separate financial
statements of consolidated subsidiary
guarantors may be omitted for each
issuer and guarantor structure that is
eligible under the proposed rule if the
other conditions of proposed Rule 3–10
are met.
should not be conditional or limited. If
the parent company’s obligation was
limited or conditional, focusing on the
parent company’s financial statements
may not be sufficient for investors to
evaluate the investment. For example, if
a subsidiary issued securities
guaranteed by its parent company, but
that parent company’s obligation under
the guarantee’s terms was less than the
subsidiary’s obligation, the parent
company’s financial statements
supplemented with the Proposed
Alternative Disclosures would not be
sufficient. Instead, the separate financial
statements of the subsidiary issuer
would likely be material for investors to
make an informed investment decision.
Therefore, under the proposed
amendments, the ability to provide the
Proposed Alternative Disclosures in lieu
of separate subsidiary issuer and
guarantor financial statements would
only be available when the parent
company’s obligation is not limited or
conditional.
making scheduled payments on the debt
security in full when they come due.
Under this category of eligible issuer
and guarantor structures, the parent
company would control each
consolidated co-issuer, the financial
information of the subsidiary coissuer(s) would be reflected in the
consolidated financial statements of the
parent company, and the parent
company would be fully and
unconditionally obligated to make
payments in full when due under the
guaranteed security. As such, we believe
the parent company’s consolidated
financial statements would serve as the
primary source of information for
investors in these circumstances and, if
all other eligibility conditions of the
proposed rule were satisfied, that
separate financial statements of the
subsidiary co-issuers would be
unnecessary. Supplemental information
about the subsidiary co-issuer(s) would
be included in the Proposed Alternative
Disclosures.
Request for Comment
22. Should the eligibility of an issuer
and guarantor structure under the
proposed rule require the parent
company’s obligation not to be limited
or conditional? Why or why not?
23. Are there circumstances where the
parent company’s consolidated financial
statements are not the primary source of
information for investors in these
situations? If so, what are those
circumstances, and what other sources
of information would be material in
making an investment decision?
24. Should the eligibility of an issuer
and guarantor structure continue to
depend on the status of subsidiary
guarantors? If so, in what way? If not,
why not?
i. Role of Parent Company
Under the proposed amendments, the
parent company’s role as issuer, coissuer, or full and unconditional
guarantor with respect to the guaranteed
security would determine whether the
issuer and guarantor structure is
eligible. Below we further describe
conditions that a parent company must
meet under the proposed rule.
(B) Parent Company as Issuer or CoIssuer
Under the first category of eligible
issuer and guarantor structures in
proposed Rule 3–10(a)(1)(i), the parent
company must issue the security or coissue the security, jointly and severally,
with one or more of its consolidated
subsidiaries. When acting as the sole
issuer, the parent company would be
fully and unconditionally obligated for
the full amount of any scheduled
payments when they come due. Also,
the parent company would be permitted
to co-issue a security with one or more
of its consolidated subsidiaries, but all
co-issuers would be required to be
jointly and severally liable under the
guaranteed security. This would
obligate each of the parent company and
its subsidiary co-issuers to all legal
responsibilities of an issuer, including
Request for Comment
25. Should this first category of
eligible issuer and guarantor structures
under the proposed rule require the
parent company to issue or co-issue the
security, jointly and severally, with one
or more of its consolidated subsidiaries?
Why or why not?
26. Are there other conditions that
should be included in this first
permissible category of eligible issuer
and guarantor structures? If so, what are
they and why would they be
appropriate?
27. If the parent company co-issues
the guaranteed security with one or
more of its consolidated subsidiaries, is
separate financial information about
issuer entities material to an investment
decision? If so, why?
(A) Parent Company Obligation Is Not
Limited or Conditional
Because the parent company’s
consolidated financial statements serve
as the primary source of information for
investors, we believe the parent
company’s obligation as either issuer or
guarantor of the guaranteed security
83 Proposed
84 Proposed
Rule 3–10(a)(1)(i).
Rule 3–10(a)(1)(ii).
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(C) Parent Company as Full and
Unconditional Guarantor
Under the second category of eligible
issuer and guarantor structures in
proposed Rule 3–10(a)(1)(ii), a debt
security issued by a parent company’s
consolidated subsidiary, or co-issued by
more than one of the parent company’s
consolidated subsidiaries, must be fully
and unconditionally guaranteed by that
parent company. For purposes of the
proposed rule, whether the parent
company’s guarantee is ‘‘full and
unconditional’’ would be determined in
the same manner as in existing Rule 3–
10(h)(2) and the 2000 Release 85 and
would be included in proposed Rule 3–
10(b)(3). Under this category of eligible
issuer and guarantor structures, the
85 See
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Section III.A.1.b of the 2000 Release.
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parent company would control each
consolidated subsidiary issuer, the
financial information of the subsidiary
issuer(s) would be reflected in the
consolidated financial statements of the
parent company, and the parent
company would be fully and
unconditionally obligated to make
payments in full when due under the
guaranteed security. In these
circumstances, we believe the parent
company’s financial statements would
serve as the primary source of
information for investors and, if all
other eligibility conditions of the
proposed rule were satisfied, that
separate financial statements of the
subsidiary issuers would be
unnecessary. Supplemental information
about the subsidiary issuer(s) or coissuer(s) would be included in the
Proposed Alternative Disclosures.
Request for Comment
28. Should this second category of
eligible issuer and guarantor structures
under the proposed rule require parent
company to fully and unconditionally
guarantee the debt security that is either
issued by that parent company’s
consolidated subsidiary, or co-issued by
more than one of that parent company’s
consolidated subsidiaries? Why or why
not?
29. Are there other conditions that
should be included in this second
permissible category of eligible issuer
and guarantor structures? If so, what are
they and why would they be
appropriate?
30. Should we retain the existing
definition of ‘‘full and unconditional’’?
Why or why not?
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ii. Role of Subsidiary Guarantors
As noted above,86 one or more
consolidated subsidiaries of the parent
company could, and we expect often
would, guarantee the securities in either
of the two proposed eligible categories
of issuer and guarantor structures.
Existing Rule 3–10(b) through (f) specify
the permissible roles of subsidiary
guarantors in an issuer and guarantor
structure and also impose certain
conditions, such as the guarantees being
full and unconditional and, where there
are multiple guarantees, being joint and
several.87 A few commenters
86 See Section III.C.1.d, ‘‘Eligible Issuer and
Guarantor Structures Condition.’’
87 Where there are multiple subsidiary guarantors,
and the guarantee of one or more subsidiaries is not
joint and several with other subsidiary guarantors,
or as applicable, with the parent company’s
guarantee, note 4 to existing Rule 3–10(d) and note
3 to existing Rule 3–10(f) permit the use of
Consolidating Information in lieu of providing
separate financial statements of that subsidiary
guarantor so long as each subsidiary whose
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specifically addressed the conditions
that subsidiary guarantees be ‘‘full and
unconditional’’ and ‘‘joint and several.’’
One commenter recommended the
elimination of these conditions.
According to this commenter, investors
place less reliance on a guarantee that
is not full and unconditional as a source
of credit, and accordingly, financial
statements of such a guarantor are even
less important to an investor and should
not be required.88 Instead, the
commenter recommended requiring
separate disclosure of those subsidiaries
providing lesser guarantees. Another
commenter stated that the existing
condition should remain unchanged.89
The 2000 Release stated that the
Commission was adopting the definition
of ‘‘full and unconditional,’’ which was
applicable to the guarantees of both
subsidiaries and the parent company,
with the intention of limiting the
availability of the Alternative
Disclosures to those situations where
the payment obligations of the issuer
and guarantor are essentially
identical.90 We continue to believe it is
necessary for the guarantee of a parent
company to be full and unconditional in
order to rely on its consolidated
financial statements as the primary
source of information for investors.
However, our experience since adoption
of the existing rule in 2000 suggests that
limitations or conditions on a subsidiary
guarantee should not preclude the use
of the Proposed Alternative Disclosures
when the consolidated subsidiary
guarantor is controlled by the parent
company and the subsidiary guarantor’s
financial information is included in the
parent company’s consolidated financial
statements. Instead, similar to existing
Rule 3–10’s approach to subsidiary
guarantees that are not joint and
several,91 we believe such limitations
and conditions on a subsidiary’s
guarantee could be highlighted for
investors through incremental financial
and non-financial disclosure in the
Proposed Alternative Disclosures rather
guarantee is not joint and several is included in a
separate column of the Consolidating Information.
88 See letter from SIFMA.
89 See letter from CalPERS.
90 See Section III.A.1.b of the 2000 Release.
91 Each of existing Rules 3–10(d)(3) and 3–10(f)(3)
specify that all guarantees must be joint and several
as a condition to permit the omission of the
separate financial statements of subsidiary
guarantors. However, if all other conditions of the
applicable exception paragraph are met, Note 4 to
existing Rule 3–10(d) and Note 3 to existing Rule
3–10(f) permit the omission of the separate financial
statements of a subsidiary guarantor whose
guarantee is not joint and several so long as the
Consolidating Information includes a separate
column for each such subsidiary guarantor.
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than requiring separate financial
statements of the subsidiary guarantor.
Under the proposed rule, because the
role of the parent company determines
whether an issuer and guarantor
structure is eligible, the role of
subsidiary guarantors would be
irrelevant for determining overall
eligibility. As a result, the subsidiary
guarantors’ role in the issuer and
guarantor structure would not need to
be specified and the aforementioned
conditions (the guarantees being full
and unconditional and, where there are
multiple guarantees, being joint and
several) would no longer be imposed on
subsidiary guarantors. Regardless, as
stated in proposed Rule 3–10(a), if a
subsidiary guarantor is consolidated in
its parent company’s consolidated
financial statements, and the other
conditions of proposed Rule 3–10 are
met, including providing the disclosures
about that subsidiary and its guarantee
as specified in proposed Rule 13–01, the
subsidiary’s financial statements could
be omitted.
The role of subsidiary guarantors and
their guarantees would affect the
required disclosure under the proposed
rule. For example, the subsidiary
guarantors would be required to be
identified pursuant to proposed Rule
13–01(a)(1), and if the guarantees of
those subsidiaries were not full and
unconditional, disclosure of the
limitations and conditions would be
required by proposed Rule 13–01(a)(2),
to the extent material.92 Furthermore,
proposed Rule 13–01(a)(4) would
require separate disclosure of
Summarized Financial Information
applicable to subsidiary guarantors
whose guarantees were not full and
unconditional, to the extent material.93
Request for Comment
31. Would the proposed changes
improve the disclosures for investors?
Why or why not?
32. Proposed Rule 3–10(a)(1)(ii)
specifies only that the parent company
guarantee must be full and
unconditional. Should the requirement
that a guarantee be full and
unconditional also extend to subsidiary
guarantors? Why or why not?
33. Where there is more than one
subsidiary guarantor, or when the
parent company and one or more of its
subsidiaries guarantees the security,
should all guarantees be joint and
several to be eligible to omit separate
financial statements of subsidiary
guarantors? Why or why not?
92 See discussion in Section III.C.2.b, ‘‘NonFinancial Disclosures.’’
93 See discussion in Section III.C.2.a.ii,
‘‘Presentation on a Combined Basis.’’
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(A) Subsidiary Guarantee Release
Provisions
One of the conditions a subsidiary
guarantor must meet under the existing
rule is that its guarantee must be full
and unconditional. A subsidiary’s
guarantee may have the characteristics
of a full and unconditional guarantee at
its inception except that there may be
contractual provisions permitting the
subsidiary to be released from that
guarantee under certain circumstances.
Such release provisions could cause the
subsidiary’s guarantee to fail to meet the
requirement that the guarantee be full
and unconditional because the potential
elimination of the guarantee is a
condition beyond the issuer’s failure to
pay. The staff has previously provided
guidance that, under certain
circumstances, a subsidiary whose
guarantee could be released should be
able to rely on existing Rule 3–10 so
long as all other required conditions of
the rule are met.94 Several commenters
recommended codifying this staff
guidance into our rules.95 As noted
above,96 because the nature of the
guarantee of a subsidiary guarantor does
not affect whether the issuer and
guarantor structure is eligible under the
proposed rule, a subsidiary guarantee
would no longer be required to be full
and unconditional. As such, the
existence of subsidiary guarantee release
provisions would not prevent that
subsidiary guarantor from omitting its
financial statements. However, to the
extent material, such release provisions
would be required to be disclosed
pursuant to proposed Rule 13–
01(a)(2) 97 and separate disclosure of
Summarized Financial Information
applicable to that subsidiary guarantor
would be required by proposed Rule
13–01(a)(4).98
Request for Comment
34. Should the proposed rule specify
that subsidiary guarantees must be full
and unconditional except that certain
subsidiary release provisions would be
expressly permitted? If so, why? In this
regard, which release provisions should
be permitted in the proposed rule and
why would they be appropriate?
iii. Treatment of Currently Eligible
Issuer and Guarantor Structures Under
Proposed Rule 3–10
The proposed amendments are not
intended to reduce the types of entities
or structures that would be able to rely
on proposed Rule 3–10. We expect
issuer and guarantor structures that are
currently eligible under existing Rule 3–
10 to be eligible under the two proposed
categories of eligible issuer and
guarantor structures. As shown in the
table below, issuer and guarantor
structures that currently fall under
existing Rules 3–10(b), (c), or (d) would
be eligible to omit their financial
statements under the eligible categories
in proposed Rules 3–10(a)(1)(i) or (ii),
depending on the role of the parent
company as either co-issuer or full and
unconditional guarantor of the
guaranteed security. Issuer and
guarantor structures that currently fall
under existing Rules 3–10(e) or (f),
wherein the parent company is the sole
issuer of the guaranteed security, would
be able to rely on the first category in
proposed Rule 3–10(a)(1)(i). We discuss
the proposed amendments in greater
detail below.
Existing Rule
Proposed Rule
Rules 3–10(b), 3–10(c), and 3–10(d) .......................................................
Rule 3–10(a)(1)(i), if the subsidiary co-issued the security, jointly and
severally, with its parent.
Rule 3–10(a)(1)(ii), if the subsidiary issued the security that is fully and
unconditionally guaranteed by its parent.
Rule 3–10(a)(1)(i).
Rules 3–10(e) and 3–10(f) .......................................................................
(A) Finance Subsidiary Issuer of
Securities Guaranteed by Its Parent
Company
Existing Rule 3–10(b) applies when a
‘‘finance subsidiary,’’ as that term is
defined in existing Rule 3–10(h)(7),
issues securities guaranteed by its
parent company. This exception was
included to address situations where a
parent company directs one of its
subsidiaries to issue debt securities that
the parent company guarantees, and that
subsidiary ‘‘has no assets, operations,
revenues, or cash flows other than those
related to the issuance, administration,
and repayment of the security and any
other securities guaranteed by its
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94 See U.S. Sec. & Exch. Comm’n, Div. of Corp.
Fin., Financial Reporting Manual Section 2510.5,
https://www.sec.gov/divisions/corpfin/cffinancial
reportingmanual.pdf (last updated Dec. 1, 2017).
These circumstances include, for example, when:
(1) the subsidiary is sold or sells all of its assets;
(2) the subsidiary is declared ‘‘unrestricted’’ for
covenant purposes; (3) the subsidiary’s guarantee of
other indebtedness is terminated or released; (4) the
requirements for legal defeasance or covenant
defeasance or to discharge the indenture have been
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parent.’’ 99 In such cases, the
Commission has determined that
detailed financial information about the
finance subsidiary is unlikely to be
material to an investment decision.
Instead, an investor would look to the
consolidated financial statements of the
parent company that guaranteed the
debt to evaluate the investment in the
guaranteed security and generally not
need additional information other than
a brief narrative describing the
arrangement.
Because the proposed amendments to
Rule 3–10 do not focus on the role and
nature of the subsidiary as a condition
to eligibility, the proposed amendments
would no longer require a subsidiary
issuer or guarantor to be designated as
a ‘‘finance subsidiary’’ in any particular
circumstances. Likewise, the proposed
amendments would remove the
definition of ‘‘finance subsidiary’’ from
the existing rule, since it is not
otherwise used in Regulation S–X.
However, a finance subsidiary used to
issue a debt security guaranteed by the
parent company, would be addressed by
proposed Rule 3–10(a)(1)(ii) or, if the
security were to be co-issued, jointly
and severally, with its parent, proposed
Rule 3–10(a)(1)(i) would apply. We
believe eliminating the provisions that
apply only to finance subsidiaries,
together with the other proposed
changes, would simplify the rules while
satisfied; (5) the rating on the parent’s debt
securities is changed to investment grade; or (6) the
parent’s debt securities are converted or exchanged
into equity securities. The staff guidance also
indicates that subsidiary guarantees with such
release provisions should not be characterized as
full and unconditional without disclosure
describing any qualifications to the subsidiary
guarantees (e.g., the circumstances in which they
could be released). If the proposed changes
described herein are adopted, this staff
interpretation would no longer be applicable.
95 See, e.g., letters from ABA-Committees, AB–
NYC, and EY.
96 See Section III.C.1.d.ii, ‘‘Role of Subsidiary
Guarantors.’’
97 See discussion in Section III.C.2.b, ‘‘NonFinancial Disclosures.’’
98 See discussion in Section III.C.2.a.ii,
‘‘Presentation on a Combined Basis.’’
99 See Section III.A.6 of the 2000 Release.
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ensuring that they remain appropriately
available for finance subsidiary
arrangements. Furthermore, we
generally expect detailed financial
disclosures about those subsidiaries
would not be material, given the nature
and amounts of those subsidiaries’
assets and operations.100 While a parent
company would be permitted to omit
immaterial detailed financial
disclosures, all other disclosures
required by proposed Rule 13–01, such
as the non-financial disclosures
specified in proposed Rule 13–01(a)(1)
though (3), would be required, to the
extent material.
Request for Comment
35. Should we eliminate the ‘‘finance
subsidiary’’ exception as proposed?
Would the proposed elimination of the
‘‘finance subsidiary’’ exception under
existing Rule 3–10(b) result in
supplemental financial information
about the finance subsidiary and its
parent company being required under
the proposed rule where it would not be
required under the existing rule? If so,
in what circumstances? Would such
financial information be material to
investors? Why or why not?
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(B) Obligated Parent Company and
Single Obligated Subsidiary
Existing Rule 3–10(c) applies when an
‘‘operating subsidiary’’ issues securities
guaranteed by its parent company.
Existing Rule 3–10(h)(8) defines an
‘‘operating subsidiary’’ to differentiate it
from a ‘‘finance subsidiary.’’ Since the
proposed amendments would remove
the ‘‘finance subsidiary’’ distinction and
definition, proposed Rule 3–10 likewise
would no longer need to refer to or
define ‘‘operating subsidiary.’’ The
operating subsidiary structure of
existing Rule 3–10(c) would be covered
in the issuer and guarantor structure in
proposed Rule 3–10(a)(1)(ii) if the
security were to be issued by the
subsidiary or proposed Rule 3–
10(a)(1)(i) if the security were to be coissued, jointly and severally, with its
parent company as contemplated in
existing Note 3 to Rule 3–10(c).
Existing Rule 3–10(e) applies to a
single subsidiary guarantor of securities
issued by the parent company of that
subsidiary. This structure would be
included in the issuer and guarantor
structure in proposed Rule 3–10(a)(1)(i).
As discussed above,101 the requirement
in the existing rule that the subsidiary
guarantor’s guarantee be full and
100 See discussion and example within Section
III.C.2.c, ‘‘When Disclosure is Required.’’
101 See Sections III.C.1.d.ii, ‘‘Role of Subsidiary
Guarantors.’’
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unconditional would not be a condition
of eligibility under the proposed rule,
but disclosure of any material
limitations or conditions to the
subsidiary guarantee would be required
pursuant to proposed Rule 13–01(a)(2).
(C) Obligated Parent Company and
Multiple Obligated Subsidiaries
Existing Rule 3–10(d) applies to a
subsidiary that issues securities
guaranteed by its parent company and
one or more other subsidiaries of that
parent company. Existing Rule 3–10(f)
applies to multiple subsidiary
guarantors of securities issued by the
parent company of those subsidiaries.
Both of these existing exceptions
involve more than one of the parent
company’s subsidiaries that are
obligated as guarantor or issuer of the
guaranteed security, and require that all
guarantees be joint and several as well
as full and unconditional. For issuer
and guarantor structures currently
included in Rule 3–10(d), proposed
Rule 3–10(a)(1)(ii) would apply if the
guaranteed security were issued by a
subsidiary and proposed Rule 3–
10(a)(1)(i) would apply if the guaranteed
security were co-issued, jointly and
severally, with its parent company as
contemplated in existing Note 3 to Rule
3–10(d). Proposed Rule 3–10(a)(1)(i)
would apply to parent company issuer
and subsidiary guarantor structures
currently included in Rule 3–10(f).
As discussed above,102 while
subsidiaries’ guarantees would no
longer be required to be full and
unconditional or joint and several, and
would not affect whether an issuer and
guarantor structure is eligible under the
proposed rule, the terms and conditions
of the subsidiary guarantee, including
any limitations and conditions, would
be required to be disclosed as part of
proposed Rule 13–01(a)(2), to the extent
material.
Finally, under existing Rule 3–10,
issuer and guarantor structures that
include more than one subsidiary coissuer do not explicitly fall into the
existing exceptions. Currently, under
those circumstances, a registrant would
generally seek pre-filing relief from the
Commission staff.103 Multiple
subsidiary co-issuers should not change
the analysis as to what financial
statement disclosures should be
102 See Section III.C1.d.ii, ‘‘Role of Subsidiary
Guarantors.’’
103 Upon request, pursuant to its delegated
authority under 17 CFR 210.3–13 (‘‘Rule 3–13 of
Regulation S–X’’), the staff has permitted the
omission of separate subsidiary issuer and
guarantor financial statements for issuer and
guarantor structures that included more than one
subsidiary co-issuer, provided the other conditions
of existing Rule 3–10 were met.
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provided to investors, because,
consistent with the other proposed
eligible issuer and guarantor structures,
the parent company controls each
consolidated co-issuer, the financial
information of the subsidiary co-issuers
would be reflected in the consolidated
financial statements of the parent
company, and the parent company
would be fully and unconditionally
obligated to make payments in full
when due under the guaranteed
security. Therefore, proposed Rule 3–
10(a)(1)(i) would apply to such
structures if the subsidiaries co-issued
the guaranteed securities jointly and
severally with the parent company.
Proposed Rule 3–10(a)(1)(ii) would
apply if the parent company is a full
and unconditional guarantor of
securities co-issued by the subsidiaries.
Request for Comment
36. Would any issuer and guarantor
structures that are currently eligible
under existing Rule 3–10 no longer be
eligible under the proposed
amendments? If so, what specific
structures would not be eligible and
why?
37. Should any issuer and guarantor
structures that would be eligible under
the proposed categories be disallowed?
Should any issuer and guarantor
structures that are ineligible under the
proposed categories be allowed? If so,
which ones and why?
2. Disclosure Requirements
Under existing Rule 3–10, one of the
conditions to omitting separate financial
statements of a subsidiary issuer or
guarantor is providing the Alternative
Disclosures in the footnotes to the
parent company’s consolidated financial
statements. We are proposing to retain
the requirement to provide Alternative
Disclosures, with modifications, as we
believe the disclosures are an important
supplement to the consolidated parent
company disclosures. If the eligibility
conditions in proposed Rule 3–10(a)
and (a)(1) are satisfied, a parent
company must include the Proposed
Alternative Disclosures specified in
proposed Rule 13–01 in the relevant
filing, but could omit the separate
financial statements of subsidiary
issuers and guarantors.104 The proposed
amendments would streamline and
simplify the rule by including the
Proposed Alternative Disclosures in a
single location within proposed Rule
13–01 rather than having such
requirements in multiple paragraphs.
104 This requirement is specified in proposed
Rule 3–10(a)(2).
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The proposed amendments are
described below.
a. Financial Disclosures
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The Consolidating Information
currently required by existing Rule 3–10
provides highly-detailed financial
information about individual issuers
and guarantors or groups of issuers and
guarantors within the consolidated
parent company, as well as nonguarantor subsidiaries.
Several commenters cited various
challenges registrants face in preparing
Consolidating Information, such as the
complexities of the disclosures; that
registrants’ books and records often are
not maintained on a basis that facilitates
the preparation of the disclosures; that
extensive manual processes are often
necessary; and the difficulty, time, and
costs to prepare the disclosures.105 A
number of commenters 106 suggested
aligning the disclosure requirements of
Rule 3–10 with disclosure practices of
issuers and guarantors in the private
debt markets that comply with
Securities Act Rule 144A.107 Some
commenters stated that the type of
information included in debt offerings
under Rule 144A, which is less detailed
than what is required by Consolidating
Information, provides all the material
information necessary for investors to
make informed investment decisions.108
For example, one commenter stated that
the typical offering memorandum in a
Rule 144A offering includes revenues,
operating income (or a similar metric)
when available, assets and liabilities of
the issuers and guarantors as a
consolidated group, and the nonguarantor subsidiaries as a consolidated
group.109 Another commenter stated
that it was ‘‘not aware of a single Rule
144A offering that has ever included
[Rule 3–10]. . .financial statements that
were not otherwise already available’’
and that the Consolidating Information
105 See letters from ABA-Committees, Anuradha,
BDO, Cahill, CAQ, DT, EY, FedEx, GM, Grant,
Headwaters, KPMG, Medtronic, and Noble-UK.
106 See letters from ABA-Committees, Davis Polk,
EY, PwC, and SIFMA.
107 The majority of private debt offerings are
conducted using Rule 144A, and 99% of Rule 144A
offerings are debt offerings. Additionally, although
most Regulation D offerings are equity offerings, a
significant number include debt securities. See
Access to Capital and Market Liquidity Report, at
p. 38; Scott Bauguess et al., U.S. Sec. & Exch.
Comm’n, Div. of Econ. & Risk Analysis, Capital
Raising in the U.S.: An Analysis of the Market for
Unregistered Securities Offerings, 2009–2014 (Oct.
2015), https://www.sec.gov/dera/staff-papers/whitepapers/30oct15_white_unregistered_offering.html.
108 See, e.g., letters from ABA-Committees, Cahill,
and Davis Polk.
109 See letter from Cahill.
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is ‘‘routinely omitted in unregistered
offerings.’’ 110
Prior to the adoption of existing Rule
3–10 in 2000, under Staff Accounting
Bulletin No. 53 (1983) (‘‘SAB 53’’),
subsidiary issuers were ‘‘permitted to
include summarized financial
information,’’ 111 which was presented
for each subsidiary issuer or guarantor
and did not exclude the financial
information of non-guarantor
subsidiaries consolidated by those
subsidiary issuers and guarantors. In
discussing its reasons in the 2000
Release for requiring Consolidating
Information instead of summarized
financial information, the Commission
highlighted that the summarized
financial information in SAB 53 did not
allow for the more complete and
independent assessment of a
subsidiary’s financial condition that
may be necessary in the case of ‘‘more
complex’’ guarantee structures.112
Additionally, the Commission noted
that SAB 53 disclosures could result in
a high number of sets of summarized
financial information, which would be
burdensome for the parent company and
would not likely be useful to
investors.113
In considering changes to the existing
Rule 3–10 disclosure requirements, we
have sought to improve the disclosure
provided to investors by focusing on the
material information needed to make an
informed investment decision while
reducing the cost and burdens for
registrants in providing the information.
Our experience since the adoption of
110 See
letter from Davis Polk.
Section III.A.3.a of the 2000 Release.
112 In the 2000 Release, the Commission stated
that SAB 53 ‘‘did not contemplate more complex
guarantee structures where investors must assess
the subsidiary’s financial condition more
completely and independently of its parent
company and other subsidiaries of its parent
company,’’ and also stated that ‘‘summarized
financial information is inadequate for this purpose.
For example, although cash flow information is
significant in assessing creditworthiness,
summarized financial information includes no cash
flow information.’’ See id.
113 In discussing the use of the summarized
financial information in SAB 53 to address
disclosures involving multiple guarantors, the
Commission, in the 2000 Release, stated ‘‘[m]any
structures presented to the staff involved a
subsidiary issuer, a parent company guarantor,
multiple subsidiary guarantors, and multiple
subsidiaries that are not guarantors. Other
structures involved more than 100 subsidiary
guarantors. [SAB 53 disclosures in such structures
would have included]. . .more than 100 sets of
summarized financial information. Not only would
that disclosure have been burdensome for the
registrant to provide, it is unlikely to have been
useful to investors.’’ See Section III.A.3.a of the
2000 Release. Other reasons cited by the
Commission for requiring Consolidating
Information in the 2000 Release are discussed in
Sections III.C.2.a.i, ‘‘Level of Detail,’’ and III.C.2.a.ii,
‘‘Presentation on a Combined Basis,’’ below.
111 See
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the existing Rule 3–10 in 2000 suggests
that the level of information required by
Consolidating Information, although
detailed, could be better focused on
what is material to an investment
decision. Additionally, we believe that
many of the reasons for requiring
Consolidating Information instead of
summarized financial information
highlighted by the Commission in the
2000 Release could be addressed
without requiring the use of
Consolidating Information, thereby
addressing the concerns noted above
regarding the burdens associated with
issuers’ preparation of Consolidating
Information.
Accordingly, as discussed below,114
the financial disclosure requirements in
proposed Rule 13–01 are tailored to the
type of material information, in addition
to the parent company’s consolidated
financial statements, that we believe
investors in registered offerings need to
make informed investment decisions
about guaranteed debt securities. In
seeking to identify the material
information investors need, we have
considered commenters’ suggestion that
we look to the disclosures provided in
the Rule 144A debt markets. In this
regard, we note that the proposed
disclosures would be more detailed than
that typically provided in exempt
offerings, in which investors have the
ability to request additional information
from potential issuers when they deem
it necessary, such as additional financial
information about the issuers and
guarantors or qualitative disclosures
pertaining to the issuer and guarantor
structure. Under the proposed revisions,
registrants would:
• Be required to provide Summarized
Financial Information rather than
Consolidating Information;
• be required to provide disclosure
about the Obligor Group without
financial information of non-obligated
entities (financial information of each
issuer and guarantor could be combined
into a single column); and
• be permitted to reduce the number
of periods presented.
As a result of the proposed revisions,
the instructions for preparing
Consolidating Information in existing
Rule 3–10(i) would be eliminated.
i. Level of Detail
Unless a brief narrative is permitted,
existing Rule 3–10 requires
Consolidating Information, which
includes all major captions of the
balance sheet, income statement, and
cash flow statement that Article 10 of
Regulation S–X requires to be shown
114 See
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separately in interim financial
statements. As noted above, a number of
commenters recommended reducing the
level of detail in financial disclosures by
replacing the Consolidating Information
with summarized financial information
in the notes to the parent company’s
financial statements.115
The Commission stated in the 2000
Release that Consolidating Information
‘‘provides the same level of detail about
the financial position, results of
operations, and cash flows of subsidiary
issuers and subsidiary guarantors that
investors are accustomed to obtaining in
interim financial statements of a
registrant.’’ 116 In our experience, this
level of detail about subsidiary issuers
and guarantors occupies multiple pages
of a parent company’s financial
statements, potentially obscuring
important information contained
therein.117 We believe the required
supplemental financial information
about issuers and guarantors should
instead be focused on the information
that is most likely to be material to an
investment decision. If additional line
items beyond those specifically required
are material to an investment decision,
they would be required to be disclosed
as well. Proposed Rule 13–01(a)(4)
would therefore require Summarized
Financial Information, which would
include select balance sheet and income
statement line items. Disclosure of
additional line items of financial
information beyond what is specified in
proposed Rule 13–01(a)(4) would be
required by proposed Rule 13–01(a)(5),
to the extent they are material to an
investment decision. For example, if a
material amount of reported revenues of
the obligated entities are derived from
transactions with related parties, such
as other non-issuer and non-guarantor
subsidiaries of the parent company,
disclosure of such related party
revenues would be required. This
Summarized Financial Information and
any additional disclosures that would
be required based on materiality would
supplement the parent company’s
consolidated financial statements and
would simplify compliance and reduce
costs for preparers, while providing
investors with more streamlined and
easier to understand financial
information that is material to an
investment decision.
While investors are provided cash
flow information at the parent company
115 See letters from BDO, CAQ, DT, EY, Grant,
and KPMG.
116 See Section III.A.3.a of the 2000 Release.
117 See also letter from BDO (‘‘In some cases, the
value of the alternative disclosure may be
overshadowed by its multi-column voluminous
nature.’’).
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consolidated level, supplemental cash
flow information about subsidiary
issuers and guarantors is not typically
included in disclosures provided in the
Rule 144A debt markets.118 This leads
us to believe that investors in a
registered offering look primarily to a
parent company’s consolidated cash
flow information to assess
creditworthiness where the parent is the
primary obligor or its guarantor
obligation is full and unconditional.
Based on this observation, and the
difficulties and significant costs
associated with the preparation of cash
flow information for inclusion in
Consolidating Information highlighted
by several commenters,119 supplemental
cash flow information would not be a
required disclosure under the proposed
rule.
Request for Comment
38. Should the Proposed Alternative
Disclosures require Summarized
Financial Information rather than
Consolidating Information? Would the
Summarized Financial Information,
along with the other disclosures
required by proposed Rule 13–01,
provide the financial information
investors need to make an informed
investment decision with respect to the
guaranteed security?
39. How would issuers and investors
be affected by requiring Summarized
Financial Information? Are there
particular items in Consolidating
Information that investors need to make
informed investment decisions that
would not be provided separately
through Summarized Financial
Information? Is there any such financial
information that underwriters would
still require? If so, what would be the
effect on the costs associated with the
offering?
40. Would additional line items of
financial information beyond what
would be required by Summarized
Financial Information help investors
make informed investment decisions? If
118 See letters from ABA-Committees, Cahill,
Davis Polk, and PwC.
119 See, e.g., letter from GM (‘‘There are many
challenges when preparing the Consolidating
Information, in particular the consolidating
statement of cash flows. Our underlying books and
records are not based on a guarantor/non-guarantor
structure, and due to a centralized cash
management function numerous intercompany
transactions exist. These factors complicate the
preparation of Consolidating Information prepared
‘as if’ the registrant was a stand-alone entity. These
intercompany transactions require extensive
analysis and manual reclassification adjustments to
permit the preparation of the Consolidating
Information, resulting in excessive complexity and
effort relative to the limited benefits of providing
this information to investors.’’). See also letters
from ABA-Committees, CAQ, Grant, KPMG, and
PwC.
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so, what line items and why? For
example, should the proposed rule
specifically require supplemental
summarized cash flow information
resulting from operating, financing, and
investing activities? Would issuers face
challenges in providing such
information?
41. Do investors need summarized
cash flow information about issuers and
guarantors in addition to the parent
company’s consolidated cash flow
statements to make informed investment
decisions about guaranteed securities? If
so, how is it used? If not, why not?
ii. Presentation on a Combined Basis
Consolidating Information
distinguishes the assets, liabilities,
operations, and cash flows of each
category of parent and subsidiaries as
issuer, guarantor, or non-guarantor.
Comments varied with respect to
whether and how the financial
information of the entities in the issuers
and guarantors should be grouped.
Some commenters suggested permitting
disclosure of financial information of
either the Obligor Group or the nonobligated entities as groups,120 other
commenters recommended requiring
disclosure of both groups separately,121
and another commenter suggested
several possible groupings.122 Other
commenters stated that investors use the
existing Rule 3–10 disclosures to
evaluate separately the likelihood of
payment by the issuer and
guarantors.123
The Commission observed in the 2000
Release that there were ‘‘complex
guarantee structures where investors
must assess the subsidiary’s financial
condition more completely and
independently of its parent company
and other subsidiaries of its parent
company.’’ 124 The Commission also
stated that it was ‘‘requiring
[Consolidating Information] because it
clearly distinguishes the assets,
liabilities, revenues, expenses, and cash
flows of the entities that are legally
obligated under the indenture from
those that are not’’ and ‘‘[i]t also
facilitates analysis of trends affecting
subsidiary issuers and subsidiary
guarantors and relationships among the
various components of a consolidated
120 See,
e.g., letters from BDO and EY.
e.g., letters from CAQ and KPMG.
122 This commenter suggested the Commission
consider summarized financial information related
only to: (1) The issuers separately and the combined
guarantor subsidiaries separately; (2) the issuers
and guarantors on a combined basis; or (3) the
guarantor subsidiaries. See letter from DT.
123 See, e.g., letters from CalPERS and CFA.
124 See Section III.A.3.a of the 2000 Release.
121 See,
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organization.’’ 125 We continue to
believe it is important to clearly
distinguish in the supplemental
financial information the entities
obligated under the guaranteed security
from those that are not obligated. Along
with some commenters, however, we
believe investors focus largely on
whether payment will be made in full
on the dates specified in the guaranteed
security, rather than whether payment
comes from an issuer or one or more
guarantors in the same consolidated
group.126 We therefore believe that it is
appropriate for our disclosure rules to
focus on the obligated entities as a
group, and that the parent company
should be able to provide financial
disclosures that convey information
about the Obligor Group on a combined,
rather than disaggregated, basis.
Accordingly, the proposed rule would
permit the parent company to present
the Summarized Financial Information
of the parent company issuer or
guarantor, each consolidated subsidiary
issuer, and each consolidated subsidiary
guarantor, on a combined basis.
Proposed Rule 13–01(a)(4) would
require intercompany transactions
between issuers and guarantors
presented on a combined basis to be
eliminated.
We recognize that there may be
circumstances in which separate
financial information about certain
issuers and guarantors is material to an
investment decision. Accordingly, when
information provided in response to
proposed Rule 13–01 is applicable to
one or more, but not all, issuers and
guarantors, proposed Rule 13–01(a)(4)
would require, to the extent it is
material, separate disclosure of
Summarized Financial Information for
the issuers and guarantors to which the
information applies. For example, if a
subsidiary’s guarantee were limited to a
particular dollar amount, disclosure of
that limitation would be required by
proposed Rule 13–01(a)(2). In that case,
separate disclosure of the Summarized
Financial Information specified in
proposed Rule 13–01(a)(4) would be
required for that subsidiary guarantor, if
material.
Because non-guarantor subsidiaries
are not obligated to make payments as
either issuer or guarantor, we do not
believe separate supplemental
disclosure of their financial information
as required under the existing rule is
likely to be material to an investment
decision. As such, the proposed rule
would no longer require separate
125 See
id.
e.g., letters from BDO and EY.
126 See,
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disclosure of the financial information
of non-guarantor subsidiaries.
In order to present the assets,
liabilities, and operations of the Obligor
Group accurately, it is necessary to
exclude the financial information of
subsidiaries not obligated under the
guaranteed security. Within
Consolidating Information under the
existing rule, a parent company should
present investments in all subsidiaries
based upon their proportionate share of
the subsidiary’s net assets,127 and
subsidiary issuer or guarantor columns
should present investments in certain
subsidiaries, including but not limited
to non-guarantor subsidiaries, under the
equity method of accounting.128 This
presentation avoids presenting the
financial information of a non-issuer or
non-guarantor subsidiary as though it
were an issuer or guarantor. We
continue to believe that the financial
information of non-issuer and nonguarantor subsidiaries should be
excluded from the Summarized
Financial Information of the Obligor
Group, even if those non-issuer and
non-guarantor subsidiaries would be
consolidated by an issuer or guarantor.
We have included a corresponding
requirement in proposed Rule 13–
01(a)(4). However, the proposed rule
would allow the parent company to
determine which method best meets the
objective of excluding the financial
information of non-issuer and nonguarantor subsidiaries from the
Proposed Alternative Disclosures, so
long as the selected method is disclosed
and used for all non-issuer and nonguarantor subsidiaries for all classes of
guaranteed securities for which the
disclosure is required, and is reasonable
in the circumstances.129 For example,
the parent company could exclude the
assets, liabilities, and operations of non127 See
Rule 3–10(i)(3) of Regulation S–X.
Rule 3–10(i)(5) of Regulation S–X.
129 This proposed amendment may result in
decreased comparability in the combined
Summarized Financial Information of the Obligor
Group between parent companies that elect to use
different methods of excluding the financial
information of their non-issuer and non-guarantor
subsidiaries. In proposing this change, we
considered the costs to the parent company of
requiring the use of a specific method of accounting
for non-issuer and non-guarantor subsidiaries to
remove their financial information from the
combined Obligor Group, particularly if that parent
company’s systems are not designed to readily
produce such information. See, e.g., letters from
CAQ, EY, Grant, KPMG, and PwC (highlighting the
challenges of this requirement under the existing
rule). We expect any decrease of comparability to
be limited, as most line items required to be
disclosed in Summarized Financial Information
would be unaffected by the use of different methods
for this purpose (e.g., current assets, current
liabilities, net sales or gross revenues and gross
profit).
128 See
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issuer and non-guarantor subsidiaries by
using the equity method of accounting
for those subsidiaries.
As discussed above,130 separate
disclosure of the Summarized Financial
Information of one or more subsidiary
issuers or guarantors may be necessary
under the proposed rule. In this case,
the same method of excluding a nonissuer’s or non-guarantor’s financial
information from the Summarized
Financial Information of the Obligor
Group would also be required for the
subsidiary issuers or guarantors whose
financial information is presented
separately. For example, if a
subsidiary’s guarantee is limited and its
Summarized Financial Information is
presented separately from that of the
combined Obligor Group, that
subsidiary guarantor’s financial
information should be excluded from
the Obligor Group information
consistent with the method selected for
excluding the financial information of
non-issuer and non-guarantor
subsidiaries from the Obligor Group
information.
Request for Comment
42. Should we permit the financial
disclosure of the Obligor Group to be
combined within the proposed
Summarized Financial Information?
Why or why not? If not, what groupings
of issuers and guarantors should be
required or permitted, and why? How
would this impact the information for
investment decisions? Are there specific
circumstances where separate
information should be required?
43. Does presentation of the financial
information of non-guarantor
subsidiaries provide investors with
information they need to make informed
investment decisions? Do investors use
the financial information of nonobligated entities as part of their
investment analyses? For example, do
investors consider ratios or any similar
derivation of the information from the
non-obligated entities? If so, how is it
used and in what circumstances?
Should Summarized Financial
Information of the non-obligated entities
also be provided? Why or why not?
44. Should we require a specific
method of accounting (e.g., the equity
method) to be used to exclude the
financial information of non-obligated
subsidiaries from the Summarized
Financial Information of the Obligor
Group instead of permitting the parent
company to choose? If so, what method
should we require, and why? If not,
why? If we do not prescribe a specific
130 See Section III.C.2.a.ii, ‘‘Presentation on a
Combined Basis.’’
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method, should we limit the permissible
methods to those concepts included
within U.S. GAAP, or IFRS, as
applicable? Alternatively, should we
limit the permissible methods to
concepts included within U.S. GAAP, or
IFRS, as applicable, only when the
Proposed Alternative Disclosures are
placed in the parent company’s
financial statements? How would
allowing different methods affect the
disclosures for investors?
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iii. Periods To Present
In addition to the parent company’s
consolidated information, the
supplemental information included in
the Proposed Alternative Disclosures
would help facilitate an investor’s
evaluation of whether the entities in the
Obligor Group have the ability to make
payments as required under the
guaranteed security, including what
assets are available to satisfy those
obligations. We believe the required
periods of Summarized Financial
Information of the Obligor Group should
be based on the most recent financial
information. Instead of the periods
specified in 17 CFR 210.3–01 and
210.3–02 (‘‘Rules 3–01 and 3–02 of
Regulation S–X’’) required by the
existing rule, the proposed rule would
require Summarized Financial
Information only as of, and for, the most
recently completed fiscal year and yearto-date interim period (‘‘interim
period’’), if applicable. When used in
conjunction with the parent company’s
consolidated financial statements, we
believe the most recent full fiscal year
and interim period should provide
investors the additional information that
is material to an investment decision in
the guaranteed security and would
eliminate unnecessary compliance costs
for registrants.
Commenters recommended limiting
disclosure to the current year, citing
challenges recasting prior period
information for circumstances such as
legal-entity mergers and discontinued
operations.131 A number of commenters
stated that interim reporting of the
Proposed Alternative Disclosures
should only be required if material
changes have occurred since the most
recent annual period that is required to
be presented.132 However, we believe
that the most recent interim period
131 See
letters from Medtronic and PwC.
letters from BDO, CAQ, CFA, Comcast,
DT, EY, GM, Grant, KPMG, and Medtronic. In
making this suggestion, several of these commenters
made reference to Rule 10–01(a)(5) of Regulation S–
X, which allows registrants to apply judgment and
omit details of accounts which have not changed
significantly in amount or composition since the
end of the most recently completed fiscal year. See
Rule 10–01(a)(5) of Regulation S–X.
132 See
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should be provided so that investors can
make decisions based on the most
recent information available.
Lastly, because Item 1 of Part I of
Form 10–Q 133 requires a registrant to
provide the information required by
Rule 10–01 of Regulation S–X, we are
proposing to add Rule 10–01(b)(9) to
require compliance with Rules 3–10 and
13–01.
Request for Comment
45. What periods of presentation are
material for investors when evaluating
the credit risk of the Obligor Group?
46. Should the required periods of
Summarized Financial Information of
the Obligor Group be based on the most
recent financial information? Why or
why not? If so, what periods should be
considered ‘‘most recent,’’ and why?
47. Should we require additional
periods of Summarized Financial
Information beyond the most recent
fiscal year and interim period? Why or
why not? If yes, which periods and
why?
48. Rather than requiring disclosure of
the most recent interim period, should
the proposed rule focus on significant
changes similar to Rule 10–01(a)(5) of
Regulation S–X, which allows
registrants to apply judgment and omit
details of accounts that have not
changed significantly in amount or
composition since the end of the most
recently completed fiscal year? Why or
why not?
b. Non-Financial Disclosures
When Consolidating Information is
presented, the existing rule requires
limited non-financial disclosures about
the issuers and guarantors and the
guarantees,134 restricted net assets,135
and certain types of restrictions on the
ability of the parent company or any
guarantor to obtain funds from their
subsidiaries.136 Although the Request
for Comment asked if there is different
or additional information that investors
need about guarantors and issuers of
guaranteed securities, we received no
comments on non-financial disclosures.
In addition to proposing amendments
to existing Rule 3–10 for financial
disclosures, we are also proposing
amendments to require specific nonfinancial disclosures. We are proposing
these amendments to enhance the
133 17
CFR 249.308a.
Rules 3–10(i)(8)(i)–(iii) requires
disclosure, if true, that each subsidiary issuer or
subsidiary guarantor is 100% owned by the parent
company, that all guarantees are full and
unconditional, and where there is more than one
guarantor, that all guarantees are joint and several.
135 Rule 3–10(i)(10) of Regulation S–X.
136 Rule 3–10(i)(9) of Regulation S–X.
134 Existing
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information provided about subsidiary
issuers and guarantors, particularly in
light of our proposal to require
Summarized Financial Information for
these subsidiaries. Proposed Rules 13–
01(a)(1) through (3) would require
certain disclosures, to the extent
material,137 about the issuers and
guarantors, the terms and conditions of
the guarantees, and how the issuer and
guarantor structure and other factors
may affect payments to holders of the
guaranteed securities. Although a parent
company must provide narrative
disclosure under the existing
requirements, we believe the proposed
requirements would result in enhanced
narrative disclosures that would
improve investor understanding of the
issuers, guarantors, and guarantees, and
make the financial disclosures they
accompany easier to understand. While
the proposed requirements are
composed of the items we believe are
most likely to be material to an investor,
there may be additional facts and
circumstances specific to particular
issuers and guarantors that would be
material to holders of the guaranteed
security. In that case, similar to existing
Rule 3–10(i)(11),138 proposed Rule 13–
01(a)(5) would require disclosure of
those facts and circumstances.139
Additionally, when a non-financial
disclosure is applicable to one or more,
but not all, issuers and guarantors,
proposed Rule 13–01(a)(4) would
require, to the extent it is material,
separate disclosure of Summarized
Financial Information for the issuers
and guarantors to which it applies.140
Request for Comment
49. Are the proposed non-financial
disclosures material to an investment
decision? Should we explicitly require
any non-financial disclosures in
addition to what is proposed? If so,
what information and why?
c. When Disclosure Is Required
One of the conditions that must be
met under existing Rule 3–10 to be
eligible to omit the financial statements
of a subsidiary issuer and guarantor is
137 See discussion within Section III.C.2.c, ‘‘When
Disclosure is Required.’’
138 Existing Rule 3–10(i)(11)(i) specifies that the
parent company ‘‘[m]ay not omit any financial and
narrative information about each guarantor if the
information would be material for investors to
evaluate the sufficiency of the guarantee,’’ and
existing Rule 3–10(i)(11)(ii) states that the
disclosure ‘‘[s]hall include sufficient information so
as to make the financial information presented not
misleading.’’
139 See discussion within Section III.C.2.c, ‘‘When
Disclosure is Required.’’
140 See discussion within Section III.C.2.ii,
‘‘Presentation on a Combined Basis.’’
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providing the Alternative Disclosures. If
certain numerical thresholds are met,
including that the parent company has
‘‘no independent assets or operations’’
and that all non-issuer and nonguarantor subsidiaries are ‘‘minor,’’ 141
the Alternative Disclosures may take the
form of a brief narrative in lieu of
detailed Consolidating Information, but
some type of the Alternative Disclosures
is always required.142 Under these
thresholds, minor changes in
circumstances can result in dramatically
different disclosures being required. A
number of commenters indicated that
these thresholds are unnecessarily
restrictive.143
Instead of using the existing rule’s
numerical thresholds to determine the
form and content of disclosure, we
believe investors should receive all
disclosures specified in the proposed
rule, unless such information is
immaterial. As such, the proposed
amendments would eliminate the ‘‘no
independent assets or operations’’ and
‘‘minor’’ numerical thresholds, as well
as the brief narrative form of Alternative
Disclosures, and instead require
financial and non-financial disclosures
to the extent material to holders of the
guaranteed security.144 For example,
under the proposed rule, the
Summarized Financial Information of
the Obligor Group could be omitted if
the parent company’s consolidated
financial statements do not differ in any
material respects from the Obligor
Group.145 As another example, if a
141 Rules 3–10(h)(5) and (6) specify the numerical
thresholds that must not be exceeded for a parent
company to have ‘‘no independent assets or
operations,’’ and for a subsidiary to be ‘‘minor,’’
respectively. See additional discussion above in
Section II.F, ‘‘Exceptions.’’
142 See discussion of existing requirements in
Section II.F, ‘‘Exception Paragraphs.’’
143 See letters from ABA-Committees, AB–NYC,
CAQ, DT, EY, FedEx, KPMG, and PwC.
144 This requirement is specified in proposed
Rule 13–01(a). Whether a disclosure specified in
proposed Rule 13–01 may be omitted or whether
additional disclosure would be required by
proposed Rule 13–01(a)(5), discussed below,
depends on whether the disclosure would be
material to a reasonable investor. The Supreme
Court in TSC v. Northway held that a fact is
material if there is ‘‘a substantial likelihood that the
disclosure of the omitted fact would have been
viewed by the reasonable investor as having
significantly altered the ‘total mix’ of information
made available.’’ See TSC Indus., Inc. v. Northway,
Inc., 426 U.S. 438, 449 (1976).
145 For example, a parent company issuer could
have guarantor subsidiaries as well as nonguarantor subsidiaries. If the non-guarantor
subsidiaries are immaterial such that the combined
Summarized Financial Information of the Obligor
Group was not materially different from the
corresponding amounts in the parent company’s
consolidated financial statements, Summarized
Financial Information could be omitted. However,
if at a later time, non-guarantor subsidiaries become
a larger part of the parent company’s business such
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finance subsidiary issues securities that
are guaranteed by its parent company,
the Summarized Financial Information
could be omitted because the finance
subsidiary has no independent material
debt-paying ability and has no material
assets or operations other than those
related to the issuance, administration,
and repayment of the guaranteed
security. While the disclosures specified
in proposed Rule 13–01(a)(1) through
(4) may be omitted if immaterial to
holders of the guaranteed security, for
clarity, proposed Rule 13–01(a)(4)
requires the registrant to disclose a
statement that those financial
disclosures have been omitted and the
reason(s) why the disclosures are not
considered to be material.
Existing Rules 3–10(i)(11)(i) and (ii),
respectively, require disclosure of any
financial and narrative information
about each guarantor if it would be
material for investors to evaluate the
sufficiency of the guarantee, and
disclosure of sufficient information to
make the financial information
presented not misleading. This
disclosure is required when
Consolidating Information is disclosed.
While we have proposed specific
financial and non-financial disclosures,
there may be other information about
the guarantees, issuers, and guarantors
that could be material to holders of the
guaranteed security. Accordingly,
proposed Rule 13–01(a)(5) would
require disclosure of any information
that would be material to holders of the
guaranteed security, rather than the
sufficiency of the guarantee as stated in
the existing rule. This requirement
would apply in all cases, including
when the proposed Summarized
Financial Information is omitted in
accordance with the proposed rule.
Request for Comment
50. Should we eliminate the existing
numerical thresholds for disclosure,
such as the parent company having ‘‘no
independent assets or operations’’ and/
or that all non-issuer and non-guarantor
subsidiaries are ‘‘minor,’’ and instead
use a materiality standard to determine
the appropriate level of disclosure?
Would this cause difficulty in practice?
If so, what are those difficulties and
how can they be avoided? Would
further guidance be necessary? If so,
please explain what guidance is needed.
Would the elimination of the numerical
thresholds and use of a materiality
standard result in a loss of material
information that investors currently use
to analyze these securities? If so, what
material information would be lost and
would it be material information
necessary for an investor’s investment
decision? Would this principles-based
approach result in different levels of
disclosure provided by issuers who, for
example, may be in similar industries or
have similar operations? If so, how
would investors view such differences
in making investment decisions?
51. Should any additional disclosures
be specifically required if default on the
guaranteed security reaches a certain
level of likelihood? If so, what type of
disclosures and when should they be
provided?
52. Are the proposed rules sufficiently
clear about what disclosures should be
provided and when? If not, how should
the rules be revised to ensure clarity?
d. Location of Proposed Alternative
Disclosures and Audit Requirement
The primary source of financial
information provided to investors—the
consolidated financial statements of the
parent company—is required to be
audited as specified in Regulation S–
X.146 Existing Rule 3–10 requires the
Alternative Disclosures to be included
in the notes to the parent company’s
consolidated financial statements,
thereby requiring them to be audited for
the same periods. A few commenters
specifically addressed whether the
Alternative Disclosures, as revised by
their suggestions, should be audited,
and those recommendations were
mixed.147
The Proposed Alternative Disclosures
would provide incremental detail as a
supplement to the parent company’s
audited annual and unaudited interim
consolidated financial statements to
facilitate an analysis of the parts of the
consolidated enterprise that are
obligated to make payments as issuers
or guarantors. We believe the
supplemental nature of this information
supports providing parent companies
with the flexibility to provide the
Proposed Alternative Disclosures inside
or outside of the consolidated financial
statements in registration statements
covering the offer and sale of the
guaranteed debt securities and any
146 Rules
3–01 and 3–02 of Regulation S–X.
example, one commenter suggested its
recommended disclosures be provided on an
unaudited basis, see letter from WhiteWave,
whereas another commenter suggested requiring, on
an audited basis, the type of information typically
included on an unaudited basis in offering
memoranda for Rule 144A debt offerings. See letter
from ABA-Committees.
147 For
that the combined Summarized Financial
Information of the Obligor Group is materially
different from the corresponding amounts in the
parent company’s consolidated financial
statements, the parent company would then be
required to provide such Summarized Financial
Information.
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related prospectus, as well as annual
and quarterly Exchange Act periodic
reports required to be filed during the
fiscal year in which the first bona fide
sale of the subject securities is
completed. This proposed optionality
should reduce costs and burdens for
parent companies and reduce the
potential for delay in offerings that
exists under the existing rule due to the
need to prepare audited Alternative
Disclosures. Parent companies using
this proposed option to provide the
disclosures outside the consolidated
financial statements may be able to
register guaranteed debt offerings and go
to market more quickly than under the
existing rule. This may allow parent
companies to more promptly access
favorable market conditions. If a parent
company elects to provide the Proposed
Alternative Disclosures outside its
audited financial statements, the
disclosures would be required in
specified prominent locations in its
offering documents and periodic
reports.
Accordingly, the note to proposed
Rule 13–01(a) would allow the parent
company to provide the Proposed
Alternative Disclosures in a footnote to
its consolidated financial statements or,
alternatively, in management’s
discussion and analysis of financial
condition and results of operations
(‘‘MD&A’’),148 in its registration
statement covering the offer and sale of
the subject securities and any related
prospectus, and in Exchange Act reports
on Forms 10–K and 10–Q 149 required to
be filed during the fiscal year in which
the first bona fide sale of the subject
securities is completed. If a parent
company elects to provide the
disclosures in its audited financial
statements, the Proposed Alternative
Disclosures would be required to be
audited.150 If not otherwise included in
the consolidated financial statements or
in the MD&A, the parent company
would be required to include the
Proposed Alternative Disclosures in its
prospectus immediately following ‘‘Risk
Factors,’’ if any, or otherwise,
immediately following pricing
148 See 17 CFR 229.303 (Item 303 of Regulation
S–K).
149 These proposed amendments also apply to
foreign private issuers and issuers offering
securities pursuant to 17 CFR 230.251 through
230.263 (‘‘Regulation A’’) and the forms applicable
to such entities. See Section III.D, ‘‘Application of
Proposed Amendments to Certain Types of Issuers,’’
below.
150 Regardless of where the Proposed Alternative
Disclosures are presented in the filing, U.S. GAAP
requires disclosure in the financial statements of
the pertinent rights and privileges of the various
securities outstanding. See ASC 470–10–50–5 and
ASC 505–10–50–3.
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information described in 17 CFR
229.503(c) (‘‘Item 503(c) of Regulation
S–K’’). Beginning with the parent
company’s annual report filed on Form
10–K for the fiscal year during which
the first bona fide sale of the subject
securities is completed, however, the
parent company would be required to
provide the Proposed Alternative
Disclosures in a footnote to its
consolidated financial statements in its
annual and quarterly reports.
The increased flexibility that would
be afforded to the parent company in
choosing where to locate the Proposed
Alternative Disclosures during the fiscal
year in which the first bona fide sale of
the subject securities is completed gives
rise to certain disclosure location
considerations. If the parent company
were to elect to provide the Proposed
Alternative Disclosures in its financial
statements, consistent with the existing
rule, the disclosures would be subject to
annual audit, interim review, and
internal control over financial reporting
requirements. By doing so, investors
and other users may benefit to the
extent that they consider the
information included in the financial
statements more reliable because it is
subject to these audit and other
requirements. Also consistent with the
existing rule, Proposed Alternative
Disclosures located in the financial
statements would be subject to XBRL
tagging requirements.151 The parent
company may incur additional costs to
comply with these tagging requirements,
whereas investors and other users may
benefit from more readily-available
information in structured formats.
In contrast, if the parent company
were to elect to provide the Proposed
Alternative Disclosures outside its
financial statements during this time
period, it would not incur costs to
comply with these requirements, but
investors would not benefit from the
enhanced reliability of information
included in the financial statements. In
addition, the safe harbor under the
Private Securities Litigation Reform Act
of 1995 (‘‘PSLRA’’) would not be
available for the disclosures if provided
in the financial statements, but would
be available for disclosure provided in
other sections of the filing, such as the
MD&A.152 If the safe harbor is available,
151 On June 28, 2018, the Commission adopted
rule and form amendments to require filers, on a
phased in basis, to use the Inline XBRL format for
financial statement information and risk/return
summary information. See Inline XBRL Filing of
Tagged Data, Release No. 33–10514 (Jun. 28, 2018).
152 Public Law 104–67, 109 Stat. 737 (1995). Since
the PSLRA does not provide a safe harbor for
forward-looking information located within the
financial statements, a parent company presenting
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a parent company may be more likely to
supplement its disclosures, which
would benefit investors. When provided
outside of the financial statements, the
Proposed Alternative Disclosures would
be subject to the parent company’s
disclosure controls and procedures and
related certification requirements.
Request for Comment
53. Should the proposed rule permit
the parent company to provide the
Proposed Alternative Disclosures
outside its financial statements in the
proposed circumstances described
above? Alternatively, should the parent
company be permitted to provide the
Proposed Alternative Disclosures
outside its financial statements in all
circumstances? What are the potential
benefits or concerns for investors and
issuers with either approach?
54. Would requiring the Proposed
Alternative Disclosures to be included
in a footnote to the parent company’s
audited annual and unaudited interim
financial statements beginning with its
annual report filed on Form 10–K or
Form 20–F for the fiscal year during
which the first bona fide sale of the
guaranteed securities is completed be
useful to investors? If so, why? If not,
why not? What are the potential benefits
or concerns for investors and issuers
with either approach?
55. Would requiring the Proposed
Alternative Disclosures to be audited or
reviewed present costs or challenges for
parent companies? If so, what are they?
For example, would it cause delays in
the offering process?
56. Should the proposed rule specify
where in a filing the Proposed
Alternative Disclosures must appear if
the parent company chooses not to
include them in its financial statements?
Why or why not? If yes, are the
locations required by the note to
proposed Rule 13–01(a) appropriate? If
so, why? If not, why not? Where should
the Proposed Alternative Disclosures be
disclosed, and why is that location
appropriate?
57. Would issuers be more likely to
voluntarily provide supplemental
information in addition to the required
Proposed Alternative Disclosures to the
extent the PSLRA applied to such
supplemental information? Why or why
not? What would that additional
supplemental information be?
the Proposed Alternative Disclosures in its financial
statements may be less likely to voluntarily
supplement those disclosures with forward-looking
information as compared with disclosures made
outside the financial statements. However, a parent
company retains the option of providing forwardlooking information outside its financial statements
so that such information is covered by the safe
harbor.
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58. Should the proposed rule instead
require the Proposed Alternative
Disclosures to be provided in the parent
company’s financial statements in the
subject registration statement and
subsequent Exchange Act periodic
reports for the fiscal year in which the
first bona fide sale of the subject
securities is completed, but permit the
parent company to provide the
Proposed Alternative Disclosures
outside its financial statements in
subsequent Exchange Act periodic
reports? If so, why? If not, why not?
Does the answer change the larger the
parent company is? Why or why not?
Would investors and issuers benefit
from such a requirement? Why or why
not? Should the Proposed Alternative
Disclosures be required to be included
in the parent company’s financial
statements for a different period of time
before the parent company is permitted
to provide them outside its financial
statements? If so, what time period and
why?
59. Should the note to proposed Rule
13–01(a) apply differently to emerging
growth companies? 153 Why or why not?
For example, should there be different
filings or periods of time if the parent
company is an emerging growth
company? If so, what should be
different and why? How would
investors and issuers be affected?
e. Recently-Acquired Subsidiary Issuers
and Guarantors
Existing Rule 3–10(g) requires preacquisition audited financial statements
of a recently acquired subsidiary issuer
or guarantor in certain circumstances.
One commenter noted that the
information provided for recently
acquired subsidiary issuers and
guarantors is more detailed than the
information required for the other
subsidiary issuers and guarantors.154
Another commenter made a similar
observation but also noted that these
financial statements will only be
included at the time the issuers and
guarantors are first registering the
guaranteed security, at which time the
probability of the guarantee being
invoked would usually be remote.155
Several commenters recommended
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153 17
CFR 230.405 (‘‘Rule 405’’) under the
Securities Act defines an emerging growth company
as an issuer that had total gross revenues of less
than $1.07 billion during its most recently
completed fiscal year. It retains that status for five
years after its initial public offering unless its
revenues rise above $1.07 billion, it issues more
than $1 billion of non-convertible debt in a three
year period, or it qualifies as a large accelerated filer
pursuant to 17 CFR 240.12b–2 (‘‘Rule 12b–2’’)
under the Exchange Act.
154 See letter from DT.
155 See letter from PwC.
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eliminating the requirement to provide
audited pre-acquisition financial
statements of recently-acquired issuers
and guarantors but differed on whether
any other disclosure should be
provided, and, if so, what type.156
Commenters also noted that, in
addition to being presented with a far
greater level of detail than is required
for existing subsidiary issuers and
guarantors in the Alternative
Disclosures under existing Rule 3–10,
these pre-acquisition audited financial
statements are burdensome and costly
for preparers.157 Additionally, Rule 3–
05 of Regulation S–X already requires
pre-acquisition audited financial
statements of an acquired business to be
provided if it exceeds specified
thresholds of significance,158 which one
commenter indicated is sufficient for
investors.159
156 See, e.g., letters from CAQ, DT, EY, Grant,
KPMG, PwC, and SIFMA. A few commenters
recommended rescinding the requirement
altogether. See letters from EY and SIFMA. Several
commenters suggested requiring disclosure about
recently acquired issuer and guarantor subsidiaries
to mirror what is required for other issuer and
guarantor subsidiaries (i.e., form and content of
Alternative Disclosures). See letters from CAQ, DT,
Grant, KPMG, and PwC.
157 See, e.g., letters from PwC (stating that a
‘‘company can incur significant costs and effort to
prepare such financial statements that will never be
required again’’) and EY (’’The requirements to
provide separate pre-acquisition financial
statements of recently acquired guarantors under S–
X Rule 3–10(g) are unnecessary and potentially
burdensome.’’). See also letters from CAQ, DT,
Grant, and KPMG.
158 Rule 3–05 of Regulation S–X specifies
requirements for pre-acquisition financial
statements of an acquired or to be acquired
significant ‘‘business.’’ Registrants determine
whether a ‘‘business’’ has been acquired by
applying Rule 11–01(d) of Regulation S–X, and
whether an acquisition is significant by using the
investment, asset, and income tests described in
Rule 1–02(w) of Regulation S–X. If the parent
company is a smaller reporting company, 17 CFR
210.8–04 (‘‘Rule 8–04 of Regulation S–X’’) specifies
requirements for pre-acquisition financial
statements of an acquired or to be acquired
significant business, including the tests used to
determine if an acquisition is significant. Recentlyacquired subsidiary issuers and guarantors would
typically be considered a ‘‘business’’ because
separate entities, subsidiaries, or divisions are
presumed to be businesses. The requirements of
Rule 3–05 of Regulation S–X overlap with Rule 3–
10(g) if a parent company files a registration
statement in connection with the offering of
guaranteed debt or debt-like securities and acquires
a subsidiary issuer or guarantor. However, the
significance test under Rule 3–10(g) measures
significance based on the purchase price of the
recently acquired subsidiary issuer or guarantor
relative to the size of the offering, which often
results in a requirement to provide financial
statements at a far lower level of significance than
under Rule 3–05 of Regulation S–X. The proposed
elimination of Rule 3–10(g) would generally result
in an investor receiving pre-acquisition financial
statements of a recently-acquired subsidiary issuer
or guarantor only if it exceeded the thresholds of
significance specified in Rule 3–05 of Regulation S–
X or 8–04 of Regulation S–X, as applicable.
159 See letter from SIFMA.
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Based on these observations, and our
belief that existing requirements under
Rule 3–05 of Regulation S–X provide
sufficient information in this context,
we do not believe the pre-acquisition
financial statements of recentlyacquired subsidiary issuers and
guarantors required by existing Rule 3–
10(g) are necessary. We are therefore
proposing to delete existing Rule 3–
10(g). Although we are not proposing to
require specific disclosures about
recently-acquired subsidiary issuers and
guarantors in lieu of pre-acquisition
financial statements, information about
these recently-acquired subsidiaries
would be required if material to an
investment decision in the guaranteed
security pursuant to proposed Rule 13–
01(a)(5).
Due to the proposed deletion of Rule
3–10(g), we also propose a conforming
change to remove paragraph (b) of Rule
12h–5.160
Request for Comment
60. Should we eliminate the existing
requirement to provide pre-acquisition
financial statements of recentlyacquired subsidiary issuers and
guarantors? Why or why not?
Alternatively, should the proposed rule
require some other type of disclosure
about recently-acquired subsidiary
issuers and guarantors instead of preacquisition financial statements? If so,
what type of disclosure and in what
instances should it be required? For
example, should disclosure of preacquisition financial information about
recently-acquired subsidiary issuers and
guarantors mirror that of existing
subsidiary issuers and guarantors?
f. Continuous Reporting Obligation
An issuer of securities is required to
file Exchange Act reports with the
Commission under Section 13(a), with
respect to any class of securities
registered pursuant to Sections 12(b) or
12(g), or for any class of securities for
which it has a reporting obligation
under Section 15(d) of the Exchange
Act.161 Section 12(b) registration is
required only for so long as the class of
securities is listed for trading on a
160 If the proposed removal of paragraph (b) of
existing Rule 12h–5 is adopted, a subsidiary issuer
or guarantor that was previously required to
provide pre-acquisition financial statements
pursuant to existing Rule 3–10(g) but was exempt
from Exchange Act reporting by paragraph (b) of
existing Rule 12h–5 would continue to be exempt
from Exchange Act reporting through proposed
Rule 12h–5.
161 Section 12(g) registration is triggered when an
issuer exceeds specified asset and ownership
thresholds with respect to a class of equity
securities and does not apply to securities subject
to Rule 3–10.
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national securities exchange.162 An
issuer incurs a Section 15(d) reporting
obligation for each class of securities
that is the subject of a Securities Act
registration statement that becomes
effective or is required to be updated
under Securities Act Section 10(a)(3).163
Section 15(d)(1) 164 provides that if, at
the beginning of any subsequent fiscal
year, the securities of any class to which
the registration statement relates are
held of record by fewer than 300
persons, or in the case of a bank, a
savings and loan holding company,165
or bank holding company,166 by fewer
than 1,200 persons, the registrant’s
Section 15(d) reporting obligation is
automatically suspended with respect to
that class.167 Rule 12h–3 permits
registrants to suspend a Section 15(d)
reporting obligation at any time during
a fiscal year provided the conditions of
the rule are met.168
The Commission explained in the
2000 Release that the parent company
must continue to provide the
Alternative Disclosures in its periodic
reports for as long as the subject
securities are outstanding.169 This
disclosure requirement continues to
apply to the parent company even if the
reporting obligation of its subsidiary
162 Accordingly, Section 12(b) reporting
obligations are terminated when, for example, the
class no longer qualifies for exchange listing or the
registrant determines to no longer list the securities
on a national securities exchange.
163 15 U.S.C. 78 j(a)(3).
164 15 U.S.C. 78o(d)(1).
165 As that term is defined in Section 10 of the
Home Owners’ Loan Act, 12 U.S.C. 1461.
166 As that term is defined in Section 2 of the
Bank Holding Company Act of 1956, 12 U.S.C.
1841.
167 The automatic statutory suspension of an
issuer’s Section 15(d) reporting obligation is not
available as to any fiscal year in which the issuer’s
Securities Act registration statement becomes
effective or is required to be updated pursuant to
Section 10(a)(3) of the Securities Act.
168 Rule 12h–3 provides that the duty to file
reports under Section 15(d) for a class of securities
is suspended immediately upon the filing of a
certification on Form 15, provided that the issuer
has fewer than 300 holders of record, fewer than
500 holders of record where the issuer’s total assets
have not exceeded $10 million on the last day of
each of the preceding three years, or, in the case of
a bank, a savings and loan holding company, or a
bank holding company, 1,200 holders of record; the
issuer has filed its Section 13(a) reports for the most
recent three completed fiscal years, and for the
portion of the year immediately preceding the date
of filing the Form 15 or the period since the issuer
became subject to the reporting obligation; and a
registration statement has not become effective or
was required to be updated pursuant to Exchange
Act Section 10(a)(3) during the fiscal year.
169 See Section III.C.1 of the 2000 Release (‘‘The
parent company periodic reports must include the
modified financial information permitted by
paragraphs (b) through (f) of Rule 3–10. The parent
company periodic reports must contain this
information for as long as the subject securities are
outstanding.’’).
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issuer or guarantor with respect to the
subsidiary’s guaranteed securities or
subsidiary’s guarantees could be
suspended under either Section 15(d) or
Rule 12h–3 of the Exchange Act.
A number of commenters indicated
that a parent company should be able to
cease providing the Alternative
Disclosures for its subsidiary issuers
and guarantors at the same time that a
subsidiary’s reporting obligation under
Section 15(d) of the Exchange Act with
respect to the subject security could be
suspended.170 Some of these
commenters noted that requiring a
parent company to continue providing
the Alternative Disclosures once its
subsidiary issuers’ and guarantors’
obligations to file reports could be
suspended under Section 15(d) or Rule
12h–3 is inconsistent with other
reporting rules.171 One commenter
stated, the ‘‘disparate treatment is
illogical, and should be harmonized by
expressly allowing registrants to cease
providing the information called for by
the Rule 3–10 accommodations when
the [reporting obligation related to the]
guaranteed security is [suspended]
pursuant to Section 15(d) of the
Exchange Act.’’ 172 Additionally, some
commenters 173 stated that this
requirement unnecessarily burdens
registrants and ‘‘acts as a disincentive
for registrants to engage in public debt
offerings as opposed to offerings under
Rule l44A or pursuant to other
Securities Act exceptions.’’ 174
We are proposing that a parent
company be permitted to cease
providing the Proposed Alternative
Disclosures if the corresponding
subsidiary issuer’s or guarantor’s
Section 15(d) obligation is suspended
automatically by operation of Section
15(d)(1) or through compliance with
Rule 12h–3. To implement this change,
the proposed rule would eliminate the
statement in existing Rule 3–10(a) that
‘‘[e]very issuer of a registered security
that is guaranteed and every guarantor
of a registered security must file the
financial statements required for a
registrant by Regulation S–X.’’ As
proposed, if a subsidiary issuer or
guarantor is required to file financial
170 See letters from ABA-Committees, BDO, CAQ,
Chamber, DT, EY, KPMG, PwC, SIFMA, and
Simpson.
171 See letters from ABA-Committees, DT, EY,
PwC, SIFMA, and Simpson (noting that a
continuous reporting obligation appears
inconsistent with the reporting obligation of a
registrant that provides separate financial
statements because that registrant may stop
providing the separate financial statements, even if
the debt is outstanding).
172 See letter from SIFMA.
173 See letters from DT and Simpson.
174 See letter from Simpson.
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statements required by Regulation S–X
with respect to the guarantee or
guaranteed security, the subsidiary may
omit such financial statements if it
complies with conditions set forth in
proposed Rule 3–10. The parent
company would be able to cease
providing the Proposed Alternative
Disclosures for a subsidiary issuer or
guarantor that is not required to file
financial statements required by
Regulation S–X with respect to the
guarantee or guaranteed security.
As described above, Section 12(b)
registration is required for so long as a
class of securities is listed for trading on
a national securities exchange. As a
continued condition of eligibility to
omit the financial statements of a
subsidiary issuer or guarantor, a parent
company must continue providing the
Proposed Alternative Disclosures for so
long as the subsidiary issuer or
guarantor has a Section 12(b) reporting
obligation with respect to the guarantee
or guaranteed security. If the subsidiary
issuer’s or guarantor’s reporting
obligation with respect to the guarantee
or guaranteed security is terminated
under Section 12(b), the parent may
cease providing the Alternative
Disclosures once the subsidiary issuer’s
and guarantor’s Section 15(d) obligation
is suspended automatically by operation
of Section 15(d)(1) or through
compliance with Rule 12h–3.
Under the proposed rule, which is
consistent with the 2000 Release,175 if a
subsidiary issuer or guarantor with an
Exchange Act reporting obligation for
the guaranteed securities would initially
be eligible to omit its financial
statements, because it would meet the
requirements of proposed Rule 3–10 and
could rely on proposed Rule 12h–5, but
later ceased to satisfy those
requirements (e.g., it ceases to be a
consolidated subsidiary of the parent
company), that subsidiary would then
be required to begin filing Exchange Act
reports for the period during which it
ceased to satisfy the requirements of
proposed Rule 3–10.176 Also, the
subsidiary would be required to present
the financial statements that are
required by Regulation S–X at the time
a report is due, and would not be able
to present the Proposed Alternative
Disclosures that proposed Rule 3–10
would have allowed it to present for
historical periods.
175 See
Section III.C.3. of the 2000 Release.
a subsidiary issuer or guarantor
should consider promptly filing a Form 8–K or a
Form 6–K to report this change in circumstance.
176 Additionally,
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Request for Comment
61. Would the proposed changes to
Rule 3–10(a) achieve the intended result
of permitting a parent company to cease
providing the Proposed Alternative
Disclosures if each subsidiary issuer’s
and guarantor’s reporting obligation is
suspended automatically by operation
of Section 15(d)(1) or through
compliance with Rule 12h–3? If not,
why, and what changes are necessary to
achieve that result?
62. We expect that the proposed
changes to both eligibility to provide the
Proposed Alternative Disclosures and
the content of the Proposed Alternative
Disclosures would reduce the burden on
a parent company’s periodic reporting.
In light of these proposed changes,
should we continue to require the
parent company to provide the
Proposed Alternative Disclosures in its
periodic reports for as long as the
subject securities are outstanding? Why
or why not?
63. If the proposed amendments are
adopted, should there be a phase-in
period for parent companies that
provide the Alternative Disclosures
under existing Rule 3–10 in reliance on
Rule 12h–5? If so, why would such a
phase-in be needed? How long should
that phase-in period be? Should it begin
with the beginning of the first fiscal year
after adoption of the proposals? Should
we permit early adoption? If so, why or
why not?
64. Should the proposed rule include
a requirement to provide current
notification to investors when a
subsidiary issuer or guarantor fails to
meet the conditions of proposed Rule 3–
10 and must begin reporting pursuant to
the Exchange Act? If so, what should
that requirement be? If not, why not?
D. Application of Proposed
Amendments to Certain Types of Issuers
Rule 3–10’s requirements apply to
several categories of issuers, including
foreign private issuers,177 smaller
reporting companies (‘‘SRCs’’),178 and
issuers offering securities pursuant to
Regulation A. The proposed
amendments also would apply to these
types of issuers, because, for the reasons
discussed above, we believe investors
would benefit from the simplified and
improved disclosures that would result
from the proposed amendments and the
cost of providing the disclosures would
be reduced for these types of issuers. In
certain circumstances, Rule 3–10 also
applies to the financial information of
177 See 17 CFR 230.405, 240.3b–4 (defining
‘‘foreign private issuer’’).
178 See 17 CFR 230.405, 240.12b–2 (defining
‘‘smaller reporting company’’).
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third parties provided by issuers of
asset-backed securities (‘‘ABS’’). We
also believe the proposed amendments
should be extended to the financial
information of such third parties for the
reasons discussed above.
Request for Comment
65. Should the proposed changes to
Rule 3–10 also apply to these types of
issuers? If so, why? If not, why not? Do
investors in guaranteed securities issued
by these types of issuers require
additional, different, or less information
to make informed investment decisions
than would be required by the proposed
rule? If so, what information and why?
66. How frequently do these types of
issuers issue guaranteed securities? Is
there a reason to believe they may offer
them more often under the proposed
rules? Why or why not?
67. Are other conforming changes to
the proposed rules necessary for them to
apply to these types of issuers? If so,
what changes are necessary and why?
68. Should the proposed amendment
that would permit the parent company
to provide the Proposed Alternative
Disclosures outside the footnotes to its
audited annual and unaudited interim
consolidated financial statements in its
registration statement covering the offer
and sale of the guaranteed securities and
any related prospectus, and in Exchange
Act annual and quarterly reports
required to be filed during the fiscal
year in which the first bona fide sale of
the subject securities is completed apply
differently to these types of issuers?
Why or why not? For example, are there
different filings or periods of time that
the parent company should be
permitted to provide the Proposed
Alternative Disclosures outside of its
financial statements for these types of
issuers? As another example, should the
proposed rule prescribe different
locations outside the financial
statements where the Proposed
Alternative Disclosures should be
provided for these types of issuers? In
each case, what are they and why? How
would investors and issuers be affected?
1. Foreign Private Issuers
Under the proposal, foreign private
issuers would continue to be required to
comply with Rule 3–10, and would also
be required to comply with proposed
Rule 13–01. As foreign private issuers
would be required to provide the
disclosures specified in proposed Rule
13–01, Instruction 1 to Item 8 of Form
20–F would be amended to specifically
require compliance with proposed Rule
13–01. We are also proposing
amendments to conform Forms F–1 and
F–3 to the streamlined structure of
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49651
proposed Rule 3–10(a). General
Instruction I.B of Form F–1 and the note
to General Instruction I.A.5 of Form F–
3 contain eligibility requirements for the
use of these forms applicable to issuers
and guarantors of guaranteed securities
that are majority-owned subsidiaries.
Rather than the current form language
stating that Rule 3–10 specifies the
financial statements that are required,
we are proposing to amend these forms
to instead state that the requirements of
Rule 3–10 are applicable to financial
statements for those subsidiary issuers
or guarantors.
Existing Rule 3–10(a)(3) includes a
reference, solely for convenience,
directing foreign private issuers to Item
8.A of Form 20–F rather than having
them go first to Rules 3–01 and 3–02 of
Regulation S–X to determine the periods
for which financial statements are
required.179 We propose to simplify the
rule by deleting this reference.
Also, existing Rule 3–10(i)(12)
requires a parent company that prepares
its financial statements on a
comprehensive basis other than U.S.
GAAP or IFRS as issued by the
International Accounting Standards
Board to reconcile Consolidating
Information to U.S. GAAP. Because of
the supplemental nature of the Proposed
Alternative Disclosures and the
requirement in Item 18 of Form 20–F
that the parent company’s consolidated
financial statements be reconciled to
U.S. GAAP, we do not believe
continuing to include a requirement to
reconcile the financial information
included in the Proposed Alternative
Disclosures to U.S. GAAP is necessary.
Although the reconciliation requirement
would be eliminated, proposed Rule 13–
01(a)(5) would require the parent
company to disclose any other
quantitative or qualitative information
that would be material to making an
investment decision with respect to the
guaranteed security.
Request for Comment
69. Should a parent company that
prepares its financial statements on a
comprehensive basis other than U.S.
GAAP or IFRS as issued by the
International Accounting Standards
Board be required to reconcile the
proposed financial disclosures specified
in proposed Rule 13–01(a)(4) to U.S.
GAAP, similar to the requirement of
existing Rule 3–10(i)(12)? If so, why? If
not, why not?
179 Rule 3–01(h) of Regulation S–X and Rule 3–
02(d) of Regulation S–X direct foreign private
issuers to Item 8.A of Form 20–F.
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2. Smaller Reporting Companies
Note 3 to Rule 8–01 of Regulation S–
X requires compliance with existing
Rule 3–10 if the subsidiary of an SRC
issues securities guaranteed by the SRC
or the subsidiary guarantees securities
issued by the SRC, except that the
periods presented are those required by
17 CFR 210.8–02 (‘‘Rule 8–02 of
Regulation S–X’’). Because the
subsidiary issuer or guarantor is itself a
registrant, it is required to file financial
statements meeting the requirements of
Regulation S–X. Such financial
statements may be prepared in
accordance with 17 CFR 210.8–01
through 210.8–08 (Article 8 of
Regulation S–X) so long as the
subsidiary issuer or guarantor qualifies
as an SRC.180 Consistent with the
existing rule, if the conditions of
proposed Rule 3–10 are satisfied, the
subsidiary issuer’s or guarantor’s
financial statements may be omitted.
While the substance of this requirement
would not change, we are proposing
amendments to Note 3 to Rule 8–01 to
conform it to the streamlined structure
of proposed Rule 3–10(a). Rather than
stating that the subsidiary issuer or
guarantor of the SRC issuer or guarantor
must present financial statements as
required by existing Rule 3–10, Note 3
to Rule 8–01 would instead state that
the requirements of proposed Rule 3–10
are applicable to financial statements of
the subsidiary issuer or guarantor. In
addition, we are proposing to add a
sentence to Note 3 to Rule 8–01 to
require an SRC to provide the
disclosures specified in proposed Rule
13–01. Lastly, because Item 1 of Part I
of Form 10–Q permits an SRC to
provide the information required by
Rule 8–03 of Regulation S–X if it does
not provide the information required by
Rule 10–01, we are proposing to add
Rule 8–03(b)(7) to require compliance
with Rules 3–10 and 13–01.
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3. Offerings Pursuant to Regulation A
In connection with offerings made
pursuant to Regulation A,181 Forms 1–
A,182 1–K,183 and 1–SA 184 direct an
entity (‘‘Regulation A Issuer’’) to present
financial statements of a subsidiary that
issues securities guaranteed by the
parent company or guarantees securities
issued by the parent company as
required by Rule 3–10 for the same
periods as the Regulation A Issuer’s
180 17
CFR 229.10(f).
CFR 230.251–230.263.
182 17 CFR 239.90.
183 17 CFR 239.91.
184 17 CFR 239.92.
181 17
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financial statements,185 because under
these circumstances such subsidiary
issuers or guarantors would themselves
be Regulation A Issuers. Consistent with
existing requirements, if the conditions
of proposed Rule 3–10 are satisfied, the
subsidiary issuer’s or guarantor’s
financial statements may be omitted.
While the substance of this requirement
would not change, we are proposing
amendments to Forms 1–A, 1–K, and 1–
SA to conform the requirements to the
streamlined structure of proposed Rule
3–10(a). Rather than stating that the
subsidiary issuer or guarantor of the
parent company must present financial
statements as required by existing Rule
3–10, Forms 1–A, 1–K, and 1–SA would
instead state that the requirements of
proposed Rule 3–10 are applicable to
financial statements of the subsidiary
issuer or guarantor. Additionally, the
proposed amendments would modify
each form to require the disclosures
specified in proposed Rule 13–01 and
specify the location of the disclosures,
similar to the proposed note to Rule 13–
01(a) but consistent with the
requirements of Regulation A. However,
if a parent company elects to provide
the disclosures in its audited financial
statements, the Proposed Alternative
Disclosures would be required to be
audited.
4. Issuers of Asset-Backed Securities—
Third Party Financial Statements
The disclosure items for issuers of
ABS, set forth in Regulation AB,186
specify circumstances when an ABS
issuer must provide financial
information for certain third parties 187
in its filings. For example, under
Regulation AB, financial information
about significant obligors of pool assets
and guarantors of those pool assets may
be required. In lieu of providing the
185 Forms 1–A and 1–K also specify the audit
requirements applicable to financial statements of
other entities, which includes those of subsidiary
issuers and guarantors of an issuer offering
guaranteed securities pursuant to Regulation A. We
are not proposing any changes to these audit
requirements for circumstances where the separate
financial statements of subsidiary issuers and
guarantors are filed.
186 17 CFR 229.1100 through 229.1125.
187 These third parties include: (1) Significant
obligors of pool assets, 17 CFR 229.1112(b); (2)
entities that provide credit enhancement and other
support, except for certain derivative instruments,
17 CFR 229.1114(b)(2); and (3) certain derivative
instrument counterparties, 17 CFR 229.1115(b).
Depending on the specified measures of
significance, the financial information required for
these third parties ranges from selected financial
data required by 17 CFR 229.301 (Item 301 of
Regulation S–K) to audited financial statements
meeting the requirements of Regulation S–X (except
Rule 3–05 of Regulation S–X and 17 CFR 210.11–
01 through 210.11–03 (Article 11 of Regulation S–
X)).
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financial information of certain
unrelated significant obligors, if certain
conditions are met, Item 1100(c)(2) of
Regulation AB permits the ABS issuer to
reference the significant obligor’s
Exchange Act reports (or, for certain
circumstances, its parent’s Exchange
Act reports) on file with the
Commission. One of these conditions is
that the significant obligor meets one of
the categories of eligible significant
obligors specified in Item 1100(c)(2)(ii)
of Regulation AB. Of these eligible
categories, two relate to pool assets
guaranteed by a parent or subsidiary of
the significant obligor, as outlined in
Items 1100(c)(2)(ii)(C) and (D). For these
two categories, Item 1100(c)(2)(ii)
permits an ABS issuer to reference
Exchange Act reports containing the
parent’s consolidated financial
statements if the information
requirements of Rule 3–10 of Regulation
S–X and certain other conditions are
satisfied.
We are proposing conforming
amendments to Items 1100(c)(2)(ii)(C)
and (D) of Regulation AB because we are
proposing to relocate the disclosure
requirements associated with issuers
and guarantors of guaranteed securities
to proposed Rule 13–01. Thus, rather
than refer to the information
requirements of Rule 3–10, Items
1100(c)(2)(ii)(C) and (D) would instead
state that disclosures specified in
proposed Rule 13–01 must be provided
in the reports to be referenced and that
financial statements of the subsidiary
third party or subsidiary guarantor, as
applicable, may be omitted if the
requirements of proposed Rule 3–10 are
satisfied. The function of the eligible
categories in Items 1100(c)(2)(ii)(C) and
(D) would not change under the
proposed revisions.
Additionally, we are proposing
conforming amendments to Items 1112,
1114, and 1115 of Regulation AB and
Item 504 of Regulation S–K because the
citations to Regulation S–X in those
item requirements refer to Regulation S–
X as encompassing ‘‘210.1–01 through
210.12–29.’’ Those citations would be
updated to include proposed Rules 13–
01 and 13–02 of Regulation S–X.
IV. Rule 3–16 of Regulation S–X
Rule 3–16 contains requirements for
affiliates whose securities are pledged as
collateral for securities registered or
being registered. Existing Rule 3–16
requires a registrant to provide separate
annual and interim 188 financial
statements for each affiliate whose
188 Rule 3–16 Financial Statements are not
required in quarterly reports, such as on Form 10–
Q. See Section III.A.6. of the 2000 Release.
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securities constitute a ‘‘substantial
portion’’ of the collateral for any class
of securities registered or being
registered as if the affiliate were a
separate registrant (‘‘Rule 3–16
Financial Statements’’).189 Rule 1–02(b)
of Regulation S–X defines an ‘‘affiliate’’
by stating that an ‘‘affiliate of, or a
person affiliated with, a specific person
is a person that directly, or indirectly
through one or more intermediaries,
controls, or is controlled by, or is under
common control with, the person
specified’’ (emphasis in original).190 In
practice, affiliates whose securities
collateralize a registered security are
almost always consolidated subsidiaries
of that registrant.
Whether an affiliate’s portion of the
collateral is a ‘‘substantial portion’’ is
determined by comparing the highest
amount among the aggregate principal
amount, par value, book value, or
market value of the affiliate’s securities
to the principal amount of the securities
registered or being registered. If the
highest of those values equals or
exceeds 20 percent of the principal
amount of the securities registered or
being registered for any fiscal year
presented by the registrant, Rule 3–16
Financial Statements are required.191
The requirements in existing Rule 3–
16 have remained unchanged for many
years,192 and we are proposing changes
to improve the disclosures required by
the rule.
V. Proposed Amendments to Rule 3–16
and Relocation to Rule 13–02
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A. Overarching Principle
Our proposed amendments to Rule 3–
10 are based on the principle that
investors in guaranteed securities rely
primarily on the consolidated financial
statements of the parent company as
supplemented by details about the
subsidiary issuers and guarantors when
making investment decisions. Similarly,
we believe that the consolidated
financial statements of the registrant are
the most relevant information for
investors when making investment
decisions about that registrant’s
securities that are collateralized by
securities of its affiliate(s). The pledge of
collateral is a residual equity interest
that could potentially be foreclosed
upon only in the event of default and
almost always relates to an affiliate
189 Rule 3–16(a) of Regulation S–X. These
financial statements are required to be provided for
the periods required by Rules 3–01 and 3–02 of
Regulation S–X.
190 Rule 1–02(b) of Regulation S–X.
191 Rule 3–16(b) of Regulation S–X.
192 See Separate Financial Statements Required
by Regulation S–X, Release No. 33–6359 (Nov. 6,
1981) [46 FR 56171 (Nov. 16, 1981)].
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whose financial information is already
included in the registrant’s consolidated
financial statements.193 While we
believe information about the affiliate(s)
whose securities are pledged as
collateral is material for an investor to
consider potential outcomes in the
event of foreclosure, we believe that
separate financial statements of each
such affiliate are not material in most
situations. Rather, we believe the nature
and extent of disclosures about the
affiliate(s) and the related collateral
arrangement should be consistent with
the supplemental nature of the
information and better balanced with
the cost of providing such disclosures.
B. Overview of the Proposed Changes
Although affiliates whose securities
are pledged as collateral are not
registrants with respect to the
collateralized security, and are not
generally subject to the related reporting
requirements, existing Rule 3–16
requires financial statements as if the
affiliates were registrants. This
requirement is more onerous than those
that apply to other forms of credit
enhancements, such as the Alternative
Disclosures permitted under existing
Rule 3–10 or the disclosures required by
17 CFR 210.4–08(b) (‘‘Rule 4–08(b) of
Regulation S–X’’) for assets that are
pledged.194 Additionally, while the
importance of the collateral to an
investor may vary widely from situation
to situation, the existing rule requires
full, audited financial statements for the
affiliate in all circumstances when the
‘‘substantial portion’’ threshold is met,
but no disclosure if the threshold is not
met. For example, Rule 3–16 Financial
Statements may be required if a
registrant issues a small amount of debt
securities, even though an affiliate may
be only a small percentage of the
registrant’s assets and operations, but
may not be required if a registrant issues
a substantial amount of debt securities,
even though an affiliate constitutes a
large percentage of a registrant’s assets
and operations.
193 Generally, in the event of default, the holders
of debt without the benefit of a pledge of collateral
are comparatively disadvantaged. In the event of
default, a holder of a debt security can make claims
for payment directly against the issuer. Unpledged
assets of an issuer’s subsidiaries would generally
only be indirectly accessible to the holder through
bankruptcy proceedings, subordinate to direct
claims against those subsidiaries or their assets. A
debt security that is secured by a pledge of
collateral typically allows a holder to make direct
claims to that collateral in the event of default.
194 Rule 4–08(b) of Regulation S–X requires
disclosure of the approximate amounts of assets
mortgaged, pledged, or otherwise subject to lien and
a brief identification of the obligations
collateralized.
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A number of commenters stated that
debt offerings are often structured to
avoid or limit Rule 3–16 disclosures by
reducing the amount of collateral an
investor might receive in the event of
default, resulting in reduced collateral
packages, or are otherwise structured as
unregistered offerings.195 Other
commenters indicated that debt
agreements may be structured to
specifically release an affiliate’s
securities from collateral if and when
their inclusion would trigger the
requirements of existing Rule 3–16.196
Another commenter indicated that the
requirements of existing Rule 3–16 often
make it uneconomical to secure
publicly-offered bonds with pledges of
stock.197
We are proposing to replace the
existing requirement—that a registrant
provide separate financial statements for
each affiliate whose securities are
pledged as collateral—with a
requirement that a registrant provide
financial and non-financial disclosures
about the affiliate(s) and the collateral
arrangement as a supplement to the
registrant’s consolidated financial
statements. The supplemental nature of
this information, similar to the proposed
disclosures for issuers and guarantors of
guaranteed securities discussed above,
supports providing registrants with the
flexibility to provide the proposed
disclosures inside or outside the
registrant’s audited annual and
unaudited interim financial statements
in registration statements covering the
offer and sale of the collateralized
securities and any related prospectus, as
well as annual and quarterly Exchange
Act periodic reports required to be filed
during the fiscal year in which the first
bona fide sale of the subject securities
is completed.198 Accordingly, the
195 See, e.g., letters from ABA-Committees, Cahill,
Chamber, Davis Polk, DT, and EY.
196 See, e.g., letters from Covenant, Davis Polk,
KPMG, and PwC.
197 See letter from Davis Polk.
198 Similar to the proposed disclosures for issuers
and guarantors of guaranteed securities discussed
above, the note to proposed Rule 13–02(a) would
allow the registrant to provide the disclosures
required by this section in a footnote to its
consolidated financial statements or alternatively,
in MD&A in its registration statement covering the
offer and sale of the subject securities and any
related prospectus, and in Exchange Act reports on
Form 10–K, Form 20–F, and Form 10–Q required
to be filed during the fiscal year in which the first
bona fide sale of the subject securities is completed.
If not otherwise included in the consolidated
financial statements or in MD&A, the registrant
would be required to include the disclosures in its
prospectus immediately following ‘‘Risk Factors,’’ if
any, or otherwise, immediately following pricing
information described in Item 503(c) of Regulation
S–K. The registrant, however, would be required to
provide the disclosures in a footnote to its
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disclosure requirements in Rule 3–16
would be amended and relocated to
proposed Rule 13–02.
Additionally, instead of requiring
disclosure only when the pledged
securities meet or exceed a numerical
threshold relative to the securities
registered or being registered under the
existing rule’s ‘‘substantial portion’’ test,
the proposed amendments would
require disclosure unless they are
immaterial to holders of the
collateralized security. Further, the
proposed changes would require
disclosure of any additional information
about the collateral arrangement and
each affiliate whose security is pledged
as collateral that would be material to
holders of the collateralized securities.
We believe these proposed disclosures
would enable an investor to evaluate the
potential outcomes in the event of
foreclosure, would reduce costs and
burdens on registrants, and may
facilitate the use of debt structures that
include pledges of affiliate securities,
resulting in improved collateral
packages being available to investors.
The proposed disclosure requirements
are discussed further below.
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Request for Comment
70. Should the proposed amendments
to Rule 3–16 be based on the approach
described above? If so, why? If not, what
approach should be used and why?
71. Would the proposed amendments
to existing Rule 3–16 result in an
increase in the number of registered
debt offerings that include pledges of
affiliate securities as collateral? Why or
why not? How would increasing the
number of registered debt offerings that
include pledges of affiliate securities
affect investors and issuers?
72. Do issuers structure registered
debt offerings to not include pledges of
affiliate securities as collateral because
of concerns about compliance with
existing Rule 3–16? If so, what are the
specific concerns? Are issuers choosing
to engage in private debt offerings that
include pledges of affiliate securities as
collateral?
consolidated financial statements in its annual and
quarterly reports beginning with its annual report
filed on Form 10–K or Form 20–F for the fiscal year
during which the first bona fide sale of the subject
securities is completed. If the registrant elects to
provide the proposed disclosures in its financial
statements, the disclosures would be subject to
annual audit, interim review, internal control over
financial reporting, and XBRL tagging requirements.
See Section III.C.2.d, ‘‘Location of Proposed
Alternative Disclosures and Audit Requirement.’’
These proposed amendments would also apply to
foreign private issuers and issuers offering
securities pursuant to Regulation A and the forms
applicable to such entities. See Section V.F,
‘‘Application of Proposed Amendments to Certain
Types of Issuers,’’ below.
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73. What factors do issuers consider
in determining whether to structure a
debt offering to include pledges of
affiliate securities as collateral, and how
are they considered?
74. How do investors use the Rule 3–
16 Financial Statements? For example,
how do retail investors, institutional
investors, or third parties, such as
financial analysts, use the information?
How would these investors use the
proposed disclosures specified in
proposed Rule 13–02?
75. Would the proposed amendments
to existing Rule 3–16 improve the
disclosures provided to investors? If so,
how? Are there other changes to the rule
that we should consider that would
improve disclosures to investors? If so,
what are they and how would they
improve disclosure?
76. Would the proposed amendments
to existing Rule 3–16 make the rule less
burdensome and, thereby, encourage
issuers to structure debt offerings to
include pledges of affiliate securities as
collateral? Are there other changes to
the rule that we should consider that
would reduce compliance burdens for
issuers but continue to provide the
material information investors need to
make informed investment decisions?
77. Would the proposed amendments
to existing Rule 3–16 result in issuers
omitting disclosures that investors or
financial analysts rely on? If so, which
disclosures? Would such a change in the
disclosures have an effect on investor
participation in registered debt offerings
that include pledges of affiliate
securities as collateral?
78. Are there alternative approaches
to disclosures about affiliates whose
securities are pledged as collateral that
would benefit investors? If so, what are
they and why? How would investors use
the disclosures under these alternative
approaches? How would such
approaches impact issuers?
79. Should the proposed rule permit
the registrant to provide the proposed
disclosures outside its financial
statements in the proposed
circumstances described? Alternatively,
should the registrant be permitted to
provide the proposed disclosures
outside its financial statements in all
circumstances? What are the potential
benefits or concerns for investors and
issuers with either approach?
80. Would requiring the proposed
disclosures to be included in a footnote
to the registrant’s audited annual and
unaudited interim financial statements
beginning with its annual report filed on
Form 10–K or Form 20–F for the fiscal
year during which the first bona fide
sale of the guaranteed securities is
completed be useful to investors? If so,
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why? If not, why not? What are the
potential benefits or concerns for
investors and issuers with either
approach?
81. Would requiring the proposed
disclosures to be audited or reviewed
present costs or challenges for
registrants? If so, what are they? For
example, would it cause delays in the
offering process?
82. Should the proposed rule specify
where in a filing the disclosures
required by proposed Rule 13–02 must
appear if the registrant chooses not to
include them in its financial statements?
Why or why not? If yes, are the
locations required by the Note to
proposed Rule 13–02(a) appropriate? If
so, why? If not, why not? Where should
these disclosures be located and why is
that location appropriate?
83. Would issuers be more likely to
voluntarily provide supplemental
information in addition to the required
proposed disclosures to the extent the
PSLRA applied to such supplemental
information? Why or why not?
84. Should the note to proposed Rule
13–02(a) apply differently to emerging
growth companies? Why or why not?
For example, should there be different
filings or periods of time if the registrant
is an emerging growth company? If so,
what should be different and why? How
would investors and issuers be affected?
C. Financial Disclosures
1. Level of Detail
Existing Rule 3–16 requires separate
financial statements of each affiliate
whose securities constitute a substantial
portion of the collateral. Commenter
recommendations for the type of
financial disclosure that should be
provided about such affiliates were
varied. For example, one commenter
expressed its support for the existing
requirements,199 and another suggested
elimination of the existing rule.200 A
number of commenters recommended
allowing disclosures other than separate
financial statements,201 and some
specifically suggested requiring
summarized financial information.202
The affiliates whose securities are
pledged as collateral are almost always
199 This commenter supported requiring financial
statements as though the affiliate were a registrant,
despite the fact that the collateral pledge is not
considered a separate security. See letter from
CalPERS.
200 This commenter stated that it is not aware of
a single Rule 144A offering that has included Rule
3–16 financial statements that were not otherwise
already available. See letter from Davis Polk.
201 See, e.g., letters from BDO, CAQ, Chamber,
Covenant, DT, EY, KPMG, and PwC.
202 See, e.g., letters from ABA-Committees, BDO,
Chamber, and EY.
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consolidated subsidiaries of the
registrant, and their financial
information is thus already reflected in
the registrant’s consolidated financial
statements. We therefore believe the
required supplemental financial
information about such affiliates should
be focused on the information that is
most likely to be material to an
investment decision. As such, proposed
Rule 13–02(a)(4) would require
Summarized Financial Information, a
widely understood and common set of
requirements, for each such affiliate,
which would include select balance
sheet and income statement line
items.203 Disclosure of additional line
items of financial information beyond
what is specified in proposed Rule 13–
02(a)(4) would be required by proposed
Rule 13–02(a)(5) if they are material to
an investment decision. For example, if
a material amount of reported revenues
of the affiliate(s) are derived from
transactions with related parties, such
as other subsidiaries of the registrant
whose securities are not pledged as
collateral, disclosure of such related
party revenues would be required.
When used in conjunction with the
consolidated financial statements of the
registrant, we believe this supplemental
disclosure of select balance sheet and
income statement line items of the
affiliate(s) whose securities are pledged
would provide the information investors
need to evaluate the potential outcomes
in the event of foreclosure. We believe
this proposed amendment also would
significantly simplify compliance efforts
and reduce costs for preparers.
One commenter suggested retaining a
financial statement requirement when
the affiliate is not a guarantor and is
either a non-subsidiary controlled
affiliate of the registrant or a controlling
affiliate of the issuer.204 We are not
proposing to retain such a requirement
because practice has demonstrated that
affiliates whose securities are pledged as
collateral are almost always
consolidated subsidiaries of the
registrant. In the rare circumstances
where the affiliate is not a consolidated
subsidiary of the registrant, proposed
Rule 13–02(a)(5) would require the
registrant to provide any other
quantitative or qualitative information
that would be material to making an
investment decision with respect to the
collateralized security.205 Because the
unconsolidated affiliate’s financial
203 As with proposed Rule 13–01(a)(4), the
Summarized Financial Information is the
information specified in Rule 1–02(bb)(1) of
Regulation S–X.
204 See letter from Cahill.
205 See Section V.E, ‘‘When Disclosure is
Required.’’
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information is not included in the
registrant’s consolidated financial
statements, we would expect disclosure
beyond what is specified in proposed
Rule 13–02(a)(1) through (4) to be
provided in these circumstances. In this
regard, separate financial statements of
the unconsolidated affiliate may be
necessary if material to an investment
decision.206
Request for Comment
85. Should the proposed rule require
Summarized Financial Information
about the affiliates whose securities are
pledged as collateral rather than
separate financial statements of each
such affiliate? Why or why not? Would
the Summarized Financial Information,
along with the other disclosures
required by proposed Rule 13–02,
provide the financial information
investors need to make an informed
investment decision with respect to the
collateralized security? Should the
proposed rule require a different type of
information be provided about such
affiliates? How would investors use this
information to assess the value of
affiliate securities pledged as collateral?
86. How would issuers and investors
be affected by requiring Summarized
Financial Information? Are there
particular items in Rule 3–16 Financial
Statements that investors need to make
informed investment decisions that
would not be provided separately
through Summarized Financial
Information? Is there any such financial
information that underwriters would
still require? If so, what would be the
effect on the costs associated with the
offering?
87. An affiliate whose securities are
pledged as collateral for a registrant’s
securities is almost always a
consolidated subsidiary of the
registrant. Should our requirements
specifically address the rare
circumstances where the affiliate is not
a consolidated subsidiary of a
registrant? If so, what should those
requirements be and why? For example,
should we require separate financial
statements of such unconsolidated
affiliates?
88. Would additional line items of
financial information beyond what
would be required by Summarized
Financial Information help investors
make informed investment decisions? If
so, what line items and why? For
example, should the proposed rule
specifically require supplemental
summarized cash flow information
resulting from operating, financing, and
206 See proposed Rule 13–02(a)(5). See also Rule
3–13 of Regulation S–X.
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49655
investing activities? Would issuers face
challenges in providing such
information?
89. Do investors need summarized
cash flow information about affiliates
whose securities are pledged as
collateral in addition to the registrant’s
consolidated cash flow statements to
make informed investment decisions
about collateralized securities? If so,
how is it used? If not, why not?
2. Presentation on a Combined Basis
The existing test used to determine
whether the securities of an affiliate
constitute a ‘‘substantial portion’’ of the
collateral for securities registered or
being registered is required to be
performed for each affiliate whose
securities are pledged. The views of
commenters were mixed regarding
whether financial disclosures about
affiliates whose securities are pledges
should be combined. For example, one
commenter recommended financial
disclosures of each affiliate be
required,207 another recommended that
we permit financial information to be
combined in certain circumstances,208
and another recommended separate or
combined presentation.209
When the securities of more than one
affiliate that is consolidated in the
registrant’s financial statements are
pledged as collateral, we believe
disclosure of the financial information
of such affiliates on a combined basis
would provide investors with the
material information they need to assess
the value of possible recoveries from the
pledged securities in a more clear and
streamlined manner than if individual
sets of financial information were
required for each such affiliate. We note
that the existing requirements can result
in potentially confusing disclosure
about the extent of collateral. For
example, when the securities of a
registrant’s subsidiary (‘‘Subsidiary A’’)
are pledged as collateral and the
securities of an entity consolidated by
Subsidiary A (‘‘Subsidiary B’’) are also
pledged, separate Rule 3–16 Financial
Statements may be required for both
Subsidiary A and Subsidiary B. In such
a scenario, Subsidiary B’s assets,
liabilities, operations, and cash flows
would be included twice (i.e., in the
financial statements of both Subsidiary
A and Subsidiary B). We believe
disclosure on a combined basis of all
consolidated affiliates whose securities
are pledged would address this
207 See
letter from PwC.
commenter recommended that we permit
the combining of the financial information of
affiliates whose ownership percentages are
essentially the same. See letter from EY.
209 See letter from DT.
208 This
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potential confusion. Furthermore, in the
event of default by the registrant, we
would expect an investor to make
claims to all of the affiliate securities
that are pledged.
Accordingly, we believe an investor
could more effectively and efficiently
assess the value of possible recoveries
from the securities pledged as collateral
by evaluating the combined financial
information of the group of consolidated
affiliates whose securities are pledged as
opposed to performing this assessment
for each such affiliate individually. As
such, our proposed amendments would
permit a registrant to disclose the
financial information of such
consolidated affiliates on a combined
rather than individual basis. Proposed
Rule 13–02(a)(4) would require
intercompany transactions between
affiliates presented on a combined basis
to be eliminated. Unlike the proposed
amendments to Rule 13–01, because the
securities pledged as collateral are an
equity interest in that pledgor affiliate,
the financial information of all
subsidiaries that would be consolidated
by that affiliate would be included in
the Summarized Financial Information
presented pursuant to proposed Rule
13–02(a)(4), even if the securities of
those subsidiaries are not pledged as
collateral.210
We recognize that there may be
circumstances where separate financial
information about certain affiliates is
material to an investment decision.
Accordingly, when the information
provided in response to proposed Rule
13–02 is applicable to one or more, but
not all, affiliates, proposed Rule 13–
02(a)(4) would require, if it is material,
separate disclosure of Summarized
Financial Information for the affiliates
to which it is applicable. For example,
if securities of one, but not all, of the
affiliates that are pledged as collateral
are subject to a contractual or statutory
delay from being transferred to the
holder of the collateralized security in
the event of default, disclosure of these
facts and circumstances would be
required by proposed Rule 13–02(a)(2).
In that case, proposed Rule 13–02(a)(4)
would require separate disclosure of the
Summarized Financial Information
specified in proposed Rule 13–02(a)(4)
for that affiliate, if material.
210 Proposed Rule 13–01 prohibits combining the
financial information of non-issuer and nonguarantor subsidiaries of issuers and guarantors
with that of issuers and guarantors in the Proposed
Alternative Disclosures in order to distinguish the
financial information of entities that are legally
obligated to pay from those that are not. Proposed
Rule 13–02 relates to pledged residual equity
interests in affiliates as opposed to guarantees to
pay, and as such, no similar prohibition is
necessary.
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Generally, a pledge of an affiliate’s
securities as collateral includes all of
the outstanding ownership interests in
that affiliate, which are held directly or
indirectly by the entity issuing the debt
securities. There could be circumstances
where either the pledge of collateral
does not include all of the outstanding
ownership interests in the affiliate held
by the issuing entity, or certain
ownership interests in the affiliate are
held by a third party and therefore
unpledged. In such cases, disclosure of
these facts and circumstances would be
required by proposed Rule 13–02(a)(5).
If such circumstances are applicable to
one or more, but not all, affiliates,
proposed Rule 13–02(a)(4) would
require, if it is material, separate
disclosure of Summarized Financial
Information for the affiliates to which it
is applicable.
Request for Comment
90. Is separate financial information
of each affiliate whose securities are
pledged as collateral material
information necessary for an investor to
assess the value of the collateral? If so,
why? If not, why not? How would
providing the information of each such
affiliate on a combined basis affect this
assessment? Are there specific
circumstances where separate
information should be required?
91. Should we permit the financial
disclosure of the consolidated affiliates
whose securities are pledged as
collateral to be combined within the
proposed Summarized Financial
Information? Why or why not?
Alternatively, should combined
disclosure of the proposed Summarized
Financial Information only be permitted
under certain circumstances? If so,
under which circumstances should it be
permitted and why?
3. Periods to Present
Proposed Rule 13–02(a)(4) would
require the disclosure of Summarized
Financial Information as of, and for, the
most recently ended fiscal year and
interim period included in the
registrant’s consolidated financial
statements. When used in connection
with the registrant’s consolidated
financial statements, we believe the
most recent full fiscal year and interim
period should provide investors the
information that is material in
evaluating possible recoveries from the
pledged securities of affiliate(s) in the
event of default. Under the existing rule,
Rule 3–16 Financial Statements are not
required in quarterly reports, such as on
Form 10–Q.211 One commenter
211 See
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suggested that interim information may
not be meaningful given it is currently
only required in certain registration
statements but not in subsequent Forms
10–Q.212 However, we believe that the
most recent interim period should be
provided so that investors can make
decisions based on the most recent
information available. As such, the
disclosures would be required in
quarterly filings, such as Form 10–Q.
Because Item 1 of Part I of Form 10–Q
requires a registrant to provide the
information required by Rule 10–01 of
Regulation S–X, we are proposing to
add Rule 10–01(b)(10) to require
compliance with proposed Rule 13–02.
Request for Comment
92. What periods of presentation of
supplemental financial information
about affiliates whose securities are
pledged as collateral are material for
investors when evaluating the
collateralized security?
93. Should the required periods of
supplemental financial information of
affiliates whose securities are pledged as
collateral be based on the most recent
financial information? Why or why not?
If so, what periods should be considered
‘‘most recent,’’ and why?
94. Should the proposed rule require
any additional periods of Summarized
Financial Information beyond the most
recent fiscal year and interim period?
Why or why not? If yes, which periods
and why?
95. Rather than requiring disclosure of
the most recent interim period, should
the proposed rule focus on significant
changes similar to Rule 10–01(a)(5) of
Regulation S–X, which allows
registrants to apply judgment and omit
details of accounts that have not
changed significantly in amount or
composition since the end of the most
recently completed fiscal year? Why or
why not?
D. Non-Financial Disclosures
Under the existing rule, a registrant is
not required to provide non-financial
disclosures about the affiliates and the
collateral arrangement unless they
would be included as part of the Rule
3–16 Financial Statements. Although
the Request for Comment asked if there
is different or additional information
that investors need about affiliates
whose securities collateralize registered
securities, we received no commentary
on non-financial disclosures.
In addition to proposing amendments
to the financial information required
about the affiliates whose securities are
pledged as collateral, the proposed rule
212 See
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would also require specific nonfinancial disclosures to be provided. We
are proposing these changes to enhance
the material information provided about
the affiliates whose securities are
pledged and the pledged securities,
particularly in light of our proposal to
require Summarized Financial
Information for these affiliates.
Proposed Rules 13–02(a)(1) through (3)
would require certain non-financial
disclosures, to the extent material,213
about the securities pledged as
collateral, each affiliate whose securities
are pledged, the terms and conditions of
the collateral arrangement, and whether
a trading market exists for the pledged
securities.
We believe the proposed requirements
would result in enhanced narrative
disclosures that would improve investor
understanding of the affiliates and the
collateral arrangement(s), and make the
financial disclosures they accompany
easier to understand. While the
proposed requirements comprise the
items we believe are most likely to be
material to an investor, there may be
additional facts and circumstances
specific to particular affiliates that
would be material to holders of the
collateralized security. In that case,
proposed Rule 13–02(a)(5) would
require disclosure of those facts and
circumstances.214 Additionally, when a
non-financial disclosure is applicable to
one or more, but not all, affiliates,
proposed Rule 13–02(a)(4) would
require, if it is material, separate
disclosure of Summarized Financial
Information for the affiliates to which it
is applicable.215
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Request for Comment
96. Are the proposed non-financial
disclosures material to an investment
decision? Should we explicitly require
any non-financial disclosures in
addition to what is proposed? If so,
what information and why?
E. When Disclosure Is Required
As discussed above,216 existing Rule
3–16 requires separate financial
statements for each affiliate whose
securities are pledged as collateral when
those securities constitute a ‘‘substantial
portion’’ of the collateral. If the
numerical thresholds specified in the
rule are not met, no disclosure is
required. At the same time, if the
213 See discussion within Section V.E, ‘‘When
Disclosure is Required.’’
214 See discussion within Section V.E, ‘‘When
Disclosure is Required.’’
215 See discussion within Section V.C.2,
‘‘Presentation on a Combined Basis.’’
216 See Section IV, ‘‘Rule 3–16 of Regulation S–
X.’’
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numerical thresholds are met, Rule 3–16
Financial Statements may be required
even though the affiliate represents an
insignificant portion of the registrant’s
consolidated financial statements.
Several commenters recommended
revising the existing ‘‘substantial
portion’’ test by making the
denominator the amount of the
collateralized securities originally
issued, not the amount outstanding as of
the reassessment date,217 or raising the
threshold from 20% to 50%.218 Another
commenter suggested considering
whether other indicators of significance
besides ‘‘market value’’ 219 may be
appropriate given the challenges of
performing the ‘‘market value’’
calculation as part of determining
whether the collateral constitutes a
‘‘substantial portion.’’ 220
Instead of revising the existing
‘‘substantial portion’’ of collateral test,
we propose to replace this test with one
based on materiality, similar to the
framework in proposed Rule 13–01.221
Under this approach, investors would
be provided with disclosure unless it is
immaterial, whereas under the existing
rule, no disclosure would be provided
unless the collateral represented a
‘‘substantial portion.’’ We believe any
incremental burden to registrants of
being required to provide the
disclosures specified in proposed Rule
13–02 in instances where the securities
pledged as collateral did not meet the
‘‘substantial portion’’ numerical
threshold under the existing rule is
justified by the benefit of investors
receiving the disclosures specified in
proposed Rule 13–02 and the reduced
costs to registrants of providing such
proposed disclosures as compared to the
existing Rule 3–16 Financial
Statements.
Proposed Rule 13–02(a) would require
the disclosures specified in proposed
Rule 13–02(a)(1) through (4) to the
extent material to holders of the
217 See, e.g., letters from BDO, CAQ, DT, EY,
KPMG, and PwC. Several of these commenters
noted that, because the denominator of the
‘‘substantial portion of the collateral’’ test is based
on the outstanding principal balance of the
registered debt, the significance of the tested
affiliates will tend to increase as the principal
obligation is reduced.
218 See letter from SIFMA. This commenter noted
that the introduction to existing Rule 3–16(a) states
that the rule shall apply to affiliates whose
securities constitute a ‘‘substantial’’ portion of the
collateral and asserted that, in other contexts,
‘‘substantial’’ is understood to be well above 20%.
219 Rule 3–16(b) of Regulation S–X.
220 See letter from DT.
221 Whether a disclosure specified in proposed
Rule 13–02 may be omitted or whether additional
disclosure would be required by proposed Rule 13–
02(a)(5), as discussed below, depends on whether
it would be material to a reasonable investor. See
Section III.C.2.i, ‘‘Level of Detail,’’ above.
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49657
collateralized security. For example,
under the proposed rule, if the
Summarized Financial Information of
the combined affiliates required by
proposed Rule 13–02(a)(4) is not
materially different from corresponding
amounts in the registrant’s consolidated
financial statements, the information
could be omitted. As another example,
if the securities of an affiliate pledged as
collateral do not represent a material
amount of collateral to an investor, the
investor would likely not require
detailed disclosures about that affiliate
or the collateral arrangement because
the collateral provides little, if any,
credit support, and therefore such
information could be omitted. While the
disclosures specified in proposed Rule
13–02(a)(1) through (4) may be omitted
if not material to holders of the
collateralized security, for clarity,
proposed Rule 13–02(a)(4) requires the
registrant to disclose a statement that
those financial disclosures have been
omitted and the reasons why the
disclosures are not material.
Conversely, there may be additional
information about the collateral
arrangement and affiliates beyond the
financial disclosures specified in
proposed Rule 13–02(a)(4) or the nonfinancial disclosures specified in
proposed Rules 13–02(a)(1) through (3)
that would be material to holders of the
collateralized security. Accordingly,
proposed Rule 13–02(a)(5) would
require disclosure of any quantitative or
qualitative information that would be
material to making an investment
decision with respect to the
collateralized security. For example,
additional financial information beyond
what is required by Summarized
Financial Information would be
required if that information is material
to an investor that holds the
collateralized security.
Request for Comment
97. Should we eliminate the existing
‘‘substantial portion’’ test for
determining whether disclosure is
necessary and instead use a materiality
standard to determine the appropriate
level of disclosure? Would this cause
difficulty in practice? If so, what are
those difficulties and how can they be
avoided? Would further guidance be
necessary? If so, please explain what
guidance is needed. Would the
elimination of the ‘‘substantial portion’’
test and use of a materiality standard
result in a loss of information that
investors currently use to analyze these
securities? If so, what information
would be lost and would it be material
for an investor’s understanding or an
investment decision?
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98. Should the proposed rule also
permit the financial disclosures
specified in proposed Rule 13–02(a)(4)
to be omitted if the amount of collateral
pledged does not exceed a specified
level of significance? Why or why not?
If so, how should significance be
determined, and what should the level
of significance be?
99. Should any additional disclosures
be specifically required if default on the
collateralized security reaches a certain
level of likelihood? If so, what type of
disclosure and when should it be
provided?
100. Are the proposed rules
sufficiently clear about what disclosures
should be provided and when? If not,
how should the rules be revised to
ensure clarity?
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F. Application of Proposed
Amendments to Certain Types of Issuers
Rule 3–16’s requirements apply to
several categories of issuers, including
foreign private issuers, SRCs, and
issuers offering securities pursuant to
Regulation A. The proposed
amendments would also apply to these
types of issuers, because, for the reasons
discussed above, we believe investors
would benefit from the simplified and
improved disclosures that would result
from the proposed amendments and the
cost of providing the disclosures would
be reduced for these types of issuers.
Request for Comment
101. Should the proposed changes to
Rule 3–16 also apply to these types of
issuers? If so, why? If not, why not? Do
investors in securities that include
pledges of affiliate securities as
collateral issued by these types of
issuers require additional, different, or
less information to make informed
investment decisions than would be
required by the proposed rule? If so,
what information and why?
102. How frequently do these types of
issuers issue securities that include
pledges of affiliate securities as
collateral? Is there a reason to believe
they may offer them more often under
the proposed rules? Why or why not?
103. Are other conforming changes to
the proposed rules necessary for them to
apply to these types of issuers? If so,
what changes are necessary and why?
104. Should the proposed amendment
that would permit the registrant to
provide the proposed disclosures
outside the footnotes to its audited
annual and unaudited interim
consolidated financial statements in its
registration statement covering the offer
and sale of the collateralized securities
and any related prospectus, and in
Exchange Act annual and quarterly
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reports required to be filed during the
fiscal year in which the first bona fide
sale of the subject securities is
completed apply differently to these
types of issuers? Why or why not? For
example, are there different filings or
periods of time that the registrant
should be permitted to provide the
proposed disclosures outside of its
financial statements for these types of
issuers? As another example, should the
proposed rule prescribe different
locations outside the financial
statements where the proposed
disclosures should be provided for these
types of issuers? In each case, what are
they and why? How would investors
and issuers be affected?
1. Foreign Private Issuers
Foreign private issuers are required to
comply with existing Rule 3–16, and
would continue to be required to
comply with the disclosures specified in
proposed Rule 13–02. Instruction 1 to
Item 8 of Form 20–F would be amended
to specifically require compliance with
proposed Rule 13–02.
2. Smaller Reporting Companies
Note 4 to Rule 8–01 of Regulation S–
X requires financial statements to be
presented as required by Rule 3–16 for
an SRC’s affiliate whose securities
constitute a substantial portion of the
collateral for securities registered or
being registered, except that the periods
presented are those required by Rule 8–
02 of Regulation S–X. As we are
proposing to eliminate Rule 3–16 and
require the disclosures specified in
proposed Rule 13–02, SRCs would be
required to comply with proposed Rule
13–02. A corresponding change to Note
4 to Rule 8–01 is therefore being
proposed. Additionally, as proposed
Rule 13–02(a)(4) specifies the periods of
Summarized Financial Information that
would be required to be presented, no
reference in Note 4 to Rule 8–01 to the
periods required by Rule 8–02 of
Regulation S–X is necessary and would
be removed. Lastly, because Item 1 of
Part I of Form 10–Q permits a SRC to
provide the information required by
Rule 8–03 of Regulation S–X if it does
not provide the information required by
Rule 10–01, we are proposing to add
Rule 8–03(b)(8) to require compliance
with proposed Rule 13–02.
3. Offerings Pursuant to Regulation A
In connection with offerings made
pursuant to Regulation A, Forms 1–A
and 1–K direct a Regulation A Issuer to
comply with Rule 3–16 for the same
periods as the Regulation A Issuer’s
financial statements and specifies the
applicable audit requirements.
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Accordingly, we propose to replace the
existing requirement in the forms that
Regulation A Issuers comply with Rule
3–16 with a requirement to provide the
disclosures specified in proposed Rule
13–02 and specify the location of the
disclosures, similar to the proposed note
to Rule 13–02(a) but consistent with the
requirements of Regulation A.222
Additionally, consistent with the
discussion above about requiring
registrants to comply with proposed
Rule 13–02 in filings made on Form 10–
Q, a requirement to comply with
proposed Rule 13–02 would be added to
Form 1–SA.
VI. General Request for Comment
We request and encourage any
interested person to submit comments
on any aspect of the proposal, other
matters that might have an impact on
the amendments and any suggestions for
additional changes. Comments are of
greatest assistance to our rulemaking
initiative if accompanied by supporting
data and analysis, particularly
quantitative information as to the costs
and benefits, and by alternatives to the
proposals where appropriate. Where
alternatives to the proposals are
suggested, please include information as
to the costs and benefits of those
alternatives.
VII. Economic Analysis
A. Introduction
As discussed above, we are proposing
amendments to the financial disclosure
requirements in Rules 3–10 and 3–16 of
Regulation S–X to improve those
requirements for both investors and
registrants. These proposed
amendments may result in simplified
disclosures that highlight information
that is material to investment decisions.
They may also serve to reduce existing
regulatory burdens that otherwise
inhibit registrants from engaging in
registered debt offerings that are backed
by guarantees or collateral and may
unnecessarily restrict the set of
investment opportunities available to
some investors. The discussion below
addresses the potential economic effects
of the proposed amendments, including
the likely benefits and costs, as well as
the likely effects on efficiency,
competition, and capital formation,
measured against a baseline that
includes both current regulatory
requirements and current market
practices. We also discuss the potential
economic effects of certain alternatives
222 If a Regulation A Issuer elects to provide the
proposed disclosures in its audited financial
statements, such disclosures would be required to
be audited.
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to the proposed amendments.
Throughout this analysis, we draw on
academic studies and incorporate public
comments, where appropriate.
We are mindful of the costs and
benefits of our rules. Section 2(b) of the
Securities Act, Section 3(f) of the
Exchange Act, Section 2(c) of the
Investment Company Act, and Section
202(c) of the Investment Advisers Act
require us, when engaging in
rulemaking that requires us to consider
or determine whether an action is
necessary or appropriate in (or, with
respect to the Investment Company Act,
consistent with) the public interest, to
consider, in addition to the protection of
investors, whether the action will
promote efficiency, competition, and
capital formation.223 Additionally,
Exchange Act Section 23(a)(2) requires
us, when adopting rules under the
Exchange Act, to consider, among other
things, the impact that any new rule
would have on competition and not to
adopt any rule that would impose a
burden on competition that is not
necessary or appropriate in furtherance
of the Exchange Act.224
B. Baseline and Affected Parties
The existing regulatory requirements
of Rules 3–10 and 3–16 under
Regulation S–X have been described
above 225 and have prompted registrants
to adopt disclosure practices and
business practices specifically designed
to comply with or avoid these
requirements. We analyze the economic
effects of the proposed amendments by
assessing their impact on affected
parties as compared to the current state
of the disclosure regime, including both
existing disclosure requirements and
available exemptions, where applicable.
The parties that are likely to be affected
by the proposed amendments include
issuers and guarantors of guaranteed
debt securities, issuers of debt securities
collateralized by securities of issuers’
affiliate(s), and investors in each of
these types of securities.226
223 15
U.S.C. 77b(b), 78c(f), 80a–2(c), and 80b–
2(c).
U.S.C. 78w(a)(2).
Section II for Rule 3–10 and Section IV for
Rule 3–16.
226 While the proposed amendments would apply
to registered investment companies, and could
thereby affect registered investment advisers, based
on staff experience, we believe registered
1. Market Participants
The first main group of market
participants affected by the proposed
amendments consists of issuers and
guarantors of guaranteed debt securities
and issuers of debt securities
collateralized by securities of the
issuer’s affiliates. These issuers would
be affected because the disclosure called
for by the proposed amendments would
differ from the content and format of
financial information currently required
to be presented in registered debt
offerings and in certain ongoing
reporting. The proposed amendments
may also alter the capital raising
decisions of potential issuers.
The second group of market
participants affected by the proposed
amendments consists of investors in
these securities. These investors can be
divided into three main categories: (1)
QIBs; 227 (2) institutional investors
(other than QIBs); and (3) noninstitutional (retail) investors. In
addition to the change in content and
location of the disclosed information
presented to them, which is discussed
below in Section VII.C.1.b, the impact
on these investors would also depend
on whether there is a change in the
number of registered debt offerings by
new issuers, issuers that previously
offered debt securities under Rule 144A,
or both, as a result of the proposed
amendments. Currently, there are four
approaches that issuers often use when
issuing guaranteed or collateralized debt
securities. First, issuers may offer
registered guaranteed and/or
collateralized debt securities and
provide the required disclosures under
existing Rules 3–10 and 3–16. Second,
issuers may opt to privately offer the
debt securities with guarantees or
pledges of affiliate securities as
collateral under Rule 144A with
registration rights. This may allow
issuers to access the capital markets
more quickly than if they had to comply
with existing requirements at initial
issuance. Issuers do, however, have to
provide the disclosures required by
existing Rules 3–10 and 3–16 when the
224 15
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225 See
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investment companies are unlikely to engage in the
activities addressed by the proposed amendments.
Accordingly, we also we believe the proposed
amendments are unlikely to affect registered
investment advisers.
227 17 CFR 230.144A(a)(1).
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privately issued notes are exchanged for
registered notes. Third, issuers may opt
to privately offer securities under Rule
144A without registration rights. Under
this approach, issuers do not have to
provide disclosures required by existing
Rules 3–10 and 3–16, but issuers and
investors are not afforded the benefits of
registration. Fourth, issuers may
structure a registered offering to not
include guarantees or pledges of
affiliated securities as collateral. Here,
while issuers would not have to provide
disclosures required by existing Rules
3–10 and 3–16, they may incur a higher
cost of capital than if they had
structured their debt agreements with
these credit enhancements.
Only QIBs can participate in Rule
144A offerings; retail and institutional
investors are unable to participate in
such offerings. Furthermore,
collateralized debt offerings are often
structured to avoid or limit Rule 3–16
disclosures by reducing the amount of
collateral investors might receive in the
event of default, resulting in reduced
collateral packages. Overall, investors
may experience both a change in the
number of investment opportunities
available, as well as a change in the
information presented to them in
registered offerings.
2. Market Conditions
To provide context for debt securities
offerings likely to be impacted by this
proposal, Table 1 provides estimates of
the number and dollar amount of all
registered debt offerings and Rule 144A
debt offerings per year since 2013.228
The dollar volume of registered debt
and Rule 144A offerings appears to have
increased in recent years, which may be
a result of improving macroeconomic
conditions and a low interest rate
environment.229
228 These estimates are based on staff analysis of
data from the Mergent database. Data specific to
offerings of guaranteed securities and offerings of
securities collateralized by the securities of an
issuer’s affiliate(s) is unavailable. We begin our
sample in the post-financial crisis timeframe in
order to exclude capital raising concerns, liquidity
shocks, and other constraints that are exogenous to
our baseline analysis.
For perspective, the amount of funding obtained
through the registered debt market on an annual
basis is much larger than that obtained through the
registered equity market. See Access to Capital and
Market Liquidity Report.
229 See id.
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TABLE 1—REGISTERED DEBT AND RULE 144A DEBT OFFERINGS FROM 2013–2017
Registered debt
Year
2013
2014
2015
2016
2017
Number of
offerings 230
.................................................................................................................
.................................................................................................................
.................................................................................................................
.................................................................................................................
.................................................................................................................
Rule 144A
$ Amount
(bil)
1,509
1,597
1,560
1,639
1,853
Number of
offerings
1,052
1,113
1,206
1,329
1,298
$ Amount
(bil)
969
920
808
785
995
512
530
575
526
657
Source: DERA staff analysis.
Studies looking at registered debt
offerings and debt offerings made under
Rule 144A find that the two offerings
have distinct characteristics. Issuers
offering debt securities under Rule 144A
have, on average, lower credit quality
and higher information asymmetry than
registered debt offerings,231 conditions
that may increase the likelihood that
investors require guarantees and
collateral relative to investment grade
issuers who may not need such credit
enhancements. This is consistent with
studies that have found the cost of
capital associated with debt offerings
made under Rule 144A to be higher than
the cost of capital in registered debt
offerings.232 According to these studies,
there are two main benefits of Rule
144A offerings: (1) The speed of
issuance, given the absence of a
registration requirement; and (2) relative
high liquidity, given the possibility to
exchange the securities for registered
securities.233
As discussed above,234 Rule 3–10
requires that every issuer of a registered
security that is guaranteed and every
guarantor of a registered security file the
financial statements required for a
registrant by Regulation S–X, except
under certain circumstances when
Alternative Disclosures are permitted.
There are two forms of Alternative
Disclosures prescribed by the rule: (1)
Consolidating Information; and (2) a
brief narrative. Consolidating
Information is the most common type of
alternative disclosure under Rule 3–10.
Table 2 presents data on the number of
unique registrants and filings that
included Consolidating Information
under Rule 3–10 for the period 2013–
2017; 235 the data is consistent with
estimates provided by one
commenter.236
TABLE 2—ESTIMATED NUMBER OF UNIQUE REGISTRANTS AND FILINGS INCLUDING CONSOLIDATING INFORMATION UNDER
RULE 3–10
Year
2013
2014
2015
2016
2017
..........................................
..........................................
..........................................
..........................................
..........................................
Number of
unique
registrants
Number of
total filings
533
530
500
469
403
10–K
1,834
1,861
1,750
1,641
1,430
10–Q
431
461
437
417
369
1,339
1,360
1,288
1,199
1,043
20–F
40–F
12
10
9
8
5
S–1
0
0
0
0
1
S–4
15
9
5
1
1
F–4
34
21
11
16
11
3
0
0
0
0
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Source: DERA staff analysis of Edgar Filings.
The second and less common form of
Alternative Disclosures under existing
Rule 3–10 is a brief narrative. While we
believe the number of filings including
the brief narrative form of Alternative
Disclosure is smaller than the number of
filings using Consolidating
Information,237 we are unable to
determine that number due to
methodological and data extraction
challenges.238
230 Number of offerings does not include
registered exchanges of debt securities previously
issued privately with registration rights.
231 See, e.g., Matteo P. Arena, The Corporate
Choice Between Public Debt, Bank Loans,
Traditional Private Debt Placements, and 144A
Debt Issues, 36 Rev. of Quantitative Fin. & Acct. 391
(2011).
232 See George W. Fenn, Speed of Issuance and
the Adequacy of Disclosure in the 144A High-Yield
Debt Market, 56 J. of Fin. Econ. 383 (2000); Miles
Livingston & Lei Zhou, The Impact of Rule 144A
Debt Offerings Upon Bond Yields and Underwriter
Fees, 31 Fin. Mgmt. 5 (2002); Susan Chaplinsky &
Latha Ramchand, The Impact of SEC Rule 144A on
Corporate Debt Issuance by International Firms, 77
J. of Bus. 1073 (2004); Usha R. Mittoo & Zhou
Zhang, The Evolving World of Rule 144A Market:
A Cross-Country Analysis (2010) (unpublished
working paper) (University of Manitoba, Winnipeg
MD). The studies of Fenn (2000) and Chaplinsky
and Ramchand (2004) find the yield premium
decreased over time, whereas the study of
Livingston and Zhou (2002) and unpublished
working paper of Mittoo and Zhang (2011) do not
observe that trend. Mittoo and Zhang (2011),
however, find that the yield premium increased
after the Sarbanes-Oxley Act was enacted.
233 See, e.g., Fenn, note 232 above.
234 See Section II.A, ‘‘Background.’’
235 To identify these disclosures, we searched all
Forms 10–K, 10–Q, 20–F, 40–F, S–1, S–4, and F–
4 and their amendments using XBRL tags most
commonly associated with Consolidating
Information. The amounts in the table represent the
number of annual, quarterly, and periodic filings
including amendments that are unique for the
covered period in each calendar year from 2013–
2017.
236 See letter from EY. The commenter identified
494 registrants that provided Consolidating
Information by searching for keywords on Form 10–
K filings only. If we limit our search to Form 10–
K filings in 2013, we reach a similar number, which
we believe provides validity to our methodology.
237 As described in Section II.F, ‘‘Exceptions,’’ the
brief narrative form of Alternative Disclosures is
available for three situations. One of these
situations is when a parent company uses a finance
subsidiary to issue securities that the parent
company guarantees, which in our experience is
limited and generally for convenience purposes. As
several commenters noted, the other situations
permitting the brief narrative form of Alternative
Disclosures require additional restrictive conditions
to be met, which greatly limit the circumstances in
which they can be used. See, e.g., letters from ABACommittees, AB–NYC, CAQ, DT, EY, FedEx,
KPMG, and PwC. Based on our experience, we
believe there are fewer instances of the brief
narrative form of Alternative Disclosures than
Consolidating Information.
238 These narrative disclosures are typically no
more than a paragraph in length and vary in content
based on the three scenarios under which the brief
narrative can be provided. We conducted text
searches of EDGAR filings in an attempt to
accurately identify issuers providing narrative
disclosure under Rule 3–10. However, given the
variation in phrasing in these paragraphs, the
search did not produce meaningful results.
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As discussed above,239 under existing
Rule 3–16, a registrant is required to
provide Rule 3–16 Financial Statements
for each affiliate whose securities,
which are pledged as collateral,
constitute a substantial portion of the
collateral for any class of securities
registered or being registered. Table 3
presents data on the number of filings
and unique registrants that included
Rule 3–16 Financial Statements since
2013. The number of registrants
remained steady over this period. Due to
the manual process by which we
attained these estimates, there are likely
more registrants providing Rule 3–16
Financial Statements than are reflected
here.240 However, based on the
comments we received, we do not
expect the number to be significantly
larger.241
TABLE 3—ESTIMATED NUMBER OF UNIQUE REGISTRANTS AND FILINGS INCLUDING RULE 3–16 FINANCIAL STATEMENTS
Number of
unique
registrants
Year
2013
2014
2015
2016
2017
.................................................................................................................
.................................................................................................................
.................................................................................................................
.................................................................................................................
.................................................................................................................
Number of
total filings
7
7
7
7
7
10–K
7
7
7
7
7
20–F
6
6
6
6
6
1
1
1
1
1
Source: DERA staff analysis of EDGAR filings.
Request for Comment
105. Are there reliable sources of
information or robust means of
estimating the proportion of Rule 144A
offerings that do not include registration
rights versus those that do include
registration rights? If so, please describe
these sources and methods.
106. What is the current level of
participation of non-QIB and retail
investors in registered offerings of
corporate debt? Are there reliable
sources of information or robust means
of estimating the proportion of
registered versus unregistered debt
offerings held by different investor types
such as QIBs and non-QIBs? If so, please
describe these sources and methods.
107. How do investors and other
market participants currently use the
information required to be disclosed by
Rules 3–10 and 3–16? Are these
disclosures generally consumed directly
by investors? Is information derived
from these disclosures made available to
investors by financial analysts or other
third party service providers?
C. Anticipated Economic Effects
In this section we discuss the
anticipated economic benefits and costs
of the proposed amendments to Rules
3–10 and 3–16.
1. Proposed Amendments to Rule 3–10
and Partial Relocation to Rule 13–01
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We received a number of comments
indicating that the existing requirements
239 See Section IV, ‘‘Rule 3–16 of Regulation
S–X.’’
240 There are no XBRL tags specific to Rule 3–16.
To identify these disclosures, we searched all
Forms 10–K, 10–Q, 20–F, 40–F, S–1, S–3, S–4, S–
11, F–1, F–3, F–4, 10, 1–A, 1–K, and 1–SA and their
amendments using a text search on the word
combination ‘‘Rule 3–16.’’ We applied different text
search combinations and found that using ‘‘Rule 3–
16’’ offered the most accurate search results. Even
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often lead registered debt agreements to
be structured in such a way as to avoid
compliance with Rule 3–10,242 thereby
depriving certain investors of the
opportunity to invest in guaranteed
securities. Similarly, others noted that
issuers who have not previously issued
guaranteed debt securities often are
deterred by the associated compliance
costs and prefer instead to issue
securities privately through Rule
144A.243 In light of these comments, we
expect the proposed amendments to
benefit issuers and investors. For
example, as a result of the overall
reduced burdens associated with the
proposed amendments, investors may
benefit from access to more registered
offerings that are structured to include
guarantees and, accordingly, the
additional protections that come with
Section 11 liability for disclosures made
in those offerings. Also, an increase in
the overall use of guarantees could
reduce structural subordination issues
that arise. Typically, all of a parent
company’s subsidiaries support the
parent company’s debt-paying ability.
However, in the event of default, the
holders of debt without the benefit of
guarantees are comparatively
disadvantaged. In the event of default, a
holder of a guaranteed debt security
issued by a parent company can make
claims for payment directly against the
issuer and its subsidiary guarantors. The
assets of non-guarantor subsidiaries
typically would be accessible by the
debtholder only indirectly through a
bankruptcy proceeding. In such a
proceeding, absent a guarantee, the
claims of the debtholder would be
structurally subordinate to the claims of
other creditors, including trade creditors
of the non-guarantor subsidiaries. The
less burdensome disclosures under the
proposed amendments may lead to
greater use of guarantees to address
these structural subordination issues,
which could result in more efficient risk
sharing within corporate groups and
potentially a lower cost of capital for
registrants.
Furthermore, the less burdensome
disclosures may lead issuers to register
the initial offerings of guaranteed
securities rather than opting to issue
them under Rule 144A with registration
rights. Issuers may be able to comply
with the proposed rule and access the
capital markets more quickly than under
the existing Rule 3–10 requirements.
These issuers would not incur costs
associated with exchanging the
privately issued debt securities for
registered guaranteed debt securities.
so, we received hundreds of false hit returns. These
were mainly registrants mentioning ‘‘Rule 3–16’’ as
part of a description of collateral release provisions.
That is, if Rule 3–16 were triggered, the debt
agreement would release the collateral that
triggered Rule 3–16. This is consistent with one
commenter who noted that issuers use such release
provisions to avoid compliance with Rule 3–16. See
letter from PwC. We manually sifted through these
false returns to identify the positive results listed
in Table 3.
241 One commenter noted that Rule 3–16
application is rarely seen in practice, see letter from
BDO, while another commenter noted that many
deals are intentionally structured to avoid Rule 3–
16 by using Rule 144A and not providing
registration rights. See letter from Covenant.
242 See, e.g., letters from CAQ and KPMG.
243 See, e.g., letter from Cahill.
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a. Eligibility Conditions To Omit
Financial Statements of Subsidiary
Issuer or Guarantor
As detailed in Section III.C.1.b,
‘‘Consolidated Subsidiary,’’ we propose
to replace one of the conditions that
must be met to be eligible to omit the
separate financial statements of a
subsidiary issuer or guarantor—that the
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subsidiary issuer or guarantor be 100%
owned by the parent company—with a
condition that the subsidiary issuer or
guarantor be consolidated in the parent
company’s consolidated financial
statements. This proposed change
would permit the parent company to
omit the separate financial statements of
a consolidated subsidiary issuer or
guarantor even if third parties hold noncontrolling ownership interests in that
subsidiary issuer or guarantor. However,
the proposed rule would require, to the
extent material, a description of any
factors that may affect payments to
holders of the guaranteed security, such
as the rights of a non-controlling interest
holder.
In addition to the proposed change
from 100% owned to consolidation, we
are proposing changes to simplify the
Rule’s eligibility conditions. Namely, as
discussed in Section III.C.1.d, ‘‘Eligible
Issuer and Guarantor Structures
Condition,’’ the proposed amendments
would replace the five specific issuer
and guarantor structures currently
eligible under the existing rule with a
broader two-category framework. Under
these changes, separate financial
statements of consolidated subsidiary
guarantors may be omitted for each
issuer and guarantor structure that is
eligible. Additionally, unlike the
existing rule, the nature of the
subsidiary guarantees, including
whether the guarantee is full and
unconditional or joint and several,
would no longer impact the eligibility to
omit separate subsidiary financial
statements and instead would only
impact the extent of disclosure in the
Proposed Alternative Disclosures.
Overall, these proposed amendments
would permit a broader scope of issuers
and guarantors to be eligible to provide
the Proposed Alternative Disclosures in
lieu of separate financial statements of
each subsidiary issuer and guarantor
than under existing Rule 3–10. This, in
turn, would reduce the compliance
costs associated with preparation of
disclosures for these registered debt
offerings and ongoing periodic
reporting.244 To the extent there are
more issuers and guarantors that are
eligible to provide the less burdensome
Proposed Alternative Disclosures in lieu
of separate financial statements of each
subsidiary issuer and guarantor under
proposed Rule 3–10, these entities may
be more likely to register their debt
offerings, either at the outset or through
an exempt offering with registration
rights. As a result, some issuers may
realize a lower cost of capital. Such an
outcome would be consistent with
previous studies that have found the
cost of capital associated with registered
debt offerings to be lower than that of
private offerings made under Rule
144A,245 although other issuer
characteristics indicative of
creditworthiness would remain relevant
with respect to the cost of capital,
regardless of offering method.
Additionally, subsidiary issuers and
guarantors that are currently required to
file separate financial statements
because they do not meet existing Rule
3–10’s eligibility criteria would have
reduced compliance costs to the extent
they meet the revised eligibility criteria
under proposed Rule 3–10 and the
Proposed Alternative Disclosures are
provided in lieu of their separate
financial statements.
Certain investors could also benefit
from the proposed amendments to the
eligibility conditions. If issuers opt to
register debt offerings, rather than
structure them as private offerings using
Rule 144A, then new investors—
namely, non-QIB institutional investors
and retail investors who cannot
participate in Rule 144A offerings—
would be eligible to participate in the
offerings. To the extent that the
proposed amendments to the eligibility
conditions encourage additional
registered debt offerings, more
investment opportunities would be
made available, and a resulting increase
in market participation would improve
the overall competitiveness and
efficiency of the capital markets.
Furthermore, these debt offerings would
benefit investors by extending to them
the protections associated with
registration.
244 Commenters highlighted the significant time
and cost associated with preparing the Alternative
Disclosures. See, e.g., letters from Cahill, FedEx,
and Noble-UK. Noble-UK estimated that
compliance with Rule 3–10 requires the equivalent
of approximately two full time employees across its
organization. FedEx estimated that compliance
requires approximately 280 hours per year. Based
on this commenter’s estimate of compliance hours,
estimated compliance costs under the existing rule
amount to $97,000 per year (calculated as 280 hours
× Compliance Attorney at $348 per hour = $97,440
per year). The per hour figure for a Compliance
Attorney is taken from SIFMA’s 2013 Management
& Professional Earnings in the Securities Industry,
modified by Commission staff to account for an
1800-hour work-year and multiplied by 5.35 to
account for bonuses, firm size, employee benefits
and overhead and adjusted for inflation. See Sec.
Indus. and Fin. Mkts. Ass’n (SIFMA), Management
& Professional Earnings in the Securities Industry
(2013), https://www.sifma.org/resources/research/
management-and-professional-earnings-in-thesecurities-industry-2013. For purposes of the
Paperwork Reduction Act of 1995 (‘‘PRA’’), 44
U.S.C. 3501 et seq., we estimate that the proposed
amendments to Rule 3–10 would result in an
overall reduction of 30 burden hours for each form
affected by the proposed amendments. See Section
VIII.B.1, ‘‘Rule 3–10,’’ below.
245 See discussion and references within Section
VII.B.2, ‘‘Market Conditions.’’
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We expect little, if any, adverse effect
on issuers and guarantors of guaranteed
debt securities from these proposed
amendments. We also believe the
adverse effects on investors, if any, are
likely to be limited. Under the existing
rule, investors receive separate financial
statements of subsidiary issuers and
guarantors if these entities are not 100%
owned by the parent company. If these
subsidiaries are consolidated in the
parent company’s financial statements
and all other conditions of proposed
Rule 3–10 are met, investors may no
longer receive the separate financial
statements of these subsidiary issuers
and guarantors. In such cases, although
investors would not receive the detailed
information about each such subsidiary
issuer or guarantor included in the
separate financial statements, a parent
company would be required to provide,
to the extent material, financial and
non-financial information for
consolidated subsidiary issuers and
guarantors with non-controlling
interests, as well as a description of any
factors associated with non-controlling
interest holders that may affect
payments to holders of the guaranteed
security. Where all eligibility conditions
of the proposed rule are met, we believe
the Proposed Alternative Disclosures
would provide the information investors
need to make informed investment
decisions with respect to a guaranteed
security.
Several commenters supported
modifying the 100% owned condition
in the existing rule for reasons
consistent with the analysis above.246
One commenter recommended we
eliminate this condition and instead
require separate disclosure of
subsidiaries providing lesser
guarantees,247 whereas another
commenter stated that the existing
requirement should remain
unchanged.248
b. Disclosure Requirements
As detailed in Section III.C.2,
‘‘Disclosure Requirements,’’ one of the
conditions in the existing rule for
omitting separate financial statements of
a subsidiary issuer or guarantor is
providing the Alternative Disclosures in
the footnotes to the parent company’s
consolidated financial statements. The
proposed rule would retain the
requirement to provide the Alternative
Disclosures, but with modifications. We
address below the proposed
amendments related to the Alternative
246 See, e.g., letters from ABA-Committees, AB–
NYC, Chamber, EY, SIFMA, and PwC.
247 See letter from SIFMA.
248 See letter from CalPERS.
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Disclosures (the Proposed Alternative
Disclosures).
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i. Financial and Non-Financial
Disclosures
As described in Section III.C.2.a,
‘‘Financial Disclosures,’’ we propose to
simplify the financial disclosures
required by current Rule 3–10 by
replacing Consolidating Information
with a requirement to provide
Summarized Financial Information. The
level of detail currently required in
Consolidating Information often
contributes to multiple pages of detail in
the parent company’s financial
statements. The proposed Summarized
Financial Information would focus on
the information that is most likely to be
material to an investment decision. If
additional line items, beyond what is
required in the Summarized Financial
Information are material, they would be
required to be disclosed.
The proposed amendments should
simplify the disclosures and reduce the
cost of compliance and could engender
further benefits. For example, academic
literature finds that simplified financial
statements are associated with more
efficient price discovery,249 and that
investors underreact more to firms with
less readable financial disclosures.250
More generally, we believe the proposed
amendments would provide investors
with streamlined and easier to
understand financial information that
we believe is material to an investment
decision. Thus, to the extent that the
proposed amendments have their
intended effect, reducing complexity
while maintaining the material
completeness of financial disclosures,
we anticipate that the financial
disclosures that result from the
proposed amendments would improve
price discovery, enhance the allocative
efficiency of markets, and facilitate
capital formation.
We are also proposing that a parent
company be permitted to provide
financial disclosures about the Obligor
Group on a combined basis rather than
on a disaggregated basis. Additionally, if
non-financial disclosure provided in
response to proposed Rule 13–01 were
applicable to one or more, but not all,
guarantors, such as where a subsidiary’s
guarantee is limited to a particular
dollar amount, separate disclosure of
249 See Brian P. Miller, The Effects of Reporting
Complexity on Small and Large Investor Trading,
85 Acct. Rev. 2107 (2010).
250 See Haifeng You & Xiao-jun Zhang, Financial
Reporting Complexity and Investor Underreaction
to 10–K Information, 14 Rev. of Acct. Stud. 559
(2009); Alastair Lawrence, Individual Investors and
Financial Disclosure, 56 J. of Acct. & Econ. 130
(2013).
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Summarized Financial Information for
one or more issuers and guarantors
would be required, to the extent
material.
To the extent that investors are
indifferent about whether payment
under the guaranteed security comes
from the issuer or one or more
guarantors in the same consolidated
group, or both, the disclosure resulting
from the proposed amendments would
not adversely impact investment
decisions and could offer investors more
readable, streamlined financial
information. To the extent that
increased readability without loss of
material information would facilitate
investor evaluation of whether the
entities in the Obligor Group have the
ability to make payments as required
under the guaranteed security, the
proposed amendments would promote
the efficiency of security prices and
investor portfolios. Consistent with
potential benefits from these changes, a
growing body of academic literature
finds that financial statement readability
affects the information environment and
that more readable statements are
associated with lower cost of debt
capital and reduced bond rating agency
disagreement.251
The proposed rule also requires that
Summarized Financial Information be
provided only for the most recently
completed fiscal year and year-to-date
interim period, if applicable, included
in the parent company’s consolidated
financial statements, rather than for the
additional periods specified under
existing Rules 3–01 and 3–02 of
Regulation S–X. This is intended to
preserve information that is material to
an investment decision while reducing
compliance costs for registrants. This
proposed change is consistent with
commenter views. The commenters that
discussed the number of annual periods
for disclosure recommended limiting
disclosure to the current year, citing
challenges recasting prior period
information for circumstances such as
legal entity mergers and discontinued
operations. Others cited significant costs
to issuers from requiring additional
periods.252
251 See Samuel B. Bonsall & Brian P. Miller, The
Impact of Narrative Disclosure Readability on Bond
Ratings and the Cost of Debt, 22 Rev. of Acct. Stud.
608 (2017).
252 See, e.g., letters form BDO, Headwaters,
Medtronic, and PwC. Headwaters noted that
Alternative Disclosure composed approximately
15% of the entire financial disclosure in its most
recent Form 10–K and approximately 28% of the
entire financial disclosure in its most recent Form
10–Q. Medtronic indicated that it has one staff
person on its external reporting team that spends
over 80% of his or her time preparing Rule 3–10
related information in support of quarterly filings.
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In addition, we are proposing to
require non-financial disclosures to
supplement the proposed financial
disclosures with additional information
that may be material to an investment
decision. This would include material
information about how payments to
holders of guaranteed securities may be
affected by such things as the issuer and
guarantor structure, the terms and
conditions of the guarantees, the impact
of non-controlling ownership interests,
or other factors specific to the offering.
These proposed amendments should
enhance the information provided to
investors about the investment without
imposing significant burdens on
registrants. Overall, this should lead to
greater transparency and reduce
information asymmetries between
issuers and investors.
Despite being unable to estimate the
number of filings that provide brief
narrative disclosures under the existing
Alternative Disclosure, we do not expect
parent companies to incur significant
costs to provide the Proposed
Alternative Disclosures. For example,
where Alternative Disclosures under the
current rule would constitute only a
brief narrative, we generally believe
separate financial disclosures about the
issuers and guarantors of the guaranteed
securities likely would not be material
and therefore could be omitted under
the proposed amendments. Finally, as
with any change to reporting format and
presentation of information, the
recommended proposals may lead
companies and investors to incur costs
to adjust to the new disclosures. As
further discussed below, we do not
expect such costs to be substantial.
ii. When Disclosure Is Required
As explained in Section III.C.2.c,
‘‘When Disclosure is Required,’’ we
propose eliminating the numerical
thresholds of existing Rule 3–10 that are
used to determine the form and content
of disclosure. Instead, all proposed
disclosures would be required unless
such information would not be material
to holders of the guaranteed security.
While numerical thresholds may be
easier to apply than a materiality
standard that requires judgment, this
change would allow for a more
principles-based disclosure approach
that is more tailored to the specific
circumstances and the needs of
investors.253 Allowing the parent
253 A number of academic studies have explored
the use of bright-line thresholds and ‘‘when
material’’ disclosure standards. The majority of
these papers highlight a preference for principlesbased ‘‘when material’’ standard. See generally, e.g.,
Eugene A. Imhoff Jr. & Jacob K. Thomas, Economic
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company to omit immaterial
information would lower the costs of
disclosure relative to existing
requirements and may help focus
investor attention on decision-relevant
information. However, this change
could also increase the risk that a parent
company would omit, potentially
inadvertently, value-relevant
information. In such instances, investors
may make suboptimal investment
decisions. Omitting material
information, however, would subject
issuers and guarantors to increased
litigation risk, providing incentive for
issuers to make careful determinations
on the form and content of disclosures.
In certain settings, there is academic
evidence that allowing issuers to make
principles-based disclosure decisions
using a materiality criterion is
consistent with investor preferences.254
However, there is also evidence of
investor benefits from rules-based
reporting standards.255 While the
proposed amendments could result in
reduced comparability across registrants
and transactions, using a principlesbased standard could benefit investors
by allowing registrants to tailor their
disclosure to provide material
information to them. The proposed
amendment also accords with a number
of commenters who indicated that
existing thresholds are overly
restrictive.256
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iii. Location of Proposed Alternative
Disclosures and Audit Requirement
The proposed amendments would
allow the parent company the choice of
whether to provide the Proposed
Alternative Disclosures in the financial
statement footnotes or elsewhere in the
registration statement covering the offer
and sale of the guaranteed debt and any
related prospectus, as well as annual
and quarterly Exchange Act periodic
reports required to be filed during the
fiscal year in which the first bona fide
Consequences of Accounting Standards: The Lease
Disclosure Rule Change, 10 J. of Acct. & Econ. 277
(1988) (providing evidence that management
modifies existing lease agreements to avoid crossing
bright-line threshold for lease capitalization).
254 See Usha Rodrigues & Mike Stegemoller, An
Inconsistency in SEC Disclosure Requirements? The
Case of the ‘‘Insignificant’’ Private Target, 13 J. of
Corp. Fin. 251 (2007) (providing evidence, in the
context of mergers and acquisitions, that bright-line
thresholds can deviate from investor preferences).
255 See Mark W. Nelson, Behavioral Evidence on
the Effects of Principles- and Rules-Based
Standards, 17 Acct. Horizons 91 (2003); see also
Katherine Schipper, Principles-Based Accounting
Standards, 17 Acct. Horizons 61 (2003). These
studies note potential advantages of rules-based
accounting standards, including: Increased
comparability among firms, increased verifiability
for auditors, and reduced litigation for firms.
256 See letters from ABA-Committees, AB–NYC,
CAQ, DT, EY, FedEx, KPMG, and PwC.
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sale of the subject securities is
completed. If the parent company were
to provide the Proposed Alternative
Disclosures in its financial statements in
its registration statement and in certain
Exchange Act periodic reports required
to be filed during fiscal year in which
the first bona fide sale of the subject
securities is completed, consistent with
the existing rule, the disclosures would
be subject to annual audit, interim
review, and internal control over
financial reporting requirements.
Investors may perceive this choice of
placement to mean the disclosures are
more reliable than if they were not in
the financial statements at the time of
registration.
In contrast, if the parent company
were to provide the Proposed
Alternative Disclosures outside its
financial statements in its registration
statement and in certain Exchange Act
periodic reports required to be filed
during the fiscal year in which the first
bona fide sale of the subject securities
is completed, lower compliance costs
would likely result with respect to these
filings. While we generally would
expect lower compliance costs,
disclosures outside the financial
statements may result in certain costs to
parent companies, such as legal costs or
due diligence activities (e.g., comfort
letters). Additionally, this proposed
optionality may reduce the potential for
delay in offerings that exists under the
current rule due to the need to prepare
audited Alternative Disclosures. Parent
companies using this proposed option
to provide the disclosures outside the
consolidated financial statements may
be able to register guaranteed debt
offerings and go to market more quickly
than under the existing rule. This may
allow parent companies to more
promptly access favorable market
conditions. Although these disclosures
are supplemental in nature, investors
may nevertheless be adversely impacted
as these disclosures would not
immediately benefit from the enhanced
accuracy and reliability associated with
information that is included in the
financial statements at registration. To
the extent that investors prefer these
initial disclosures to be included in the
parent company’s financial statements,
their willingness to invest may be
influenced or they may discount the
information provided in the unaudited
portion of the disclosure, potentially
reducing the amount of information
incorporated into security prices and
increasing the issuer’s cost of capital.257
257 One commenter noted that supplemental
information typically included in offering
memoranda for Rule 144A debt offerings, including
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Additionally, the amount of
information that investors receive in the
registration statement and in certain
Exchange Act periodic reports required
to be filed during the fiscal year in
which the first bona fide sale of the
subject securities is completed could be
affected by the choice of placement. The
safe harbor for forward-looking
information under PSLRA is not
available for disclosures provided in the
financial statements. A parent company
providing the Proposed Alternative
Disclosures outside its financial
statements may be more likely to
voluntarily supplement those required
disclosures with forward-looking
information, as compared to a parent
company that provides the Proposed
Alternative Disclosures in its financial
statements. Such supplemental forwardlooking information, if provided, could
benefit investors. The relocation of
disclosures may also affect the
prominence of the disclosures. Some
academic research provides indirect
evidence that users may treat
information differently depending on
the location of the disclosure.258
If a parent company provides the
Proposed Alternative Disclosures in its
financial statements, consistent with the
existing rule, such disclosures would be
subject to XBRL requirements. Because
the machine-readable nature of XBRL
disclosures facilitates aggregation,
comparison, and large-scale analysis of
reported information through automated
means, investors stand to benefit from
enhanced analysis capabilities,
particularly in the comparison of
disclosures across issuers and time
periods. The parent company may incur
revenues, operating income, assets and liabilities of
the non-guarantor group, is provided on an
unaudited basis. See letter from ABA-Committees.
If QIBs currently do not require such supplemental
disclosures to be audited in 144A debt offerings, the
costs outlined above would not be expected to
apply to this group of investors.
258 For instance, research shows a weaker relation
between equity prices and disclosed items in the
notes to the financial statements versus recognized
items on the face of the financial statements. See,
e.g., Maximilian A. Mu¨ller, Edward J. Riedl &
Thorsten Sellhorn, Recognition versus Disclosure of
Fair Values, 90 Acct. Rev. 2411 (2015) (showing a
lower association between equity prices and
disclosed investment property fair values relative to
recognized investment property fair values and
finding that reduced information processing costs
and higher readability mitigates the discount
applied to disclosed fair values); Hassan Espahbodi
et al., Stock Price Reaction and Value Relevance of
Recognition versus Disclosure: The Case of StockBased Compensation, 33 J. of Acct. & Econ. 343
(2002) (examining the equity price reaction to the
announcements related to accounting for stockbased compensation to assess the value relevance
of recognition (on the face of the financial
statements) versus disclosure (in the notes to the
financial statements) and concluding that
recognition and disclosure are not substitutes).
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additional costs to comply with these
tagging requirements. In contrast,
Proposed Alternative Disclosures
provided outside the financial
statements would not be subject to
XBRL tagging requirements. Investors
would not benefit from the enhanced
analysis capabilities and the parent
company would not incur the related
costs to comply with the tagging
requirements. In general, we believe the
incremental cost of tagging the Proposed
Alternative Disclosures in XBRL, and
hence the incremental cost savings of
not having to tag the proposed
Alternative Disclosures likely would be
relatively low, as issuers already would
have software or processes in place for
tagging financial statement information.
Finally, while a parent company is
afforded a choice of where to locate
disclosures in its registration statement
and in certain Exchange Act periodic
reports required to be filed during fiscal
year in which the first bona fide sale of
the subject securities is completed,
beginning with its annual report filed on
Form 10–K or Form 20–F for the fiscal
year during which the first bona fide
sale of the subject securities is
completed, the parent company would
be required to locate the disclosures
within the footnotes to its consolidated
financial statements, which are subject
to applicable annual audit, interim
review, and internal control over
financial reporting. Because this
requirement would be consistent with
existing location requirements, we do
not anticipate economic effects from
this requirement as compared to the
current state except, as discussed above
that there may be decreases in costs
attributable to the more simplified and
streamlined proposed disclosures.
iv. Recently Acquired Subsidiary Issuers
and Guarantors
We are proposing to delete the
requirement to provide pre-acquisition
audited financial statements of a
recently acquired subsidiary issuer or
guarantors. The existing requirement for
pre-acquisition financial statements of
recently-acquired subsidiary issuers or
guarantors calls for far greater detail
than what is required for any other
subsidiary issuer and guarantor.259 As
discussed in Section III.C.2.e,
‘‘Recently-Acquired Subsidiary Issuers
and Guarantors,’’ we believe Rule 3–05
of Regulation S–X, which requires
audited pre-acquisition financial
259 Some
commenters also noted the
inconsistency in that information required for
recently acquired subsidiary issuers and guarantors
is more detailed than information required for other
subsidiary issuers and guarantors. See, e.g., letters
from DT and PwC.
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statements of an acquired business to be
provided if the acquired subsidiary
exceeds specified thresholds of
significance, provides sufficient
information in this context such that the
pre-acquisition financial statements of
recently-acquired subsidiary issuers and
guarantors required by existing Rule 3–
10(g) are unnecessary.
In addition, the trigger for preacquisition financial statements of a
recently-acquired subsidiary issuer or
guarantor under existing Rule 3–10(g) is
based on the significance of the
acquired subsidiary compared to the
size of the offering. This may lead
issuers to provide audited financial
statements of a recently-acquired
subsidiary that is small relative to its
consolidated parent company. The
proposed changes would address these
circumstances.
We believe the proposed amendment
would reduce the compliance burden
for preparers without reducing material
information for investors, since material
information about recently acquired
subsidiaries would be required by Rule
3–05 of Regulation S–X and proposed
Rule 13–01(a)(5). Furthermore, to the
extent that investors find the
information provided under the existing
requirement redundant, as it overlaps
with Rule 3–05 of Regulation S–X,
eliminating the existing requirement
would streamline disclosures. Academic
research suggests that individuals invest
more in firms with more concise
financial disclosures.260 Thus, to the
extent that the proposed amendments
alleviate duplication and do not affect
the completeness of financial
disclosures, the resulting disclosures
could result in improved price
discovery, enhance the allocative
efficiency of the market, and facilitate
capital formation.
v. Continuous Reporting Obligation
As discussed in Section III.C.2.f,
‘‘Continuous Reporting Obligation,’’ we
are proposing that a parent company be
permitted to cease providing the
Proposed Alternative Disclosures in its
ongoing reporting if the corresponding
subsidiary issuer’s or guarantor’s
reporting obligation under Section 13
and/or Section 15(d) of the Exchange
Act with respect to the guaranteed
securities is terminated or suspended.
This amendment would reduce
compliance costs without loss of
material information for investors. To
the extent that the existing requirements
impose unnecessary burdens by
requiring a parent company to continue
providing the Alternative Disclosures
260 See
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beyond when the subsidiary would have
to report with respect to the guaranteed
securities,261 or otherwise deter issuers
and guarantors from engaging in public
debt offerings to avoid such reporting
obligations,262 this amendment would
remove such inefficiencies. Commenters
generally supported the proposed
amendment, noting inconsistencies
between the existing requirement and
other reporting rules,263 and suggesting
that it likely deters registration of debt
offerings.264
2. Proposed Amendments to Rule 3–16
and Relocation to Rule 13–02
As discussed in detail in Section V.B,
‘‘Overview of the Proposed Changes,’’
although affiliates whose securities are
pledged as collateral are not registrants
with respect to the collateralized
security, Rule 3–16, when triggered,
requires financial statements as if such
affiliates were registrants. We are
proposing to replace the existing
requirement to provide separate
financial statements for each affiliate
whose securities are pledged as
collateral with financial and nonfinancial disclosures about the
affiliate(s) and the collateral
arrangement, where material, as a
supplement to the consolidated
financial statements of the registrant
that issues the collateralized security.
Debt agreements are often structured
to avoid the requirements of Rule 3–16
by either structuring the debt agreement
to release any pledge of affiliate
securities as collateral if and when such
pledge triggers the requirements under
Rule 3–16, or by not including pledges
of affiliate securities as collateral
altogether.265 In such circumstances,
investors may demand a higher interest
rate from issuers to compensate for the
absence of collateral, potentially
increasing the cost of capital to issuers.
The proposed amendments would
reduce the burden of having to provide
separate financial statements of affiliates
under the existing rule and provide
issuers with the flexibility to structure
their debt agreements with pledges of
affiliate securities. If, as a result of the
proposed amendments, debt agreements
are no longer structured to avoid Rule
3–16 requirements, investors would
obtain the benefit of both the collateral
and the related disclosures, all of which
would be subject to Section 11 liability.
This flexibility may also permit issuers
261 See
letters from DT and Simpson.
letter from Simpson.
263 See letters from ABA-Committees, DT, EY,
PwC, SIFMA, and Simpson.
264 See letters from DT and Simpson.
265 See letters from ABA-Committees, Cahill,
Chamber, Covenant, Davis, DT, and EY.
262 See
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to attract investors that prefer to invest
in obligations where collateral is fully
available and not subject to the release
mechanisms designed to avoid Rule 3–
16 requirements. By appealing to a
broader range of investors and providing
more attractive collateral arrangements,
registrants may be able to obtain a lower
cost of capital.
As discussed above for the Proposed
Amendments to Rule 3–10, Proposed
Rule 13–02 would provide flexibility to
place the proposed disclosures within
the notes to the financial statements or
in specified prominent locations outside
the financial statements in registration
statements covering the offer and sale of
the collateralized debt securities and
any related prospectus, as well as
annual and quarterly Exchange Act
periodic reports required to be filed
during the fiscal year in which the first
bona fide sale of the subject securities
is completed. For registrants that
include the proposed disclosures in
their financial statements, such
information would be subject to
applicable annual audit, interim review,
and internal control over financial
reporting requirements. Investors may
perceive this choice of placement as
making the disclosure more reliable
than if it were placed outside of the
financial statements. To the extent that
investors prefer these disclosures to be
located in the registrant’s financial
statements, this choice may influence
their willingness to invest. Registrants
could attempt to influence such
willingness by including the proposed
disclosures in their financial statements.
Also consistent with the proposed
amendments to Rule 3–10, the registrant
would, however, be required to provide
the proposed disclosures in a footnote to
its consolidated financial statements in
its annual and quarterly reports
beginning with its annual report filed
for the fiscal year during which the first
bona fide sale of the subject securities
is completed. This requirement would
be consistent with existing location
requirements, and we do not anticipate
economic effects as compared to the
current state.
Finally, as with any change to
reporting format and presentation of
information, the proposed amendments
may lead companies and investors to
incur costs to adjust to the new
disclosures, as further discussed below.
a. Financial Disclosures
i. Level of Detail
As discussed in Section V.C.1, ‘‘Level
of Detail,’’ affiliates whose securities are
pledged as collateral are almost always
consolidated subsidiaries of the
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registrant,266 and their financial
information is thus already reflected in
the registrant’s consolidated financial
statements. We propose to require
Summarized Financial Information for
each such affiliate and disclosure of
additional financial information if
material to holders of the collateralized
security. For registrants, this would
reduce compliance costs by reducing
the amount of information needed to be
prepared and disclosed.267 For
investors, we do not anticipate
significant costs since material
information would still be required to
be provided. The simplified disclosures
would highlight material information
needed to make informed investment
decisions and therefore would enable
investors to process information more
efficiently and make more informed
investment decisions.
ii. Presentation on a Combined Basis
We are proposing to permit a
registrant to provide the Summarized
Financial Information of consolidated
affiliates that are pledged as collateral
on a combined rather than individual
basis. Additional disclosure specific to
an affiliate would be required, if
material. As with the effects of the
proposed amendments to Rule 3–10
discussed above, we believe the
simplified disclosures in the proposed
amendments to Rule 3–16 would both
lower compliance costs for issuers and
provide investors with more
streamlined and concise disclosures that
would promote more efficient decisionmaking by investors. We do not
anticipate significant costs to investors
since material information would still
be required to be provided.
iii. Periods to Present
The proposed amendments would
require the disclosure of Summarized
Financial Information for the most
recently ended fiscal year and year-todate interim period included in the
registrant’s consolidated financial
statements. Rule 3–16 financial
statements are not currently required in
266 In the rare circumstances where the affiliate is
not a consolidated subsidiary of the registrant,
proposed Rule 13–02(a)(5) would require the
registrant to provide any other quantitative or
qualitative information that would be material to
making an investment decision with respect to the
collateralized security. In this regard, separate
financial statements of the unconsolidated affiliate
may be necessary if material to an investment
decision. See additional discussion in Section
V.C.1, ‘‘Level of Detail.’’
267 For purposes of the PRA, we estimate that the
proposed amendments to Rule 3–16 would result in
an overall reduction of 30 burden hours for each
form (other than Form 10–Q) affected by the
proposed amendments. See Section VIII.B.2, ‘‘Rule
3–16,’’ below.
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quarterly reports, and as such,
registrants would incur costs to provide
this additional interim disclosure.268
We believe the proposed amendments
would benefit investors by providing
them with the most recent information
to ensure informed investment
decisions.
b. Non-Financial Disclosures
We are proposing to require nonfinancial information about affiliates
whose securities are pledged as
collateral and the collateral
arrangements, to the extent material.
While we did not receive comments on
non-financial disclosures, we do not
believe this proposed amendment
would impose undue costs for issuers,
as the majority of the information
required to be disclosed under the
proposed amendments should be
readily available or attainable.269 We
believe investors would benefit because
the proposed amendment would
supplement the financial disclosures
with additional, material information,
thereby rendering the combined
financial and non-financial disclosures
more informative for investment
decisions.
c. When Disclosure Is Required
Rather than utilizing existing
numerical thresholds, disclosure of the
proposed financial and non-financial
disclosures would be required if
material to holders of the collateralized
security. To the extent the numerical
thresholds under the existing rule result
in disclosure of unnecessary or
immaterial information, investors may
benefit from reduced search costs and
the facilitation of more efficient
information processing.270 Further, we
believe that, compared to existing rule
requirements, the proposed
amendments to Rule 3–16 would reduce
compliance costs for issuers and
increase the likelihood of registration.
268 For purposes of the PRA, we estimate that the
proposed amendments to Rule 3–16 would result in
an increase of 70 burden hours per Form 10–Q
filing. See Section VIII.B.2, ‘‘Rule 3–16,’’ below.
269 The content of the proposed non-financial
disclosures consists of basic information about the
collateral arrangement and the entities involved.
We do not expect such information, which is
generally available from debt agreements, would
impose a significant burden on a registrant to
prepare.
270 See David Hirschleifer & Siew Hong Teoh,
Limited Attention, Information Disclosure, and
Financial Reporting, 36 J. of Acct. and Econ. 337
(2003) (developing a theoretical model where
investors have limited attention and processing
power). The authors show that with partially
attentive investors, means of presenting information
may have an impact on stock price reactions,
misvaluation, long-run abnormal returns, and
corporate decisions.
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D. Anticipated Effects on Efficiency,
Competition, and Capital Formation
Several commenters noted that the
need to comply with existing disclosure
requirements often makes issuers
structure registered offerings to avoid
triggering Rules 3–10 or 3–16, or avoid
registration altogether.271 As discussed
above, and as a general matter, we
believe the proposed amendments
would improve the content, format, and
focus of required registrant disclosures.
This should both reduce the compliance
cost for issuers and allow more efficient
decision-making by investors. This may
be true particularly to the extent that the
proposed amendments result in more
efficient and effective dissemination of
material information to investors and
increase the efficiency of investor
processing and usage of this
information. Further, the proposed rule
amendments may affect issuers’
registration choices. This, in turn, could
broaden the investment opportunities
available for different types of investors
and may allow for more efficient
matching of investors with assets that
meet their investment objectives and
preferences. Retail investors could
additionally be indirectly affected
through their investments managed by
institutional investors, who would have
greater access to a broader range of
investment opportunities in the
registered debt market. To the extent
that the proposed amendments ease
registration burdens for issuers, there
could be an increase in the number of
registered offerings. If such issuers
would not have otherwise issued debt
securities under Rule 144A, this would
result in an increase in capital
formation. If such issuers would have
otherwise issued debt under Rule 144A,
it is possible that a switch to a registered
offering would lower the issuers’ cost of
capital while also providing investors
with the enhanced protections afforded
by registered offerings.
Finally, rather than be 100% owned
by the parent company, the proposed
amendments allow for the subsidiary
issuer or guarantor to be consolidated in
the parent company’s consolidated
financial statements as one of the
conditions that must be met in order to
be eligible to omit separate subsidiary
issuer and guarantor financial
statements. To the extent that the
proposed amendments expand the
scope of subsidiary issuers and
guarantors that meet Rule 3–10
eligibility requirements, the proposed
amendments may promote greater
271 See, e.g., letters from BDO, Cahill, Covenant,
and PwC.
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competition among issuers and
guarantors of guaranteed debt securities.
This may enable more registrants,
especially those on the margins, to
compete on better terms. However, we
do not anticipate the overall impact on
competition to be substantial.
E. Consideration of Reasonable
Alternatives
We discuss below potential
alternatives to the proposed
amendments to existing Rules 3–10 and
3–16.
1. Alternative to Proposed Amendments
to Existing Rule 3–10
An alternative to the proposed
amendments to Rule 3–10 would be to
permit the Proposed Alternative
Disclosures be provided if the
subsidiary issuers and/or guarantors
were ‘‘wholly owned’’ by the parent
company, as defined in Rule 1–02(aa) of
Regulation S–X.272 Using ‘‘wholly
owned’’ as the parent company
ownership threshold, rather than the
existing 100% ownership requirement,
would likely permit more subsidiary
issuers and guarantors to use the
Alternative Disclosures as compared to
the existing rule, but would be less
flexible than the proposed amendments,
as detailed above. As a result, we
believe the proposed amendments
would better serve to enhance
efficiency, competition, and capital
formation.
2. Alternatives Common to Proposed
Amendments to Existing Rule 3–10 and
Existing Rule 3–16
One alternative to each set of
proposed amendments would be to
require that the Proposed Alternative
Disclosures, or the disclosures specified
in proposed Rule 13–02, as applicable,
be located in the audited annual and
unaudited interim financial statement
footnotes of the parent company, or
registrant, as applicable, in all filings.
Under this alternative, the parent
company or registrant would not have a
choice of whether to locate the proposed
disclosures outside its consolidated
financial statements in registration
statements covering the offer and sale of
the guaranteed or collateralized debt
securities and any related prospectus, or
in annual and quarterly Exchange Act
periodic reports required to be filed
during the fiscal year in which the first
bona fide sale of the subject securities
272 Rule 1–02(aa) of Regulation S–X (’’The term
wholly owned subsidiary means a subsidiary
substantially all of whose outstanding voting shares
are owned by its parent and/or the parent’s other
wholly owned subsidiaries.’’ (Emphasis in
original.)).
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is completed. On the one hand, this
could increase investor confidence in
the disclosed information and provide
the benefits of XBRL tagging. On the
other hand, the cost to a parent
company or registrant associated with
preparing registration statements and
certain periodic reports would be higher
with this alternative than if the
disclosures were provided outside of the
financial statements. Furthermore, the
flexibility of going to market more
quickly would not be available under
this alternative. This could limit the
incentives to pursue registered offerings
compared to the proposed amendments,
and those registrants that do pursue
registered offerings may be less likely to
issue guarantees, or pledge affiliate
securities as collateral, given the
additional cost associated with
including the proposed disclosures in
the financial statements. Additionally, a
parent company or registrant may be
less likely to voluntarily supplement the
disclosures with forward-looking
information because the safe harbor for
forward-looking information under
PSLRA is not available for disclosures
provided in the financial statements. As
discussed above,273 guarantees and
pledges of affiliate securities as
collateral serve, in part, to reduce
investor risk of structural subordination.
Overall, we believe the benefits to
investors of enhanced access to
registered offerings with guarantees and
pledges of affiliate securities as
collateral, together with the benefits of
reduced compliance burdens for issuers,
justify forgoing the benefits of requiring
these disclosures to be located in the
financial statements of the parent
company, or registrant, as applicable,
included in registration statements
covering the offer and sale of the
guaranteed or collateralized debt
securities and any related prospectus, as
well as annual and quarterly Exchange
Act periodic reports required to be filed
during the fiscal year in which the first
bona fide sale of the subject securities
is completed. However, we solicit
comment on this point and the potential
benefits and concerns for registrants and
investors of requiring the proposed
disclosures to be located in the notes to
the financial statements in all filings.
A second related alternative to each
set of the proposed rules would be to
allow the parent company or registrant
to provide the Proposed Alternative
Disclosures, or the disclosures specified
in proposed Rule 13–02, as applicable,
outside the financial statement footnotes
in all filings. On the one hand, if the
273 See Section VII.C.1, ‘‘Proposed Amendments
to Rule 3–10 and Partial Relocation to Rule 13–01.’’
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parent company or registrant opts to
disclose the information outside the
financial statements, the cost to a parent
company or registrant associated with
preparing the information would be
lower with this alternative than if the
disclosures were provided in the
financial statements. This could
incentivize the pursuit of registered
offerings with guarantees or collateral,
given the flexibility and associated
reduced costs. While we generally
would expect lower compliance costs,
disclosures outside the financial
statements may result in certain costs to
parent companies and registrants, such
as legal costs or due diligence activities
(e.g., comfort letters). Additionally, a
parent company or registrant may be
more likely to voluntarily supplement
the disclosures with forward-looking
information because the safe harbor for
forward-looking information under
PSLRA is not available for disclosures
provided in the financial statements. On
the other hand, allowing the parent
company or registrant the flexibility of
disclosing outside the financial
statements may reduce investor
confidence in the disclosed information,
as this information would not be subject
to annual audit, interim review, and
internal control over financial reporting
requirements. As a result, this
alternative could reduce investor
confidence in the disclosed information
and may affect their willingness to
invest.
While we acknowledge that providing
additional flexibility to the parent
company or registrant in the location of
the disclosures would likely further
reduce the compliance burdens
associated with registered offerings with
guarantees or collateral, investors may
demand a higher expected return if they
perceive reduced reliability of the
Proposed Alternative Disclosure. The
potential for higher borrowing costs may
encourage issuers to voluntarily include
the Proposed Alternative Disclosures or
proposed disclosures, as applicable, in
the financial statements of the parent
company, or registrant, as applicable.
We solicit comment on this point and
the potential benefits and concerns for
registrants and investors of providing
flexibility to locate the Proposed
Alternative Disclosures outside the
financial statements in all filings.
Finally, a third alternative relevant to
each set of proposed amendments
would be to require Summarized
Financial Information to be provided for
the same periods as the parent company
or registrant, as applicable, instead of
the most recent annual and interim
period as proposed. While this
alternative would increase the amount
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of information available to investors, the
additional information may not be
material in making informed investment
decisions. As discussed above,274 prior
studies have suggested that simpler
disclosures may benefit investors by
reducing search costs and facilitating
more efficient information processing.
Moreover, including additional
historical periods would result in higher
costs to registrants when preparing
registration information and ongoing
reporting. We do not believe the
potential benefit to investors of this
additional historical information
justifies the potential cost to the
registrants.
F. Request for Comment
We request comment on all aspects of
our economic analysis, including the
potential costs and benefits of the
proposed amendments and alternatives
thereto, and whether the rules, if
adopted, would promote efficiency,
competition, and capital formation or
have an impact on investor protection.
Commenters are requested to provide
empirical data, estimation
methodologies, and other factual
support for their views, in particular, on
costs and benefits estimates.
VIII. Paperwork Reduction Act
A. Background
Certain provisions of our rules and
forms that would be affected by the
proposed amendments contain
‘‘collection of information’’
requirements within the meaning of the
PRA.275 The Commission is submitting
the proposal to the Office of
Management and Budget (‘‘OMB’’) for
review in accordance with the PRA.276
The hours and costs associated with
preparing and filing the forms and
reports constitute reporting and cost
burdens imposed by each collection of
information. An agency may not
conduct or sponsor, and a person is not
required to respond to, a collection of
information requirement unless it
displays a currently valid OMB control
number. Compliance with the
information collections is mandatory.
Responses to the information collections
are not kept confidential and there is no
mandatory retention period for the
information disclosed. The titles for the
affected collections of information
are: 277
274 See
note 249 and accompanying text.
note 244 above.
276 44 U.S.C. 3507(d) and 5 CFR 1320.11.
277 As noted above, while the proposed
amendments would apply to registered investment
companies, and could thereby affect registered
investment advisers, based on staff experience, we
275 See
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• ‘‘Regulation S–K’’ (OMB Control
No. 3235–0071); 278
• ‘‘Regulation S–X’’ (OMB Control
No. 3235–0009);
• ‘‘Form S–1’’ 279 (OMB Control No.
3235–0065);
• ‘‘Form S–3’’ 280 (OMB Control No.
3235–0073); 281
• ‘‘Form S–4’’ 282 (OMB Control No.
3235–0324);
• ‘‘Form S–11’’ 283 (OBM Control No.
3235–0067);
• ‘‘Form F–1’’ (OMB Control No.
3235–0258);
• ‘‘Form F–3’’ (OMB Control No.
3235–0256);
• ‘‘Form F–4’’ 284 (OMB Control No.
3235–0325);
• ‘‘Form 10’’ 285 (OMB Control No.
3235–0064);
• ‘‘Form 20–F’’ (OMB Control No.
3235–0288);
• ‘‘Form 40–F’’ 286 (OMB Control No.
3235–0381);
• ‘‘Form 10–K’’ 287 (OMB Control No.
3235–0063);
• ‘‘Form 8–K’’ 288 (OMB Control No.
3235–0060); 289
• ‘‘Regulation 14A’’ 290 and
‘‘Schedule 14A’’ 291 (OMB Control No.
3235–0059); 292
believe registered investment companies are
unlikely to engage in the activities addressed by the
proposed amendments. Accordingly, we are not
revising the burden estimates for the forms and
reports filed by these types of entities.
278 The paperwork burdens for Regulation S–K
and Regulation S–X are imposed through the forms
that are subject to the requirements in these
regulations and are reflected in the analysis of those
forms. To avoid a PRA inventory reflecting
duplicative burdens, and for administrative
convenience, we estimate that the proposed
amendments would not impose an incremental
burden for these regulations.
279 17 CFR 239.11.
280 17 CFR 239.13.
281 The paperwork burdens for Form S–3 and
Form F–3 are imposed through the forms from
which they incorporate by reference and are
reflected in the analysis of those forms. To avoid
a PRA inventory reflecting duplicative burdens and
for administrative convenience, we assign a onehour burden to each of these forms.
282 17 CFR 239.25.
283 17 CFR 239.18.
284 17 CFR 239.34.
285 17 CFR 249.210.
286 17 CFR 249.240f.
287 17 CFR 249.310.
288 17 CFR 249.308.
289 The paperwork burdens for Form 8–K is
imposed through the forms from which they
incorporate by reference and are reflected in the
analysis of those forms. To avoid a PRA inventory
reflecting duplicative burdens and for
administrative convenience, we estimate that the
proposed amendments would not impose an
incremental burden for this form.
290 17 CFR 240.14a-1 through 240.14a–104.
291 17 CFR 240.14a–101.
292 As described below, our estimates for Form
10–K take into account the burden that would be
incurred by including the proposed disclosure in
the annual report directly or incorporating by
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• ‘‘Regulation 14C’’ 293 and
‘‘Schedule 14C’’ 294 (OMB Control No.
3235–0057); 295
• ‘‘Form 10–Q’’ (OMB Control No.
3235–0070);
• ‘‘Form SF–1’’ 296 (OMB Control No.
3235–0707);
• ‘‘Form SF–3’’ 297 (OMB Control No.
3235–0690);
• ‘‘Form 1–A’’ 298 (OMB Control No.
3235–0286);
• ‘‘Form 1–K’’ 299 (OMB Control No.
3235–0720); and
• ‘‘Form 1–SA’’ 300 (OMB Control No.
3235–0721).
The regulations, schedules, and forms
listed above were adopted under the
Securities Act and/or the Exchange Act.
These regulations, schedules, and forms
set forth the disclosure requirements for
registration statements, periodic and
current reports, distribution reports, and
proxy and information statements filed
by registrants to help investors make
informed investment and voting
decisions.
We are proposing amendments to the
disclosure requirements in Rules 3–10
and 3–16 of Regulation S–X to better
align those requirements with the needs
of investors and to simplify and
streamline the disclosure obligations of
registrants. We are proposing to amend
both rules and relocate part of Rule 3–
10 and all of Rule 3–16 to proposed
Rules 13–01 and 13–02, respectively.
We also are proposing to make
conforming amendments to Items 504,
1100, 1112, 1114, and 1115 of
Regulation S–K; Forms F–1, F–3, 1–A,
1–K, and 1–SA under the Securities Act;
and Rule 12h-5 and Form 20–F under
the Exchange Act. These amendments
are intended to provide investors with
the information that is important given
the specific facts and circumstances,
make the disclosures easier to
understand, and reduce the costs and
burdens to registrants.
reference from a proxy or information statement. To
avoid a PRA inventory reflecting duplicative
burdens, we estimate that the proposed disclosure
would not impose an incremental burden for proxy
statements on Schedule 14A.
293 17 CFR 240.14c–1 through 240. 14c–7.
294 17 CFR 240.14c–101.
295 As described below, our estimates for Form
10–K take into account the burden that would be
incurred by including the proposed disclosure in
the annual report directly or incorporating by
reference from a proxy or information statement. To
avoid a PRA inventory reflecting duplicative
burdens, we estimate that the proposed disclosure
would not impose an incremental burden for
information statements on 14C.
296 17 CFR 239.44.
297 17 CFR 239.45.
298 17 CFR 239.90.
299 17 CFR 239.91.
300 17 CFR 239.92.
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B. Summary of the Proposed
Amendments Impact on Collection of
Information
In this section, we summarize the
proposed amendments and their general
impact on the paperwork burdens
associated with the forms listed above.
In the subsequent section below, we
provide the revised burden estimates of
each affected form.
1. Rule 3–10
The proposed amendments to Rule 3–
10 would replace the Consolidating
Information required by existing Rule 3–
10 with Summarized Financial
Information of the Obligor Group.
Several commenters noted that
preparing and providing Consolidated
Information is particularly challenging,
complex, and costly.301 Among other
things, the Proposed Alternative
Disclosures would permit a parent
company to: (1) Exclude the financial
information of non-obligated entities; (2)
reduce the number of periods to be
presented; and (3) provide the
information of each issuer and guarantor
on a combined, rather than
disaggregated, basis. These changes
would reduce a parent company’s
paperwork burden by permitting the
parent company to exclude information
unnecessary to an investment decision
as compared to the existing rule. In
certain circumstances, the paperwork
burden could be reduced even further
because registrants would not be
required to recast prior period
information, which commenters noted
can be particularly challenging.302
Existing Rule 3–10 requires the
Alternative Disclosures to be included
in the notes to the parent company’s
consolidated financial statements,
thereby requiring the Alternative
Disclosures to be audited for the same
periods. The proposed amendments
would revise this requirement so that
parent companies may provide the
Proposed Alternative Disclosures
outside their financial statement
footnotes in a registration statement
covering the offer and sale of the subject
securities and any related prospectus,
and in Exchange Act annual and
quarterly reports required to be filed
during the fiscal year in which the first
bona fide sale of the subject securities
is completed, but require the Proposed
Alternative Disclosures to be included
in the footnotes to the parent company’s
consolidated financial statements for
301 See, e.g., letters from ABA-Committees,
Anuradha, BDO, Cahill, CAQ, DT, EY, FedEx, GM,
Grant, Headwaters, KPMG, Medtronic, and NobleUK.
302 See, e.g., letters from Medtronic and PwC.
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annual and quarterly reports beginning
with the annual report for the fiscal year
during which the first bona fide sale of
the subject securities is completed. This
amendment could reduce the burdens
associated with preparing the Proposed
Alternative Disclosures because the
information would not need to be
immediately audited or tagged.
However, this amendment could result
in certain legal and due diligence costs
(e.g., comfort letters).
Whether a parent company would
elect to provide the Proposed
Alternative Disclosures outside its
financial statement footnotes likely
would depend on the company’s
specific facts and circumstances and, as
discussed above,303 we believe there
could be reasons for companies to elect
either option. In addition, any reduction
in paperwork burden associated with
such an election would be incremental,
as the parent company would still incur
expenses to prepare audited financial
information. Given these considerations,
and to avoid overestimating the overall
paperwork burden reduction associated
with the proposed amendments, we are
not estimating a specific burden
reduction for this aspect of the proposed
amendments. However, we solicit
comment on whether it would be
appropriate to do so, and, if so, how we
might estimate such a reduction.
The existing rule also requires a
parent company to provide the
Alternative Disclosures as a condition to
omitting the separate financial
statements of a subsidiary issuer or
guarantor. In most cases, the Alternative
Disclosures consist of Consolidating
Information, but the Alternative
Disclosures may consist of a brief
narrative if certain numerical thresholds
are met. The proposed amendments
would eliminate these separate
categories of Alternative Disclosures.
Instead, the proposed amendments
would require a parent company to
provide all financial and non-financial
disclosures specified in proposed Rule
13–01 to the extent they are material to
a holder of the guaranteed security. The
proposed amendments would also
require disclosure of any additional
information that would be material to a
holder of the guaranteed security.
While the proposed amendments
would eliminate some disclosure that
may be required by the existing rule,
they would also require other disclosure
that may not be required by the existing
rule. For example, if a numerical
303 See Sections III.C.2.d, ‘‘Location of Proposed
Alternative Disclosures and Audit Requirement,’’
and VII.C.1.b.iii, ‘‘Location of Proposed Alternative
Disclosures and Audit Requirement.’’
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threshold is met under the existing rule,
disclosure is required even if that
disclosure is immaterial to an
investment decision. The proposed
amendments would not require that
disclosure if it was not material, which
would reduce the parent company’s
paperwork burden. Conversely, if a
numerical threshold is not met under
the existing rule, disclosure is not
required unless that information is
necessary to make the disclosure
provided not misleading.304 The
proposed amendments would require
that disclosure in all cases, to the extent
material, which could increase the
parent company’s paperwork burden.
We have estimated the number of
filings that include Consolidating
Information under Rule 3–10, but we are
unable to identify accurately the issuers
providing narrative disclosures under
Rule 3–10 because the language of those
disclosures varies based on facts and
circumstances.305 However, we do not
believe that the proposed amendments
would affect the paperwork burden for
filings that include the narrative
disclosures under existing Rule 3–10
because registrants that provide these
narrative disclosures would be
permitted to provide similar
information under the proposed
amendments.
Further, under the proposed
amendments, parent companies would
no longer be required to provide the preacquisition financial statements of
recently-acquired subsidiary issuers and
guarantors, as is currently required by
existing Rule 3–10(g). Disclosure may be
required under the proposed rule,
however, if it is material to an
investment decision in the guaranteed
security. This aspect of the proposed
amendments would decrease the overall
paperwork burden of the affected forms.
This reduction would be mitigated
somewhat, however, because parent
companies would still be required to
provide information about any recentlyacquired subsidiaries when it is
material.
Finally, we are proposing
amendments to require specific nonfinancial disclosures, where material,
about the issuers and guarantors, the
terms and conditions of the guarantees,
and how the issuer and guarantor
structure and other factors may affect
payments to holders of the guaranteed
securities. These disclosures would
enhance the information provided about
subsidiary issuers and guarantors and
would be more comprehensive than the
similar disclosures a parent company
must provide under existing Rule 3–10.
These additional disclosures, therefore,
could incrementally increase a parent
company’s existing paperwork burden.
Considering the various impacts to
the existing collection of information
requirements outlined above, we
estimate that the proposed amendments
to Rule 3–10 would reduce the overall
paperwork burden for registrants.
Moreover, some aspects of the proposed
amendments could reduce the
paperwork burden significantly. For
example, Consolidating Information,
which includes multiple columns and
typically occupies several pages of a
parent company’s filing, would be
replaced with the Proposed Alternative
Disclosures, which we expect in most
cases would consist of one or two pages
of disclosure in a parent company’s
filing. Overall, therefore, we estimate
that the proposed amendments would
reduce the paperwork burden for
registrants by approximately 30 hours
for each filing that includes the
Proposed Alternative Disclosures in lieu
of the existing Alternative Disclosures.
Although the proposed amendments
would reduce the paperwork burden for
any particular filing on an affected form
that includes the existing Alternative
Disclosures, not all filings on the
affected forms include these disclosures
because they are provided only in
certain instances.306 Therefore, to
estimate the overall paperwork burden
reduction from the proposed
amendments, we estimated the number
of filings that include the Alternative
Disclosures. To do so, we used a
number of methods that varied based on
the affected form.
As an initial step, we examined the
XBRL tags most commonly associated
with Consolidating Information. Not all
filings include XBRL tags, so we
estimated the number of all the affected
forms that included XBRL tags and
extrapolated the number of affected
forms based on the percentage of filings
that include XBRL tags. For example, in
Section VII.B.2, ‘‘Market Conditions,’’
using XBRL tags, we estimated that
registrants filed 1,223 Form 10–Ks with
the Alternative Disclosures in the last
three calendar years from 2015 to 2017,
which averages approximately 407.67
filings per year. However, over those
three years, only approximately 86
percent of Forms 10–K included XBRL
tags. For PRA purposes, therefore, we
divided 407.67 by 0.86 to estimate that
474 filings per year included Alternative
Disclosures over the last three years.
We were able to use this extrapolation
method for Forms 10–K, 10–Q, S–1, 20–
F, and 40–F, because the percentage of
filings made on those forms that
included XBRL tags was sufficient to
make the extrapolation meaningful. The
table below sets forth our estimates of
the number of filings on these forms that
included the Alternative Disclosures
based on the XBRL tagging extrapolation
method.
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TABLE 4—CALCULATION OF THE NUMBER OF FILINGS ON AFFECTED FORMS WITH THE ALTERNATIVE DISCLOSURES BASED
ON XBRL TAGGING EXTRAPOLATION
Number of
responses over
three-year period
using XBRL data
Annual
average of
responses using
XBRL data
Percentage
of responses
tagged using
XBRL
Annual average of
responses
Estimated
average annual
responses
(A)
(B)
(C)
(D) = (B) / (C)
(E)
10–K .......................................................
10–Q ......................................................
S–1 .........................................................
20–F .......................................................
40–F .......................................................
304 See
1,223
3,530
7
17
1
17 CFR 230.408(a), 240.12b–20.
Section VII.B.2, ‘‘Baseline and Affected
Parties—Market Conditions.’’
305 See
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407.67
1,176.67
2.33
5.67
.33
.86
.94
.24
.41
.16
306 We were not able to determine the number of
filings that included the Alternative Disclosures
with certainty because registrants are not required
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474.03
1,251.77
9.71
12.82
8.31
474
1,252
10
14
8
to state explicitly that the disclosures they are
providing are meant to satisfy the requirements of
Rule 3–10.
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We also searched Forms S–4, S–11,
10, F–1, F–4, SF–1, SF–3, 1–A, 1–K, and
1–SA using XBRL tags most commonly
associated with Consolidating
Information. However, this
extrapolation method did not provide
meaningful results because registrants
rarely include XBRL tags for these
affected forms. For example, only one
percent of Form S–4 filings include
XBRL tags.307 Therefore, to provide a
more meaningful estimate of the number
of these forms that include the
Alternative Disclosures, we conducted
separate database searches for filings of
those forms over the last three calendar
years using search terms similar to those
used by a commenter.308
Based on these searches, we estimate
that, over the last three calendar years
from 2015 to 2017, there were on
average 300 filings on Form S–4, 15
filings on Form S–11, 20 filings on Form
10, 15 filings on Form F–1, and 20
49671
filings on Form F–4 that included the
Alternative Disclosures. We were unable
to find any filings on the remaining
affected forms that included the
Alternative Disclosures. Therefore, we
estimate that no filings on those forms
included the Alternative Disclosures.
The table below sets forth our estimates
of the number of filings on these forms
that included the Alternative
Disclosures based on the other database
searches.
TABLE 5—CALCULATION OF THE NUMBER OF FILINGS ON AFFECTED FORMS WITH THE ALTERNATIVE DISCLOSURES BASED
ON DATABASE SEARCHES
Number of
responses over
three-year period
using database
searches
Annual average of
responses using
database
searches
Estimated
average annual
responses
(A)
(B) = (A) / 3
(C)
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S–4 .............................................................................................................................
S–11 ...........................................................................................................................
10 ...............................................................................................................................
F–1 .............................................................................................................................
F–4 .............................................................................................................................
1–A .............................................................................................................................
1–K .............................................................................................................................
1–SA ..........................................................................................................................
SF–1 ..........................................................................................................................
SF–3 ..........................................................................................................................
Although the proposed amendments
to Rule 3–10 would reduce the
paperwork burden for each individual
affected form, the proposed
amendments could cause the number of
affected forms filed to change over a
period of time. One commenter 309
stated that the high compliance costs
associated with preparing the Rule 3–10
financial information leads many
companies to issue debt securities
privately. Again, we believe that the
proposed amendments would encourage
potential issuers to conduct registered
debt offerings or private offerings with
registration rights. Therefore, we believe
that the number of registration
statements and periodic reports filed on
affected forms that include the Proposed
Alternative Disclosures would increase.
For example, we believe the number
of issuers and guarantors eligible to
provide the Proposed Alternative
Disclosures would increase in lieu of
providing separate financial statements
of each subsidiary issuer and guarantor
because the proposed amendments
would replace the 100%-owned
condition with one requiring that the
subsidiary issuer/guarantor be a
consolidated subsidiary of the parent
307 Similarly, only six percent of Form S–11, three
percent of Form F–1, and three percent of Form 10
filings include XBRL tags.
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300
15
20
15
20
0
0
0
0
0
company pursuant to the relevant
accounting standards it already uses and
eliminate the requirement that
guarantees of subsidiary guarantors be
full and unconditional. If some of those
eligible issuers and guarantors conduct
registered debt offerings or private
offerings with registration rights instead
of conducting offerings privately and
without registration rights, the number
of registration statements and associated
periodic reports filed on affected forms
would necessarily increase when
measured over a period of time.
Conversely, other aspects of the
proposed amendments would lead to a
decrease in the number of periodic
reports filed on affected forms when
measured over time. For example, under
existing Rule 3–10, if a parent company
conducts a registered debt offering or
private offering with registration rights
and the subsidiary issuer or guarantor is
not 100%-owned, but is instead
consolidated into the parent company’s
financial statements, or if the subsidiary
guarantor’s guarantee is not full and
unconditional, the subsidiary must file
its own periodic reports. The subsidiary
is required to file a registration
statement for the transaction, which is
308 See
100
5
6.67
5
6.67
0
0
0
0
0
usually combined with its parent’s
registration statement, so the number of
registration statements filed with the
Proposed Alternative Disclosures would
not decrease as a result of this aspect of
the proposed amendments. However,
under the proposed amendments, if that
parent company provides the Proposed
Alternative Disclosures, and meets the
other conditions of proposed Rule 3–10,
its subsidiaries would be exempt from
periodic reporting under Rule 12h–5.
Therefore, fewer periodic reports on
affected forms would be filed, which
would decrease those forms’ paperwork
burden when measured over a period of
time.
As another example, existing Rule 3–
10 requires a parent company to include
the Alternative Disclosures of its
subsidiary issuers and guarantors in its
periodic reports for so long as the
guaranteed securities are outstanding.
The proposed amendments would
permit the parent company to cease
providing the Proposed Alternative
Disclosures in its periodic reports if the
corresponding Section 15(d) obligations
of its subsidiary issuers and guarantors
are suspended. Therefore, we expect
that parent companies would provide
letter from EY.
from Cahill.
309 Letter
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5
7
5
7
0
0
0
0
0
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the Proposed Alternative Disclosures in
fewer filings, which would reduce the
paperwork burden for periodic reports
on affected forms when measured over
a period of time.
Overall, we believe that the decrease
in the number of periodic reports filed
on affected forms due to the change in
ongoing reporting requirements would
be largely mitigated, and perhaps offset,
by the number of periodic reports that
would increase due to the filing of new
registration statements. Consequently, to
avoid overestimating the paperwork
reduction associated with the proposed
amendments, we are not adjusting our
existing estimate for the number of
periodic reports filed on affected forms.
However, we solicit comment on
whether and, if so, how we should make
an adjustment to this estimate in light
of the proposed amendments.
Although we believe the number of
periodic reports filed on affected forms
would remain steady, we estimate that
the number of registration statements
that include the Proposed Alternative
Disclosures, as opposed to those that
presently include the existing
Alternative Disclosures, would increase.
As discussed in Section VII.B.2,
‘‘Market Conditions,’’ we note that
issuers have conducted approximately
half as many Rule 144A debt offerings
as registered debt offerings. We do not
believe that all the issuers that
conducted Rule 144A would conduct
registered debt offerings as a result of
the proposed amendments, but we
estimate that there would be a 33
percent increase in registration
statements filed based on the proposed
amendments. Therefore, we estimate
that there would be an additional three
filings on Form S–1,310 33 filings on
Form S–4,311 two filings on Form S–
11,312 two filings on Form 10,313 two
filings on Form F–1,314 and two filings
on Form F–4 per year.315 Further, we
estimated above that 14 filings on Form
20–F included the existing Alternative
Disclosures. We estimate that half of
those filings were registration
statements. Therefore, we estimate there
would be an additional two registration
310 Ten current filings on Form S–1 × 0.33 = 3.3
filings, which rounds to 3 filings.
311 One hundred current filings on Form S–4 ×
0.33 = 33 filings.
312 Five current filings on Form S–11 × 0.33 =
1.65 filings, which rounds to two filings.
313 Seven current filings on Form 10 × 0.33 = 2.31
filings, which rounds to two filings.
314 Five current filings on Form F–1 × 0.33 = 1.65
filings, which rounds to two filings.
315 Seven current filings on Form F–4 × 0.33 =
2.31 filings, which rounds to two filings.
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statements filed on Form 20–F per
year.316
Finally, to determine the paperwork
burden for an issuer to file a registration
statement with the Proposed Alternative
Disclosures, we first estimated the
number of burden hours required for an
issuer to provide the existing
Alternative Disclosures. A number of
commenters provided examples of the
burdens required to prepare and process
the existing Alternative Disclosures,317
but only one commenter quantified the
number of hours.318 This commenter
indicated that it required 280 hours per
year to prepare and review its
Alternative Disclosures.319 We note that
this commenter is relatively large and
not necessarily representative of the size
of all reporting companies. Therefore,
for PRA purposes, we estimate that the
existing Alternative Disclosures require
an average of 100 burden hours to
prepare and process. However, we
solicit comment on the number of
burden hours required to prepare the
Alternative Disclosures. If the Proposed
Alternative Disclosures would reduce
an issuer’s burden by 30 hours, as
compared to the issuer providing the
existing Alternative Disclosures, we
estimate that the Proposed Alternative
Disclosures would require 70 hours to
prepare and process.
2. Rule 3–16
Existing Rule 3–16 requires separate
Rule 3–16 Financial Statements for each
affiliate whose securities constitute a
‘‘substantial portion’’ of the collateral
for any class of registered securities as
if the affiliate were a separate registrant.
The proposed amendments related to
Rule 3–16 would replace this
requirement with a requirement for a
registrant to provide Summarized
Financial Information of those affiliates
on a combined basis, pursuant to
proposed Rule 13–02, if the affiliates are
consolidated subsidiaries of the
registrant. If additional line items of
financial information are material to an
investment decision, the registrant
would be required to disclose that
316 Seven current fillings on Form 20–F × .033 =
2.31 filings, which rounds to two filings.
317 See, e.g., letters from EY, FedEx, Medtronic,
and Noble-UK.
318 Letter from FedEx.
319 Id. The commenter noted that it would require
280 hours to prepare and review its Consolidating
Information. As discussed above, the existing
Alternative Disclosures may include either
Consolidating Information or brief narrative
disclosure, and we do not believe that the proposed
amendments would affect the paperwork burden for
filings that include the narrative disclosure under
existing Rule 3–10 because registrants that provide
these narrative disclosures would be permitted to
provide similar information under the proposed
amendments.
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information as well. In addition, the
proposed amendments would require, to
the extent material, certain nonfinancial disclosures about the
securities pledged as collateral, each
affiliate whose securities are pledged,
the terms and conditions of the
collateral arrangement, and whether a
trading market exists for the pledged
securities.
We believe that these amendments
would reduce the paperwork burden for
the affected forms because Summarized
Financial Information is less detailed
than separate financial statements and,
therefore, is less costly and burdensome
to prepare. Further, we believe the
registrant’s ability to present
Summarized Financial Information on a
combined basis with its consolidated
affiliates would reduce the registrant’s
paperwork burden because the
registrant would not be required to
prepare and disclose each of its
affiliates’ financial statements
separately. However, because proposed
Rule 13–02 requires certain financial
information that may not otherwise be
required in the Summarized Financial
Information and additional nonfinancial disclosures, when material, the
expected paperwork burden reduction
may be somewhat mitigated.
Existing Rule 3–16 requires the Rule
3–16 Financial Statements of an affiliate
to be audited for the periods required by
Rules 3–01 and 3–02 of Regulation S–
X. Similar to the proposed amendments
to Rule 3–10, the proposed amendments
related to Rule 3–16 would permit a
registrant to provide the disclosures in
proposed Rule 13–02 outside its
financial statements in a registration
statement covering the offer and sale of
the subject securities and any related
prospectus, and in Exchange Act annual
and quarterly reports required to be
filed during the fiscal year in which the
first sale of the subject securities is
completed, but require the proposed
disclosures to be included in the
footnotes to the registrant’s consolidated
financial statements for annual and
quarterly reports beginning with the
annual report for the fiscal year during
which the first bona fide sale of the
subject securities is completed.
Therefore, if provided outside the
registrant’s financial statements, the
proposed Rule 13–02 disclosures would
not be audited or tagged, which could
reduce the burdens associated with
preparing this information. Whether a
registrant would elect to provide the
disclosures outside its financial
statement footnotes likely would
depend on the company’s specific facts
and circumstances and, as discussed
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above,320 we believe there could be
reasons for companies to elect either
option. In addition, any reduction in
paperwork burden associated with such
an election would be incremental, as the
registrant would still incur expenses to
prepare audited financial information.
Given these considerations, and to avoid
overestimating the overall paperwork
burden reduction associated with the
proposed amendments, we are not
estimating a specific additional burden
reduction for this aspect of the proposed
amendments. However, we solicit
comment on whether it would be
appropriate to do so and, if so, how we
might estimate such a reduction.
The proposed amendments would
require registrants to provide
Summarized Financial Information of
affiliates as of, and for, the most
recently-ended fiscal year and interim
period included in their consolidated
financial statements. Under existing
Rule 3–16, financial statements of
affiliates are required for the periods
specified in Rules 3–01 and 3–02 of
Regulation S–X. This aspect of the
proposed amendments, therefore, would
reduce the paperwork burden for
registrants by reducing the number of
periods required to be presented.
Overall, we estimate that the
proposed amendments related to Rule
3–16 would reduce the current
paperwork burden by approximately 30
hours for each affected form except for
quarterly reports on Form 10–Q.
Existing Rule 3–16 requires registrants
to include interim period Rule 3–16
Financial Statements when the financial
statements are presented in registration
statements, but it does not require Rule
3–16 Financial Statements in quarterly
reports on Form 10–Q. The proposed
amendments related to Rule 3–16 would
require financial information in
quarterly reports on Form 10–Q, which
would increase registrants’ paperwork
burden for that form. We estimate that
the proposed amendments related to
Rule 3–16 would increase the current
paperwork burden by approximately 70
hours 321 for each affected quarterly
report on Form 10–Q.
As with the proposed amendments to
Rule 3–10, although the proposed
amendments related to Rule 3–16 would
reduce the paperwork burden for each
individual affected form, except for
Form 10–Q, the proposed amendments
320 Sections V.B., ‘‘Overview of the Proposed
Changes,’’ and VII.C.2 ‘‘Proposed Amendments to
Rule 3–16 and Relocation to Rule 13–02.’’
321 This figure corresponds to the 70 burden
hours we estimate will be required to prepare and
process the proposed Rule 13–02 information in
connection with the filing of a registration
statement. See discussion below.
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could cause the number of affected
forms filed over a period of time to
change. A number of commenters stated
that, due to the costs and burdens
associated with preparing the
information, collateralized debt
offerings are often unregistered or
structured to avoid or limit Rule 3–16
disclosures.322 We believe that the
proposed amendments would encourage
potential issuers to conduct additional
registered collateralized debt offerings
because the costs of complying with
proposed Rule 13–02 could be less than
the costs required to comply with
existing Rule 3–16. As the number of
these registered offerings increases, the
number of affected forms filed would
also increase over a period of time.
As discussed in Section VII.B.2,
‘‘Market Conditions,’’ over the last three
calendar years from 2015 to 2017,
approximately seven filings per year
have included Rule 3–16 Financial
Statements, with six of those filings on
Form 10–K and one on Form 20–F.
However, a number of filings on affected
forms include references to Rule 3–16
even though they do not include Rule
3–16 Financial Statements.323 As
commenters indicated, indenture
agreements frequently include
provisions that release collateral
requirements if their inclusion would
trigger Rule 3–16 Financial
Statements.324
We do not believe that all the filings
on affected forms that reference Rule 3–
16 but do not include Rule 3–16
Financial Statements would include the
proposed Rule 13–02 information, but
we believe many would include this
information. For PRA purposes, we
estimate that the proposed amendments
would result in approximately 33
percent of the registration statements
that reference Rule 3–16 but do not
include Rule 3–16 Financial Statements
providing the proposed Rule 13–02
information. As such, we estimate that
approximately ten additional
registration statements would include
the proposed Rule 13–02 information,
322 See, e.g., letters from ABA-Committees, Cahill,
Chamber, Covenant, Davis Polk, DT, KPMG, EY,
and PwC.
323 We estimate that, over the last three calendar
years, approximately 21 filings on Form 10–K
included Rule 3–16 Financial Statements and an
additional 15 filings on that form referenced Rule
3–16 but did not include Rule 3–16 Financial
Statements. Also, three filings on Form 20–F
included Rule 3–16 Financial Statements and no
other filings on that form referenced Form 3–16.
Further, 25 filings on Form 10–Q, 11 filings on
Form S–1, 35 filings on Form S–4, one filing on
Form S–11, one filing on Form 10, and one filing
on Form 1–A referred to Rule 3–16 but did not
include Rule 3–16 Financial Statements. No filings
on the other affected forms referenced the rule.
324 See, e.g., letters from Davis, KPMG, and PwC.
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49673
with four of those filings on Form S–
4 325 and one each on Forms S–1,326 S–
11, 10, 1–A, F–1, and F–4.327
Further, we do not believe that all
registrants that file additional
registration statements with the
proposed Rule 13–02 information would
be new registrants, so we do not believe
there would be an additional ten filings
on Form 10–K. We estimate that 33
percent of the registrants that file
additional registration statements with
the proposed Rule 13–02 information
would be new registrants, so an
additional three filings on Form 10–K
would include the proposed Rule 13–02
information.328 Also, we estimate that
two additional filings on Form 20–F,
one registration statement and one
annual report, would include the
proposed Rule 13–02 information.
Estimating the number of additional
filings on Form 10–Q requires a separate
determination because the proposed
amendments would require that
proposed Rule 13–02 information be
included in quarterly reports on Form
10–Q. Rule 3–16 Financial Statements
are not required in quarterly reports on
Form 10–Q under existing Rule 3–16.
To estimate the number of additional
filings on Form 10–Q that would
include the proposed Rule 13–02
information, we look to the estimated
number of filings on Form 10–K. For
every Form 10–K, a registrant would be
required to file three quarterly reports
on Form 10–Q. Assuming that six filings
on Form 10–K would be made each year
with the proposed Rule 13–02
325 We estimated this figure by multiplying the
average number of filings per year from the last
three calendar years on Form S–4 that referenced
Rule 3–16 but did not include the Rule 3–16
Financial Statements (12 filings) by 0.33. The
average annual number of filings on Form S–4 that
referenced Rule 3–16 but did not include the Rule
3–16 Financial Statements is 11.67, which rounds
to 12.
326 We estimated this figure by multiplying the
average number of filings per year from the last
three calendar years on Form S–1 that referenced
Rule 3–16 but did not include the Rule 3–16
Financial Statements (four filings) by 0.33. The
average annual number of filings on Form S–1 that
referenced Rule 3–16 but did not include the Rule
3–16 Financial Statements is 1.33, which rounds to
one.
327 Over the last three calendar years, one filing
on Form S–11, one filing on Form 10, and one filing
on Form 1–A referred to Rule 3–16 but did not
include Rule 3–16 Financial Statements. Therefore,
we estimate that one additional filing on each of
these forms would include the proposed Rule 13–
02 information. Also, although there were no filings
on Forms F–1 and F–4 that referenced Rule 3–16
in the last three calendar years, one filing on Form
F–1 and two filings on Form F–4 referenced Rule
3–16 in calendar years 2013 and 2014, so we
estimated that one additional filing on each of these
forms would include the proposed Rule 13–02
information.
328 Thirty-three percent of ten is 3.33, which
rounds to three.
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Federal Register / Vol. 83, No. 191 / Tuesday, October 2, 2018 / Proposed Rules
information,329 we estimate that 18
quarterly reports on Form 10–Q per year
would be filed with the proposed Rule
13–02 information.
Finally, to determine the paperwork
burden for a registrant to file a
registration statement with the proposed
Rule 13–02 information, we estimated
the number of burden hours required for
an issuer to provide the existing Rule 3–
16 Financial Statements. Unlike for Rule
3–10, no commenter provided an
estimate for the cost of Rule 3–16
Financial Statements. For PRA
purposes, we estimate that the Rule 3–
16 Financial Statements require an
average of 100 burden hours, which is
the same estimate we use for the hours
required to prepare and process the
Alternative Disclosures under existing
Rule 3–10. However, we solicit
comment on the number of burden
hours required to prepare the Rule 3–16
Financial Statements. If proposed Rule
13–02 would reduce a registrant’s
burden by 30 hours, as compared to the
registrant providing the existing Rule 3–
16 Financial Statements, we estimate
that the proposed Rule 13–02
information would require 70 hours to
prepare and process.
C. Burden and Cost Estimates for the
Proposed Amendments
Below we estimate the aggregate
change in paperwork burden as a result
of the proposed amendments, both in
terms of the change to existing
responses as well as the effect of
additional responses. These estimates
represent the average burden for all
registrants, both large and small. In
deriving our estimates, we recognize
that the burdens will likely vary among
individual registrants based on a
number of factors, including the nature
of their business. The burden estimates
were calculated by multiplying the
estimated number of responses by the
estimated average amount of time it
would take a registrant to prepare and
review disclosure required under the
proposed amendments. The portion of
the burden carried by outside
professionals is reflected as a cost, while
the portion of the burden carried by the
registrant internally is reflected in
hours.
For purposes of the PRA, we estimate
that 75% of the burden of preparation
of Forms 10–K, 10–Q, 1–A, and 1–K is
carried by the registrant internally and
that 25% of the burden of preparation
is carried by outside professionals
retained by the company at an average
cost of $400 per hour.330 Additionally,
we estimate that 25% of the burden of
preparation for Forms 10, S–1, S–3, S–
4, S–11, SF–3, F–1, F–3, F–4, 20–F, and
40–F and is carried by the registrant
internally and that 75% of the burden
of preparation is carried by outside
professionals retained by the company
at an average cost of $400 per hour.
Finally, we estimate that 85% of the
burden of preparation of Form 1–SA is
carried by the registrant internally and
that 15% of the burden of preparation
is carried by outside professionals
retained by the company at an average
cost of $400 per hour.
The tables below illustrate the change
to the total annual compliance burden
of affected forms, in hours and in costs,
as a result of the proposed amendments.
TABLE 6—CALCULATIONS OF CHANGE IN BURDEN ESTIMATES OF CURRENT RESPONSES DUE TO PROPOSED AMENDMENTS
TO RULE 3–10
Number of
current
affected
responses
Burden hour
change per
current
affected
response
Change in
burden hours
for current
affected
responses
Change in
company
hours for
current
affected
responses
Change in
professional
hours for
current
affected
responses
Change in
professional
costs for
current
affected
responses
(A)
(B)
(C) = (A) × (B)
(D) = (C) ×
0.75, 0.25, or
0.85
(E) = (C) ×
0.25, 0.75, or
0.15
(F) = (E) × $400
(30)
(30)
(30)
(30)
(30)
(30)
(30)
(30)
(30)
(30)
........................
........................
........................
........................
........................
(14,220)
(37,560)
(300)
(420)
(240)
(3,000)
(150)
(210)
(150)
(210)
..........................
..........................
..........................
..........................
..........................
(10,665)
(28,170)
(75)
(105)
(60)
(750)
(37.5)
(52.5)
(37.5)
(52.5)
..........................
..........................
..........................
..........................
..........................
(3,555)
(9,390)
(225)
(315)
(180)
(2,250)
(112.5)
(157.5)
(112.5)
(157.5)
..........................
..........................
..........................
..........................
..........................
($1,422,000)
(3,756,000)
(90,000)
(126,000)
(72,000)
(900,000)
(45,000)
(63,000)
(45,000)
(63,000)
..........................
..........................
..........................
..........................
..........................
amozie on DSK3GDR082PROD with PROPOSALS2
10–K .................................................
10–Q ................................................
S–1 ...................................................
20–F .................................................
40–F .................................................
S–4 ...................................................
S–11 .................................................
10 .....................................................
F–1 ...................................................
F–4 ...................................................
1–A ...................................................
1–K ...................................................
1–SA ................................................
SF–1 .................................................
SF–3 .................................................
474
1,252
10
14
8
100
5
7
5
7
0
0
0
0
0
329 This figure was determined by adding the two
current filings on Form 10–K that include Rule 3–
16 Financial Statements with the estimated four
additional filings on Form 10–K that would include
proposed Rule 13–02 information.
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330 We recognize that the costs of retaining
outside professionals may vary depending on the
nature of the professional services, but for purposes
of this PRA analysis, we estimate that such costs
would be an average of $400 per hour. This estimate
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is based on consultations with several registrants,
law firms and other persons who regularly assist
registrants in preparing and filing reports with the
Commission.
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49675
TABLE 7—CALCULATIONS OF CHANGE IN BURDEN ESTIMATES OF ADDITIONAL RESPONSES DUE TO PROPOSED
AMENDMENTS TO RULE 3–10
Number of
additional
affected
responses
Burden hour
change per
additional
affected
response
Change in
burden hours
for additional
affected
responses
Change in
company
hours for
additional
affected
responses
Change in
professional
hours for
additional
affected
responses
Change in
professional
costs for
additional
affected
responses
(A)
(B)
(C) = (A) × (B)
(D) = (C) ×
0.75, 0.25, or
0.85
(E) = (C) ×
0.25, 0.75, or
0.15
(F) = (E) × $400
........................
........................
70
70
........................
70
70
70
70
70
........................
........................
........................
........................
........................
..........................
..........................
210
140
..........................
2,310
140
140
140
140
..........................
..........................
..........................
..........................
..........................
..........................
..........................
52.5
35
..........................
577.5
35
35
35
35
..........................
..........................
..........................
..........................
..........................
..........................
..........................
157.5
105
..........................
1,732.5
105
105
105
105
..........................
..........................
..........................
..........................
..........................
..........................
..........................
$63,000
42,000
..........................
693,000
42,000
42,000
42,000
42,000
..........................
..........................
..........................
..........................
..........................
10–K .................................................
10–Q ................................................
S–1 ...................................................
20–F .................................................
40–F .................................................
S–4 ...................................................
S–11 .................................................
10 .....................................................
F–1 ...................................................
F–4 ...................................................
1–A ...................................................
1–K ...................................................
1–SA ................................................
SF–1 .................................................
SF–3 .................................................
0
0
3
2
0
33
2
2
2
2
0
0
0
0
0
TABLE 8—CALCULATIONS OF CHANGE IN BURDEN ESTIMATES OF CURRENT RESPONSES DUE TO PROPOSED AMENDMENTS
TO RULE 3–16
Number of
current
affected
responses
Burden hour
change per
current
affected
response
Change in
burden hours
for current
affected
responses
Change in
company
hours for
current
affected
responses
Change in
professional
hours for
current
affected
responses
Change in
professional
costs for
current
affected
responses
(A)
(B)
(C) = (A) × (B)
(D) = (C) ×
0.75, 0.25, or
0.85
(E) = (C) ×
0.25, 0.75, or
0.15
(F) = (E) × $400
(30)
........................
........................
(30)
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
(210)
..........................
..........................
(30)
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
(157.5)
..........................
..........................
(7.5)
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
(52.5)
..........................
..........................
(22.5)
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
($21,000)
..........................
..........................
(9,000)
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
10–K .................................................
10–Q ................................................
S–1 ...................................................
20–F .................................................
40–F .................................................
S–4 ...................................................
S–11 .................................................
10 .....................................................
F–1 ...................................................
F–4 ...................................................
1–A ...................................................
1–K ...................................................
1–SA ................................................
SF–1 .................................................
SF–3 .................................................
7
0
0
1
0
0
0
0
0
0
0
0
0
0
0
amozie on DSK3GDR082PROD with PROPOSALS2
TABLE 9—CALCULATIONS OF CHANGE IN BURDEN ESTIMATES OF ADDITIONAL RESPONSES DUE TO PROPOSED
AMENDMENTS TO RULE 3–16
Number of
additional
affected
responses
Burden hour
change per
additional
affected
response
Change in
burden hours
for additional
affected
responses
Change in
company hours
for additional
affected
responses
Change in
professional
hours for
additional
affected
responses
Change in
professional
costs for
additional
affected
responses
(A)
(B)
(C) = (A) × (B)
(D) = (C) ×
0.75, 0.25, or
0.85
(E) = (C) ×
0.25, 0.75, or
0.15
(F) = (E) × $400
10–K .................................................
10–Q ................................................
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3
18
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70
70
Fmt 4701
210
1,260
Sfmt 4702
157.5
945
E:\FR\FM\02OCP2.SGM
02OCP2
52.5
315
$21,000
126,000
49676
Federal Register / Vol. 83, No. 191 / Tuesday, October 2, 2018 / Proposed Rules
TABLE 9—CALCULATIONS OF CHANGE IN BURDEN ESTIMATES OF ADDITIONAL RESPONSES DUE TO PROPOSED
AMENDMENTS TO RULE 3–16—Continued
Number of
additional
affected
responses
Burden hour
change per
additional
affected
response
Change in
burden hours
for additional
affected
responses
Change in
company hours
for additional
affected
responses
Change in
professional
hours for
additional
affected
responses
Change in
professional
costs for
additional
affected
responses
(A)
(B)
(C) = (A) × (B)
(D) = (C) ×
0.75, 0.25, or
0.85
(E) = (C) ×
0.25, 0.75, or
0.15
(F) = (E) × $400
70
70
........................
70
70
70
70
70
70
........................
........................
........................
........................
70
140
..........................
280
70
70
70
70
70
..........................
..........................
..........................
..........................
17.5
35
..........................
70
17.5
17.5
17.5
17.5
52.5
..........................
..........................
..........................
..........................
52.5
105
..........................
210
52.5
52.5
52.5
52.5
17.5
..........................
..........................
..........................
..........................
21,000
42,000
..........................
84,000
21,000
21,000
21,000
21,000
7,000
..........................
..........................
..........................
..........................
S–1 ...................................................
20–F .................................................
40–F .................................................
S–4 ...................................................
S–11 .................................................
10 .....................................................
F–1 ...................................................
F–4 ...................................................
1–A ...................................................
1–K ...................................................
1–SA ................................................
SF–1 .................................................
SF–3 .................................................
1
2
0
4
1
1
1
1
1
0
0
0
0
TABLE 10—CALCULATIONS FOR INCREMENTAL PAPERWORK BURDEN UNDER THE PROPOSED AMENDMENTS TO RULES
3–10 AND 3–16
[Current Responses + Additional Responses]
10–K ......................
10–Q ......................
S–1 ........................
20–F ......................
40–F ......................
S–4 ........................
S–11 ......................
10 ..........................
F–1 ........................
F–4 ........................
1–A ........................
1–K ........................
1–SA ......................
SF–1 ......................
SF–3 ......................
Number of
total affected
responses
under
Proposed
Rule 3–10
Number of
total affected
responses
under
Proposed
Rule 3–16
Change in
burden hours
for total
affected
responses
under
Proposed
Rule 3–10
Change in
burden hours
for total
affected
responses
under
Proposed
Rule 3–16
Change in
company
hours for total
affected
responses
under
Proposed
Rule 3–10
Change in
company
hours for total
affected
responses
under
Proposed
Rule 3–16
Change in
professional
hours for total
affected
responses
under
Proposed
Rule 3–10
Change in
professional
hours for total
affected
responses
under
Proposed
Rule 3–16
Change in
professional
costs for total
affected
responses
under
Rule 3–10
Change in
professional
costs for total
affected
responses
under
Rule 3–16
(A) 331
(B) 332
(C) 333
(D) 334
(E) 335
(F) 336
(G) 337
(H) 338
(I) 339
(J) 340
(14,220)
(37,560)
(90)
(280)
(240)
(690)
(10)
(70)
(10)
(70)
........................
........................
........................
........................
........................
0
1,260
70
110
........................
280
70
70
70
70
70
........................
........................
........................
........................
(10,665)
(28,170)
(22.5)
(70)
(60)
(172.5)
(2.5)
(17.5)
(2.5)
(17.5)
........................
........................
........................
........................
........................
0
945
17.5
27.5
........................
70
17.5
17.5
17.5
17.5
52.5
........................
........................
........................
........................
(3,555)
(9,390)
(67.5)
(210)
(180)
(517.5)
(7.5)
(52.5)
(7.5)
(52.5)
........................
........................
........................
........................
........................
0
315
52.5
82.5
........................
210
52.5
52.5
52.5
52.5
17.5
........................
........................
........................
........................
($1,422,000)
(3,756,000)
(27,000)
(84,000)
(72,000)
(207,000)
(3,000)
(21,000)
(3,000)
(21,000)
........................
........................
........................
........................
........................
$0
126,000
21,000
33,000
........................
84,000
21,000
21,000
21,000
21,000
7,000
........................
........................
........................
........................
474
1,252
13
16
8
133
7
9
7
9
0
0
0
0
0
10
18
1
3
0
4
1
1
1
1
1
0
0
0
0
amozie on DSK3GDR082PROD with PROPOSALS2
TABLE 11—INCREMENTAL PAPERWORK BURDEN UNDER THE PROPOSED AMENDMENTS TO RULES 3–10 AND 3–16
10–K .....................................................................................
10–Q ....................................................................................
S–1 .......................................................................................
20–F .....................................................................................
40–F .....................................................................................
6, Column (A) + Table 7, Column (A).
8, Column (A) + Table 9, Column (A).
333 Table 6, Column (C) + Table 6, Column (C).
334 Table 8, Column (C) + Table 9, Column (C).
Number of
affected
responses
Change in
burden hours
of affected
response
Change in
company
hours
Change in
professional
hours
Change in
professional
costs
(A) 341
(B) 342
(C) 343
(D) 344
(E) 345
484
1,270
14
19
8
(14,220)
(36,300)
(20)
(170)
(240)
331 Table
335 Table
339 Table
332 Table
336 Table
340 Table
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6, Column (D) + Table 7, Column (D).
8, Column (D) + Table 9, Column (D).
337 Table 6, Column (E) + Table 7, Column (E).
338 Table 8, Column (E) + Table 9, Column (E).
(10,665)
(27,225)
(5)
(42.5)
(60)
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E:\FR\FM\02OCP2.SGM
(3,555)
(9,075)
(15)
(127.5)
(180)
($1,422,000)
(3,630,000)
(6,000)
(51,000)
(72,000)
6, Column (F) + Table 7, Column (F).
8, Column (F) + Table 9, Column (F).
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TABLE 11—INCREMENTAL PAPERWORK BURDEN UNDER THE PROPOSED AMENDMENTS TO RULES 3–10 AND 3–16—
Continued
Number of
affected
responses
Change in
burden hours
of affected
response
Change in
company
hours
Change in
professional
hours
Change in
professional
costs
(A) 341
(B) 342
(C) 343
(D) 344
(E) 345
(410)
60
0
60
0
70
........................
........................
........................
........................
(102.5)
15
0
15
0
52.5
........................
........................
........................
........................
(307.5)
45
0
45
0
17.5
........................
........................
........................
........................
(123,000)
18,000
0
18,000
0
7,000
........................
........................
........................
........................
S–4 .......................................................................................
S–11 .....................................................................................
10 .........................................................................................
F–1 .......................................................................................
F–4 .......................................................................................
1–A .......................................................................................
1–K .......................................................................................
1–SA ....................................................................................
SF–1 .....................................................................................
SF–3 .....................................................................................
137
8
10
8
10
1
0
0
0
0
TABLE 12—REQUESTED PAPERWORK BURDEN UNDER THE PROPOSED AMENDMENTS TO RULES 3–10 AND 3–16 346
Current burden
Current
annual
responses
(A)
10–K ............................................
10–Q ............................................
S–1 ..............................................
20–F .............................................
40–F .............................................
S–4 ..............................................
S–11 ............................................
10 .................................................
F–1 ...............................................
F–4 ...............................................
1–A ..............................................
1–K ..............................................
1–SA ............................................
SF–1 ............................................
SF–3 ............................................
8,137
22,907
901
725
160
551
64
216
63
39
250
188
188
6
71
Current
burden
hours
(B)
14,596,183
3,271,578
151,143
480,226
17,197
565,282
12,529
11,783
26,980
14,245
140,813
84,600
29,952
2,076
24,548
amozie on DSK3GDR082PROD with PROPOSALS2
D. Request for Comment
Pursuant to 44 U.S.C. 3506(c)(2)(B),
we request comment in order to:
• Evaluate whether the proposed
collections of information are necessary
for the proper performance of the
functions of the Commission, including
whether the information will have
practical utility;
• Evaluate the accuracy of our
assumptions and estimates of the
burden of the proposed collection of
information;
• Determine whether there are ways
to enhance the quality, utility, and
clarity of the information to be
collected;
• Evaluate whether there are ways to
minimize the burden of the collection of
information on those who respond,
including through the use of automated
341 Table
10, Columns (A) + (B).
10, Columns (C) + (D).
343 Table 10, Columns (E) + (F).
18:46 Oct 01, 2018
Number of
affected
responses
Change in
company
hours
(C)
(D) 347
$1,950,114,190
436,240,908
181,371,300
576,270,600
20,636,800
678,338,304
15,034,368
14,140,051
32,375,700
17,093,700
18,775,200
11,280,000
2,113,872
2,491,200
29,457,900
484
1,270
14
19
8
137
8
10
8
10
1
0
0
0
0
Requested change in burden
Change in
professional
costs
Annual
responses
Burden
hours
(E) 348
(F) 349
(G) = (A) + (D)
(H) = (B) + (E)
(10,665)
(27,225)
(5)
(42.5)
(60)
(102.5)
15
0
15
0
52.5
........................
........................
........................
........................
($1,422,000)
(3,630,000)
(6,000)
(51,000)
(72,000)
(123,000)
18,000
0
18,000
0
7,000
........................
........................
........................
........................
8,621
24,117
915
744
168
688
72
226
71
49
251
188
188
6
71
14,585,518
3,244,353
151,138
480,184
17,137
565,180
12,544
11,783
26,995
14,245
140,866
84,600
29,952
2,076
24,548
collection techniques or other forms of
information technology; and
• Evaluate whether the proposed
amendments would have any effects on
any other collection of information not
previously identified in this section.
Any member of the public may direct
to us any comments concerning the
accuracy of these burden estimates and
any suggestions for reducing these
burdens. Persons submitting comments
on the collection of information
requirements should direct their
comments to the Office of Management
and Budget, Attention: Desk Officer for
the U.S. Securities and Exchange
Commission, Office of Information and
Regulatory Affairs, Washington, DC
20503, and send a copy to, Brent J.
Fields, Secretary, U.S. Securities and
Exchange Commission, 100 F Street NE,
Washington, DC 20549, with reference
10, Columns (G) + (H).
10, Columns (I) + (J).
346 The figures in Table 12, Columns (G), (H), and
(I) have been rounded to the nearest whole number.
342 Table
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Current
cost
burden
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IX. Small Business Regulatory
Enforcement Fairness Act
For purposes of the Small Business
Regulatory Enforcement Fairness Act of
347 From
345 Table
348 From
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(I) = (C) + (F)
$1,948,692,190
432,610,908
181,365,300
576,219,600
20,564,800
678,215,304
15,052,368
14,140,051
32,393,700
17,093,700
18,782,200
11,280,000
2,113,872
2,491,200
29,457,900
to File No. S7–19–18. Requests for
materials submitted to OMB by the
Commission with regard to the
collection of information requirements
should be in writing, refer to File No.
S7–19–18 and be submitted to the U.S.
Securities and Exchange Commission,
Office of FOIA Services, 100 F Street
NE, Washington, DC 20549. OMB is
required to make a decision concerning
the collection of information
requirements between 30 and 60 days
after publication of the proposed
amendments. Consequently, a comment
to OMB is best assured of having its full
effect if the OMB receives it within 30
days of publication.
344 Table
PO 00000
Cost
burden
Table 11, Column (A).
Table 11, Column (C).
349 From Table 11, Column (F).
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Federal Register / Vol. 83, No. 191 / Tuesday, October 2, 2018 / Proposed Rules
1996 (‘‘SBREFA’’),350 we solicit data to
determine whether the proposed
amendments constitute a ‘‘major’’ rule.
Under SBREFA, a rule is considered
‘‘major’’ where, if adopted, it results or
is likely to result in:
• An annual effect on the economy of
$100 million or more (either in the form
of an increase or a decrease);
• A major increase in costs or prices
for consumers or individual industries;
or
• Significant adverse effects on
competition, investment, or innovation.
Commenters should provide comment
and empirical data on (a) the potential
annual effect on the U.S. economy; (b)
any increase in costs or prices for
consumers or individual industries; and
(c) any potential effect on competition,
investment, or innovation.
X. Initial Regulatory Flexibility Act
Analysis
This Initial Regulatory Flexibility Act
Analysis has been prepared in
accordance with the Regulatory
Flexibility Act.351 It relates to the
proposed amendments to the financial
disclosure requirements in Rules 3–10
and 3–16 of Regulation S–X to improve
those requirements for both investors
and registrants.
amozie on DSK3GDR082PROD with PROPOSALS2
A. Reasons for, and Objectives of, the
Proposing Action
The purpose of the proposed
amendments to Rules 3–10 and 3–16 is
to better align those requirements with
the needs of investors and to simplify
and streamline the disclosure
obligations of registrants. The proposed
changes would include amending both
rules and relocating part of Rule 3–10
and all of Rule 3–16 to proposed Rules
13–01 and 13–02 in Regulation S–X,
respectively. These changes are
intended to provide investors with the
information that is important given the
specific facts and circumstances, make
the disclosures easier to understand,
and reduce the costs and burdens to
registrants. The reasons for, and
objectives of, the proposed amendments
are discussed in more detail in Sections
I through III above.
B. Legal Basis
We are proposing the rule and form
amendments contained in this release
under the authority set forth in Sections
3, 6, 7, 8, 9, 10, 19(a), and 28 of the
Securities Act of 1933, as amended and
Sections 3(b), 12, 13, 15(d), 23(a), and
36 of the Securities Exchange Act of
1934, as amended.
350 Public Law 104–121, tit. II, 110 Stat. 857
(1996).
351 5 U.S.C. 601 et seq.
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C. Small Entities Subject to the
Proposed Rules
The proposed changes would affect
some registrants that are small entities.
The Regulatory Flexibility Act defines
‘‘small entity’’ to mean ‘‘small
business,’’ ‘‘small organization,’’ or
‘‘small governmental jurisdiction.’’ 352
For purposes of the Regulatory
Flexibility Act, under our rules, an
issuer, other than an investment
company or an investment adviser, is a
‘‘small business’’ or ‘‘small
organization’’ if it had total assets of $5
million or less on the last day of its most
recent fiscal year and is engaged or
proposing to engage in an offering of
securities that does not exceed $5
million.353 We estimate that there are
1,196 issuers that file with the
Commission, other than investment
companies and investment advisers,
that may be considered small entities
and are potentially subject to the
proposed amendments.354
D. Reporting, Recordkeeping, and Other
Compliance Requirements
As noted above, the purpose of the
proposed amendments to Rules 3–10
and 3–16 is to better align those
requirements with the needs of
investors and to simplify and streamline
the disclosure obligations of registrants.
Proposed Rule 3–10 would continue to
permit the omission of separate
financial statements of subsidiary
issuers and guarantors when certain
conditions are met and the parent
company provides the Proposed
Alternative Disclosures. While the
conditions that must be met to omit
separate subsidiary issuer or guarantor
financial statements would continue to
be located in proposed Rule 3–10, the
disclosure requirements would be
relocated to proposed Rule 13–01. The
proposed amendments would:
• Replace the condition that a
subsidiary issuer or guarantor be 100%
owned by the parent company with a
condition that it be consolidated in the
parent company’s consolidated financial
statements;
• replace Consolidating Information
with Summarized Financial Information
of the Obligor Group, which may be
presented on a combined basis, and
reduce the number of periods presented;
352 5
U.S.C. 601(6).
17 CFR 230.157 under the Securities Act
and 17 CFR 240.0–10(a) under the Exchange Act.
354 This estimate is based on staff analysis of
XBRL data submitted by filers, other than coregistrants, with EDGAR filings of Forms 10–K, 20–
F, and 40–F and amendments filed during the
calendar year 2017 and a staff analysis of Forms 1–
A and 1–K filed during the calendar year 2017.
353 See
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• expand the qualitative disclosures
about the guarantees and the issuers and
guarantors;
• eliminate quantitative thresholds
for disclosure and require disclosure of
additional information that would be
material to a holder of the guaranteed
security;
• permit the Proposed Alternative
Disclosures to be provided outside the
footnotes to the parent company’s
audited annual and unaudited interim
consolidated financial statements in a
registration statement covering the offer
and sale of the subject securities and
any related prospectus, and in certain
Exchange Act reports filed shortly
thereafter;
• require that the Proposed
Alternative Disclosures be included in
the footnotes to the parent company’s
consolidated financial statements for
annual and quarterly reports beginning
with the annual report for the fiscal year
during which the first bona fide sale of
the subject securities is completed;
• eliminate the requirement to
provide pre-acquisition financial
statements of recently-acquired
subsidiary issuers and guarantors; and
• require the Proposed Alternative
Disclosures for as long as the issuers
and guarantors have an Exchange Act
reporting obligation with respect to the
guaranteed securities rather than for so
long as the guaranteed securities are
outstanding.
The proposed amendments to Rule 3–
10 would simplify and streamline the
rule structure in several ways. Most
significantly, under proposed Rules 3–
10(a) and 3–10(a)(1) there would be only
a single set of eligibility criteria that
would apply to all issuer and guarantor
structures instead of having separate
sets of criteria contained in each of the
five exceptions in existing Rules 3–10(b)
through (f). Similarly, the requirements
for the Proposed Alternative Disclosures
would be included in a single location
within proposed Rule 13–01, rather than
spread among the multiple paragraphs
of existing Rule 3–10.
Proposed Rule 3–16 would replace
the rule’s existing requirement to
provide separate financial statements for
each affiliate whose securities are
pledged as collateral with financial and
non-financial disclosures about the
affiliate(s) and the collateral
arrangement as a supplement to the
consolidated financial statements of the
registrant that issues the collateralized
security. Similar to the proposed
disclosures for issuers and guarantors of
guaranteed securities under Rule 3–10,
the disclosure requirements in Rule 3–
16 would be amended and relocated to
proposed Rule 13–02.
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Federal Register / Vol. 83, No. 191 / Tuesday, October 2, 2018 / Proposed Rules
Additionally, instead of requiring
disclosure only when the pledged
securities meet or exceed a numerical
threshold relative to the securities
registered or being registered under the
existing rule’s ‘‘substantial portion’’ test,
the proposed amendments would
require disclosure to the extent material
to a holder of the collateralized security.
Further, the proposed amendments
would require disclosure of any
additional information about the
collateral arrangement and each affiliate
whose security is pledged as collateral
that would be material to a holder of the
collateralized securities. We believe
these proposed disclosures would
enable an investor to evaluate the
potential outcomes in the event of
foreclosure, would reduce costs and
burdens on registrants, and may
facilitate the use of debt structures that
include pledges of affiliate securities,
resulting in improved collateral
packages being available to investors.
Many of the proposed changes would
simplify and streamline existing
disclosure requirements in ways that are
expected to reduce compliance burdens
for all registrants, including small
entities. Some of the proposed changes
would incrementally increase
compliance costs for registrants,
although we do not expect these
additional costs to be significant. In
addition, compliance with the proposed
amendments would require the use of
professional skills, including accounting
and legal skills. The proposed
amendments are discussed in detail in
Sections II and III above. We discuss the
economic impact including the
estimated costs and burdens, of the
proposed amendments to all registrants,
including small entities, in Sections VII
and VIII above.
E. Duplicative, Overlapping, or
Conflicting Federal Rules
We believe that the proposed
amendments would not duplicate,
overlap, or conflict with other federal
rules.
amozie on DSK3GDR082PROD with PROPOSALS2
F. Significant Alternatives
The Regulatory Flexibility Act directs
us to consider alternatives that would
accomplish our stated objectives, while
minimizing any significant adverse
impact on small entities. In connection
with the proposed amendments, we
considered the following alternatives:
• Establishing different compliance or
reporting requirements that take into
account the resources available to small
entities;
• Clarifying, consolidating, or
simplifying compliance and reporting
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requirements under the rules for small
entities;
• Using performance rather than
design standards; and
• Exempting small entities from all or
part of the requirements.
We believe the proposed amendments
would simplify and streamline
disclosure requirements in ways that are
expected to reduce compliance burdens
for all registrants, including small
entities. We do not believe that the
proposed amendments would impose
any significant new compliance
obligations. Accordingly, we do not
believe it is necessary to exempt small
entities from all or part of the proposed
amendments. We note in this regard that
the Commission’s existing disclosure
requirements provide for scaled
disclosure requirements and other
accommodations for small entities, and
the proposed amendments would not
alter these existing accommodations.
We are, however, soliciting comment on
whether the amendments should permit
additional or different flexibility for
SRCs and other types of issuers to locate
the Proposed Alternative Disclosures
outside the financial statements in light
of the burdens associated with annual
audit, interim review, and internal
control over financial reporting
requirements.
Finally, with respect to using
performance rather than design
standards, the proposed amendments
generally contain elements similar to
performance standards, which we
believe is appropriate because it would
allow registrants to omit financial
information that is not necessary for an
investment decision based on facts and
circumstances applicable to that
registrant and offering. For example,
under the proposed amendments, the
Summarized Financial Information of
the Obligor Group that generally would
be required could be omitted if it is not
materially different from corresponding
amounts in the parent company’s
consolidated financial statements. This
and other performance standards
included in the proposed amendments
would reduce compliance burdens for
all registrants, including small entities.
Request for Comment
Frm 00051
Fmt 4701
Sfmt 4702
• the number of small entity
companies that may be affected by the
proposed rule and form amendments;
• the existence or nature of the
potential effects of the proposed
amendments on small entity companies
discussed in the analysis; and
• how to quantify the effects of the
proposed amendments.
Commenters are asked to describe the
nature of any effect and provide
empirical data supporting the extent of
that effect. Comments will be
considered in the preparation of the
Final Regulatory Flexibility Analysis, if
the proposed rules are adopted, and will
be placed in the same public file as
comments on the proposed rules
themselves.
XI. Statutory Authority
The amendments contained in this
release are being proposed under the
authority set forth in Sections 3, 6, 7, 8,
10, 19(a), and 28 of the Securities Act,
as amended, and Sections 3(b), 12, 13,
15(d), 23(a), and 36 of the Exchange Act.
List of Subjects in 17 CFR Parts 210,
229, 239, 240 and 249
Reporting and recordkeeping
requirements, Securities.
Text of Proposed Rule and Form
Amendments
For the reasons set out in the
preamble, the Commission is proposing
to amend title 17, chapter II of the Code
of Federal Regulations as follows:
PART 210—FORM AND CONTENT OF
AND REQUIREMENTS FOR FINANCIAL
STATEMENTS, SECURITIES ACT OF
1933, SECURITIES EXCHANGE ACT
OF 1934, INVESTMENT COMPANY ACT
OF 1940, INVESTMENT ADVISERS ACT
OF 1940, AND ENERGY POLICY AND
CONSERVATION ACT OF 1975
1. The authority citation for part 210
continues to reads as follows:
■
Authority: 15 U.S.C. 77f, 77g, 77h, 77j,
77s, 77z–2, 77z–3, 77aa(25), 77aa(26),
77nn(25), 77nn(26), 78c, 78j–1, 78l, 78m,
78n, 78o(d), 78q, 78u–5, 78w, 78ll, 78mm,
80a–8, 80a–20, 80a–29, 80a–30, 80a–31, 80a–
37(a), 80b–3, 80b–11, 7202 and 7262, and
sec. 102(c), Pub. L. 112–106, 126 Stat. 310
(2012), unless otherwise noted.
2. Revise § 210.3–10 to read as
follows:
■
We encourage the submission of
comments with respect to any aspect of
this Initial Regulatory Flexibility
Analysis. In particular, we request
comments regarding:
• How the proposed rule and form
amendments can achieve their objective
while lowering the burden on small
entities;
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§ 210.3–10 Financial statements of
guarantors and issuers of guaranteed
securities registered or being registered.
(a) If an issuer or guarantor of a
guaranteed security that is registered or
being registered is required to file
financial statements required by
Regulation S–X with respect to the
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guarantee or guaranteed security, such
financial statements may be omitted if
the issuer or guarantor is a consolidated
subsidiary of the parent company, the
parent company’s consolidated financial
statements have been filed, and the
conditions in paragraphs (a)(1) and (2)
of this section have been met:
(1) The guaranteed security is debt or
debt-like; and
(i) The parent company issues the
security or co-issues the security, jointly
and severally, with one or more of its
consolidated subsidiaries; or
(ii) A consolidated subsidiary issues
the security or co-issues the security
with one or more other consolidated
subsidiaries of the parent company, and
the security is guaranteed fully and
unconditionally by the parent company.
(2) The parent company provides the
disclosures specified in § 210.13–01.
(b) For the purposes of this section
and § 210.13–01:
(1) The ‘‘parent company’’ is the
entity that:
(i) Is an issuer or guarantor of the
guaranteed security;
(ii) Is, or as a result of the subject
Securities Act registration statement
will be, an Exchange Act reporting
company; and
(iii) Consolidates each subsidiary
issuer and/or subsidiary guarantor of the
guaranteed security in its consolidated
financial statements.
(2) A security is ‘‘debt or debt-like’’ if
it has the following characteristics:
(i) The issuer has a contractual
obligation to pay a fixed sum at a fixed
time; and
(ii) Where the obligation to make such
payments is cumulative, a set amount of
interest must be paid.
Note 1 to paragraph (b)(2). Neither the
form of the security nor its title will
determine whether a security is debt or debt
like. Instead, the substance of the obligation
created by the security will be determinative.
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Note 2 to paragraph (b)(2). The phrase ‘‘set
amount of interest’’ is not intended to mean
‘‘fixed amount of interest.’’ Floating and
adjustable rate securities, as well as indexed
securities, may meet the criteria specified in
paragraph (b)(2)(ii) of this section as long as
the payment obligation is set in the debt
instrument and can be determined from
objective indices or other factors that are
outside the discretion of the obligor.
(3) A guarantee is ‘‘full and
unconditional,’’ if, when an issuer of a
guaranteed security has failed to make
a scheduled payment, the guarantor is
obligated to make the scheduled
payment immediately and, if it does not,
any holder of the guaranteed security
may immediately bring suit directly
against the guarantor for payment of all
amounts due and payable.
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§ 210.3–16
[Removed and Reserved]
3. Remove and reserve § 210.3–16.
4. Amend § 210.8–01 by revising Note
3 and Note 4 to read as follows:
■
■
§ 210.8–01
Preliminary Notes to Article 8.
*
*
*
*
*
Note 3 to § 210.8. The requirements of
§ 210.3–10 are applicable to financial
statements for a subsidiary of a smaller
reporting company that issues securities
guaranteed by the smaller reporting company
or guarantees securities issued by the smaller
reporting company. Disclosures about
guarantors and issuers of guaranteed
securities registered or being registered must
be presented as required by § 210.13–01.
Note 4 to § 210.8. Disclosures about a
smaller reporting company’s affiliates whose
securities collateralize any class of securities
registered or being registered and the related
collateral arrangement must be presented as
required by § 210.13–02.
*
*
*
*
*
5. Amend § 210.8–03 by adding
paragraphs (b)(7) and (8) to read as
follows:
■
§ 210.8–03
Interim financial statements.
*
*
*
*
*
(b) * * *
(7) Financial statements of and
disclosures about guarantors and
issuers of guaranteed securities. The
requirements of § 210.3–10 are
applicable to financial statements for a
subsidiary of a smaller reporting
company that issues securities
guaranteed by the smaller reporting
company or guarantees securities issued
by the smaller reporting company.
Disclosures about guarantors and issuers
of guaranteed securities registered or
being registered must be presented as
required by § 210.13–01.
(8) Disclosures about affiliates whose
securities collateralize an issuance.
Disclosures about a smaller reporting
company’s affiliates whose securities
collateralize any class of securities
registered or being registered and the
related collateral arrangement must be
presented as required by § 210.13–02.
*
*
*
*
*
■ 6. Amend § 210.10–01 by adding
paragraphs (b)(9) and (10) to read as
follows:
§ 210.10–01
Interim financial statements.
*
*
*
*
*
(b) * * *
(9) The requirements of § 210.3–10 are
applicable to financial statements for a
subsidiary of the registrant that issues
securities guaranteed by the registrant or
guarantees securities issued by the
registrant. Disclosures about guarantors
and issuers of guaranteed securities
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registered or being registered must be
presented as required by § 210.13–01.
(10) Disclosures about a registrant’s
affiliates whose securities collateralize
any class of securities registered or
being registered and the related
collateral arrangement must be
presented as required by § 210.13–02.
*
*
*
*
*
■ 7. Add an undesignated center
heading and §§ 210.13–01 and 210.13–
02 to read as follows:
Financial and Non-Financial
Disclosures for Certain Securities
Registered or Being Registered
§ 210.13–01 Guarantors and issuers of
guaranteed securities registered or being
registered.
(a) For each class of guaranteed
security registered or being registered
for which the registrant is the parent
company (as that term is defined in
§ 210.3–10(b)(1)), provide the following
disclosures to the extent material to
holders of the guaranteed security:
(1) Identification of the issuers and
guarantors of the guaranteed security;
(2) A description of the terms and
conditions of the guarantees, and how
payments to holders of the guaranteed
security may be affected by the
composition of and relationships among
the issuers, guarantors, and subsidiaries
of the parent company that are not
issuers or guarantors of the guaranteed
security;
(3) A description of other factors that
may affect payments to holders of the
guaranteed security, such as contractual
or statutory restrictions on dividends,
guarantee enforceability, or the rights of
a noncontrolling interest holder;
(4) Summarized financial information
as specified in § 210.1–02(bb)(1) of each
issuer and guarantor of the guaranteed
security. The summarized financial
information of each such issuer and
guarantor consolidated in the parent
company’s consolidated financial
statements may be presented on a
combined basis with the summarized
financial information of the parent
company. Intercompany transactions
between issuers and guarantors whose
summarized financial information is
presented on a combined basis shall be
eliminated. If the information provided
in response to the requirements of this
section is applicable to one or more, but
not all, issuers and/or guarantors,
separately disclose the summarized
financial information applicable to
those issuers and/or guarantors. The
financial information of subsidiaries
that are not issuers or guarantors shall
not be combined with that of issuers
and guarantors. The method selected to
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present investments in subsidiaries that
are not issuers or guarantors shall be
disclosed and used for all such
subsidiaries for all of the classes of
guaranteed securities for which
disclosure is required by this section,
and shall be reasonable in the
circumstances. Disclose this
summarized financial information as of
and for the most recently ended fiscal
year and interim period included in the
parent company’s consolidated financial
statements. If the disclosure required by
this paragraph (a)(4) is omitted because
it is not material to holders of the
guaranteed security, disclose a
statement to that effect and the reasons
therefore; and
(5) Any other quantitative or
qualitative information that would be
material to making an investment
decision with respect to the guaranteed
security.
Note 1 to paragraph (a). The parent
company may elect to provide the
disclosures required by this section in a
footnote to its consolidated financial
statements or alternatively, in management’s
discussion and analysis of financial
condition and results of operations described
in § 229.303 (Item 303 of Regulation S–K) of
this chapter in its registration statement
covering the offer and sale of the subject
securities and any related prospectus, and in
Exchange Act reports on the forms described
in §§ 249.310 (Form 10–K), 249.220f (Form
20–F), and 249.308a (Form 10–Q) of this
chapter required to be filed during the fiscal
year in which the first bona fide sale of the
subject securities is completed. If not
otherwise included in the consolidated
financial statements or in management’s
discussion and analysis of financial
condition and results of operations, the
parent company must include the disclosures
in its prospectus immediately following
‘‘Risk Factors,’’ if any, or otherwise,
immediately following pricing information
described in § 229.503(c) (Item 503(c) of
Regulation S–K) of this chapter. However, the
parent company must provide the disclosures
in a footnote to its consolidated financial
statements in its annual and quarterly reports
beginning with its annual report filed on the
forms described in §§ 249.310 (Form 10–K)
and 249.220f (Form 20–F) of this chapter for
the fiscal year during which the first bona
fide sale of the subject securities is
completed.
amozie on DSK3GDR082PROD with PROPOSALS2
(b) [Reserved]
§ 210.13–02 Affiliates whose securities
collateralize securities registered or being
registered.
(a) For each class of security
registered or being registered that is
collateralized by a security of the
registrant’s affiliate or affiliates, provide
the following disclosures to the extent
material to holders of the collateralized
security:
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(1) A description of the security
pledged as collateral and each affiliate
whose security is pledged as collateral;
(2) A description of the terms and
conditions of the collateral arrangement,
including the events or circumstances
that would require delivery of the
collateral;
(3) A description of the trading market
for the affiliate’s security pledged as
collateral or a statement that there is no
market;
(4) Summarized financial information
as specified in § 210.1–02(bb)(1) of each
affiliate whose securities are pledged as
collateral. The summarized financial
information of each such affiliate
consolidated in the registrant’s financial
statements may be presented on a
combined basis. Intercompany
transactions between affiliates whose
summarized financial information is
presented on a combined basis shall be
eliminated. If the information provided
in response to the requirements of this
section is applicable to one or more, but
not all, affiliates, separately disclose the
summarized financial information
applicable to those affiliates. Disclose
this summarized financial information
as of and for the most recently ended
fiscal year and interim period included
in the registrant’s consolidated financial
statements. If the disclosure required by
this paragraph (a)(4) is omitted because
it is not material to holders of the
collateralized security, disclose a
statement to that effect and the reasons
therefore; and
(5) Any other quantitative or
qualitative information that would be
material to making an investment
decision with respect to the
collateralized security.
Note 1 to paragraph (a). The registrant may
elect to provide the disclosures required by
this section in a footnote to its consolidated
financial statements or alternatively, in
management’s discussion and analysis of
financial condition and results of operations
described in § 229.303 (Item 303 of
Regulation S–K) of this chapter in its
registration statement covering the offer and
sale of the subject securities and any related
prospectus, and in Exchange Act reports on
the forms described in §§ 249.310 (Form 10–
K), 249.220f (Form 20–F), and 249.308a
(Form 10–Q) of this chapter required to be
filed during the fiscal year in which the first
bona fide sale of the subject securities is
completed. If not otherwise included in the
consolidated financial statements or in
management’s discussion and analysis of
financial condition and results of operations,
the registrant must include the disclosures in
its prospectus immediately following ‘‘Risk
Factors,’’ if any, or otherwise, immediately
following pricing information described in
§ 229.503(c) (Item 503(c) of Regulation S–K)
of this chapter. However, the registrant must
provide the disclosures in a footnote to its
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49681
consolidated financial statements in its
annual and quarterly reports beginning with
its annual report filed on the forms described
in §§ 249.310 (Form 10–K) and 249.220f
(Form 20–F) of this chapter for the fiscal year
during which the first bona fide sale of the
subject securities is completed.
(b) [Reserved]
PART 229—STANDARD
INSTRUCTIONS FOR FILING FORMS
UNDER SECURITIES ACT OF 1933,
SECURITIES EXCHANGE ACT OF 1934
AND ENERGY POLICY AND
CONSERVATION ACT OF 1975—
REGULATION S–K
8. The authority citation for part 229
reads as follows:
■
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j,
77k, 77s, 77z–2, 77z–3, 77aa(25), 77aa(26),
77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj,
77nnn, 77sss, 78c, 78i, 78j, 78j–3, 78l, 78m,
78n, 78n–1, 78o, 78u–5, 78w, 78ll, 78 mm,
80a–8, 80a–9, 80a–20, 80a–29, 80a–30, 80a–
31(c), 80a–37, 80a–38(a), 80a–39, 80b–11 and
7201 et seq.; 18 U.S.C. 1350; sec. 953(b), Pub.
L. 111–203, 124 Stat. 1904 (2010); and sec.
102(c), Pub. L. 112–106, 126 Stat. 310 (2012).
9. Amend § 229.504 by revising
Instruction 6 to read as follows:
■
§ 229.504
(Item 504) Use of proceeds.
*
*
*
*
*
6. Where the registrant indicates that
the proceeds may, or will, be used to
finance acquisitions of other businesses,
the identity of such businesses, if
known, or, if not known, the nature of
the businesses to be sought, the status
of any negotiations with respect to the
acquisition, and a brief description of
such business shall be included. Where,
however, pro forma financial statements
reflecting such acquisition are not
required by §§ 210.1–01 through
210.13–02 (Regulation S–X) of this
chapter, including § 210.8–05 (Rule 8–
05 of Regulation S–X) of this chapter for
smaller reporting companies, to be
included in the registration statement,
the possible terms of any transaction,
the identification of the parties thereto
or the nature of the business sought
need not be disclosed, to the extent that
the registrant reasonably determines
that public disclosure of such
information would jeopardize the
acquisition. Where §§ 210.1–01 through
210.13–02 (Regulation S–X) of this
chapter, including § 210.8–04 (Rule 8–
04 of Regulation S–X) of this chapter for
smaller reporting companies, as
applicable, would require financial
statements of the business to be
acquired to be included, the description
of the business to be acquired shall be
more detailed.
*
*
*
*
*
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Federal Register / Vol. 83, No. 191 / Tuesday, October 2, 2018 / Proposed Rules
§ 229.1112 (Item 1112) Significant obligors
of pool assets.
10. Amend § 229.1100 by revising
paragraphs (c)(2)(ii)(C), (D), and (F) to
read as follows:
■
§ 229.1100
(Item 1100) General.
*
amozie on DSK3GDR082PROD with PROPOSALS2
*
*
*
*
*
(c) * * *
(2) * * *
(ii) * * *
(C) If the third party does not meet the
conditions of paragraph (c)(2)(ii)(A) or
(B) of this section and the pool assets
relating to the third party are fully and
unconditionally guaranteed by a direct
or indirect parent of the third party,
General Instruction I.C.3 of the form
described in § 239.13 (Form S–3) of this
chapter or General Instruction I.A.5(iii)
of the form described in § 239.33 (Form
F–3) of this chapter is met with respect
to the pool assets relating to such third
party and the disclosures specified in
§ 210.13–01 (Rule 13–01 of Regulation
S–X) of this chapter have been provided
in the reports to be referenced. Financial
statements of the third party may be
omitted if the requirements of § 210.3–
10 (Rule 3–10 of Regulation S–X) of this
chapter are satisfied.
(D) If the pool assets relating to the
third party are guaranteed by a wholly
owned subsidiary of the third party and
the subsidiary does not meet the
conditions of paragraph (c)(2)(ii)(A) or
(B) of this section, the criteria in either
paragraph (c)(2)(ii)(A) or (B) of this
section are met with respect to the third
party and the disclosures specified in
Rule 13–01 of Regulation S–X have been
provided in the reports to be referenced.
Financial statements of the subsidiary
guarantor may be omitted if the
requirements of Rule 3–10 of Regulation
S–X are satisfied.
*
*
*
*
*
(F) The third party is a U.S.
government-sponsored enterprise, has
outstanding securities held by nonaffiliates with an aggregate market value
of $75 million or more, and makes
information publicly available on an
annual and quarterly basis, including
audited financial statements prepared in
accordance with generally accepted
accounting principles covering the same
periods that would be required for
audited financial statements under
§§ 210.1–01 through 210.13–02
(Regulation S–X) of this chapter and
non-financial information consistent
with that required by §§ 229.10 through
229.1208 (Regulation S–K).
*
*
*
*
*
■ 11. Amend § 229.1112 by revising
paragraph (b)(2) to read as follows:
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Jkt 247001
*
*
*
*
(b) * * *
(2) If pool assets relating to a
significant obligor represent 20% or
more of the asset pool, provide financial
statements meeting the requirements of
§§ 210.1–01 through 210.13–02
(Regulation S–X) of this chapter, except
§§ 210.3–05 (Rule 3–05) and 210.11–01
through 210.11–03 (Article 11 of
Regulation S–X) of this chapter, of the
significant obligor. Financial statements
of such obligor and its subsidiaries
consolidated (as required by § 240.14a3(b) of this chapter) shall be filed under
this item.
*
*
*
*
*
■ 12. Amend § 229.1114 by revising
paragraph (b)(2)(ii) to read as follows:
§ 229.1114 (Item 1114) Credit enhancement
and other support, except for certain
derivatives instruments.
*
*
*
*
*
(b) * * *
(2) * * *
(ii) If any entity or group of affiliated
entities providing enhancement or other
support described in paragraph (a) of
this section is liable or contingently
liable to provide payments representing
20% or more of the cash flow
supporting any offered class of the assetbacked securities, provide financial
statements meeting the requirements of
§§ 210.1–01 through 210.13–02
(Regulation S–X) of this chapter, except
§§ 210.3–05 (Rule 3–05) and 210.11–01
through 210.11–03 (Article 11 of
Regulation S–X) of this chapter, of such
entity or group of affiliated entities.
Financial statements of such
enhancement provider and its
subsidiaries consolidated (as required
by § 240.14a–3(b) of this chapter) shall
be filed under this item.
*
*
*
*
*
■ 13. Amend § 229.1115 by revising
paragraph (b)(2) to read as follows:
§ 229.1115 (Item 1115) Certain derivatives
instruments.
*
*
*
*
*
(b) * * *
(2) If the aggregate significance
percentage related to any entity or group
of affiliated entities providing derivative
instruments contemplated by this
section is 20% or more, provide
financial statements meeting the
requirements of §§ 210.1–01 through
210.13–02 (Regulation S–X) of this
chapter, except §§ 210.3–05 (Rule 3–05)
and 210.11–01 through 210.11–03
(Article 11 of Regulation S–X) of this
chapter, of such entity or group of
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affiliated entities. Financial statements
of such entity and its subsidiaries
consolidated (as required by § 240.14a–
3(b) of this chapter) shall be filed under
this item.
*
*
*
*
*
PART 239—FORMS PRESCRIBED
UNDER THE SECURITIES ACT OF 1933
14. The authority citation for part 239
is revised to read as follows:
■
Authority: 15 U.S.C. 77c, 77f, 77g, 77h,
77j, 77s, 77z–2, 77z–3, 77sss, 78c, 78l, 78m,
78n, 78o(d), 78o–7, 78u–5, 78w(a), 78ll,
78mm, 80a–2(a), 80a–3, 80a–8, 80a–9, 80a–
10, 80a–13, 80a–24, 80a–26, 80a–29, 80a–30,
and 80a–37; and sec. 107, Pub. L. 112–106,
126 Stat. 312, unless otherwise noted.
15. Amend § 239.31 by revising
paragraph (b) to read as follows:
■
§ 239.31 Form F–1, registration statement
under the Securities Act of 1933 for
securities of certain foreign private issuers.
*
*
*
*
*
(b) If a registrant is a majority-owned
subsidiary, which does not itself meet
the conditions of these eligibility
requirements, it shall nevertheless be
deemed to have met such conditions if
its parent meets the conditions and if
the parent fully guarantees the securities
being registered as to principal and
interest. In such an instance the parentguarantor is the issuer of a separate
security consisting of the guarantee
which must be concurrently registered
but may be registered on the same
registration statement as are the
guaranteed securities. Both the parentguarantor and the subsidiary shall each
disclose the information required by
this Form as if each were the only
registrant except that if the subsidiary
will not be eligible to file annual reports
on the form described in § 249.229f
(Form 20–F) of this chapter after the
effective date of the registration
statement, then it shall disclose the
information specified in the form
described in § 239.11 (Form S–1) of this
chapter. The requirements of § 210.3–10
(Rule 3–10 of Regulation S–X) of this
chapter are applicable to financial
statements for a subsidiary of a parent
company that issues securities
guaranteed by the parent company.
16. Amend Form F–1 (referenced in
§ 239.31) by revising Instruction I.B
under ‘‘General Instructions’’ to read as
follows:
■
Note: The text of Form F–1 does not, and
this amendment will not, appear in the Code
of Federal Regulations.
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Federal Register / Vol. 83, No. 191 / Tuesday, October 2, 2018 / Proposed Rules
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC 20549
FORM F–1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
*
*
*
*
*
GENERAL INSTRUCTIONS
*
I. Eligibility Requirements for Use of
Form F–1
*
*
*
*
*
B. If a registrant is a majority-owned
subsidiary, which does not itself meet
the conditions of these eligibility
requirements, it shall nevertheless be
deemed to have met such conditions if
its parent meets the conditions and if
the parent fully guarantees the securities
being registered as to principal and
interest. Note: In such an instance the
parent-guarantor is the issuer of a
separate security consisting of the
guarantee which must be concurrently
registered but may be registered on the
same registration statement as are the
guaranteed securities. Both the parentguarantor and the subsidiary shall each
disclose the information required by
this Form as if each were the only
registrant except that if the subsidiary
will not be eligible to file annual reports
on Form 20–F after the effective date of
the registration statement, then it shall
disclose the information specified in
Forms S–1 (§ 239.11 of this chapter).
The requirements of Rule 3–10 of
Regulation S–X (§ 210.3–10 of this
chapter) are applicable to financial
statements for a subsidiary of a parent
company that issues securities
guaranteed by the parent company.
*
*
*
*
*
■ 17. Amend § 239.33 by revising Note
to paragraph (a)(5) to read as follows:
§ 239.33 Form F–3, for registration under
the Securities Act of 1933 of securities of
certain foreign private issuers offered
pursuant to certain types of transactions.
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*
*
*
*
*
Note to paragraph (a)(5). In the situations
described in paragraphs (a)(5)(iii), (iv), and
(v) of this section, the parent or majorityowned subsidiary guarantor is the issuer of
a separate security consisting of the
guarantee, which must be concurrently
registered, but may be registered on the same
registration statement as are the guaranteed
non-convertible securities. Both the parent
and majority-owned subsidiary shall each
disclose the information required by this
Form as if each were the only registrant
except that if the majority-owned subsidiary
will not be eligible to file annual reports on
the forms described in § 249.220f (Form 20–
F) or § 249.240f (Form 40–F) of this chapter
after the effective date of the registration
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18:46 Oct 01, 2018
statement, then it shall disclose the
information specified in the form described
in § 239.13 (Form S–3) of this chapter. The
requirements of § 210.3–10 (Rule 3–10 of
Regulation S–X) of this chapter are
applicable to financial statements of a
subsidiary of a parent company that issues
securities guaranteed by the parent company
or guarantees securities issued by the parent
company.
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*
*
*
*
■ 18. Amend Form F–3 (referenced in
§ 239.33) by revising the note to
Instruction I.A.5 under ‘‘General
Instructions’’ to read as follows:
Note: The text of Form 1–A does not, and
this amendment will not, appear in the Code
of Federal Regulations.
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC 20549
FORM 1–A
REGULATION A OFFERING
STATEMENT UNDER THE
SECURITIES ACT OF 1933
*
*
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
*
FORM F–3
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
*
*
*
*
*
GENERAL INSTRUCTIONS
*
*
*
*
*
I. Eligibility Requirements for Use of
Form F–3
*
*
*
*
*
A. Registration Requirements
*
*
*
*
*
5. Majority-owned Subsidiaries. If a
registrant is a majority-owned
subsidiary, security offerings may be
registered on this Form if:
*
*
*
*
*
Note: In the situation described in
paragraphs I.A.5(iii), I.A.5(iv), and I.A.5(v)
above, the parent or majority-owned
subsidiary guarantor is the issuer of a
separate security consisting of the guarantee,
which must be concurrently registered, but
may be registered on the same registration
statement as are the guaranteed nonconvertible securities. Both the parent or
majority-owned subsidiary shall each
disclose the information required by this
Form as if each were the only registrant
except that if the majority-owned subsidiary
will not be eligible to file annual reports on
Form 20–F or Form 40–F after the effective
date of the registration statement, then it
shall disclose the information specified in
Form S–3. The requirements of Rule 3–10 of
Regulation S–X are applicable to financial
statements for a subsidiary of a parent
company that issues securities guaranteed by
the parent company or guarantees securities
issued by the parent company.
*
*
*
*
*
19. Amend Form 1–A (referenced in
§ 239.90) by revising paragraph (b)(7) of
Part F/S to read as follows:
■
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Part F/S
Note: The text of Form F–3 does not, and
this amendment will not, appear in the Code
of Federal Regulations.
Washington, DC 20549
49683
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(b) Financial Statements for Tier 1
Offerings
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*
(7) Financial Statements of and
Disclosures About Other Entities. The
circumstances described below may
require you to file financial statements
of, or provide disclosures about, other
entities in the offering statement. The
financial statements of other entities
must be presented for the same periods
as if the other entity was the issuer as
described above in paragraphs (b)(3) and
(b)(4) unless a shorter period is
specified by the rules below. The
financial statements of other entities
shall follow the same audit requirement
as paragraph (b)(2) of this Part F/S:
(i) Financial Statements of and
Disclosures About Guarantors and
Issuers of Guaranteed Securities. The
requirements of Rule 3–10 of Regulation
S–X are applicable to financial
statements of a subsidiary that issues
securities guaranteed by the ‘‘parent
company,’’ as that term is defined in
Rule 3–10 of Regulation S–X, or
guarantees securities issued by the
parent company. However, the reference
in Rule 3–10(a) of Regulation S–X to ‘‘an
issuer or guarantor of a guaranteed
security that is registered or being
registered is required to file financial
statements required by Regulation S–X
with respect to the guarantee or
guaranteed security’’ instead refers to
‘‘an issuer or guarantor of a guaranteed
security that is qualified or being
qualified pursuant to Regulation A is
required to file financial statements
required by Part F/S of Form 1–A with
respect to the guarantee or guaranteed
security.’’ The parent company must
also provide the disclosures required by
Rule 13–01 of Regulation S–X. The
parent company may elect to provide
these disclosures in a footnote to its
consolidated financial statements or
alternatively, in management’s
discussion and analysis of financial
condition and results of operations
described in Item 9 of Form 1–A in its
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offering statement on Form 1–A filed in
connection with the offer and sale of the
subject securities.
(ii) Disclosures About Affiliates
Whose Securities Collateralize an
Issuance. Disclosures about an issuer’s
affiliates whose securities collateralize
any class of securities being offered
must be provided as required by Rule
13–02 of Regulation S–X. The issuer
may elect to provide these disclosures
in a footnote to its consolidated
financial statements or alternatively, in
management’s discussion and analysis
of financial condition and results of
operations described in Item 9 of Form
1–A in its offering statement on Form 1–
A filed in connection with the offer and
sale of the subject securities.
*
*
*
*
*
■ 20. Amend Form 1–K (referenced in
§ 239.91) by revising paragraph Item 7(g)
of Part II to read as follows:
Note: The text of Form 1–K does not, and
this amendment will not, appear in the Code
of Federal Regulations.
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC 20549
FORM 1–K
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PART II
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*
Item 7. Financial Statements
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(g) Financial Statements of and
Disclosures About Other Entities. The
circumstances described below may
require you to file financial statements
of, or provide disclosures about, other
entities. The financial statements of
other entities must be presented for the
same periods as the issuer’s financial
statements described above in
paragraphs (d) and (e) unless a shorter
period is specified by the rules below.
(1) Financial Statements of and
Disclosures About Guarantors and
Issuers of Guaranteed Securities. The
requirements of Rule 3–10 of Regulation
S–X are applicable to financial
statements of a subsidiary that issues
securities guaranteed by the ‘‘parent
company,’’ as that term is defined in
Rule 3–10 of Regulation S–X, or
guarantees securities issued by the
parent company. However, the reference
in Rule 3–10(a) of Regulation S–X to ‘‘an
issuer or guarantor of a guaranteed
security that is registered or being
registered is required to file financial
statements required by Regulation S–X
with respect to the guarantee or
guaranteed security’’ instead refers to
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‘‘an issuer or guarantor of a guaranteed
security that is qualified or being
qualified pursuant to Regulation A is
required to file financial statements
required by Item 7 of Part II of Form 1–
K with respect to the guarantee or
guaranteed security.’’ The parent
company must also provide the
disclosures required by Rule 13–01 of
Regulation S–X. The parent company
may elect to provide these disclosures
in a footnote to its consolidated
financial statements or alternatively, in
management’s discussion and analysis
of financial condition and results of
operations described in Item 9 of Form
1–A in reports on Form 1–K and Form
1–SA required to be filed during the
fiscal year in which the first bona fide
sale of the subject securities is
completed. However, the parent
company must provide the disclosures
in a footnote to its consolidated
financial statements in its annual and
semiannual reports beginning with its
annual report filed on Form 1–K for the
fiscal year during which the first bona
fide sale of the subject securities is
completed.
(2) Disclosures About Affiliates Whose
Securities Collateralize an Issuance.
Disclosures about an issuer’s affiliates
whose securities collateralize any class
of securities being offered must be
provided as required by Rule 13–02 of
Regulation S–X. The issuer may elect to
provide these disclosures in a footnote
to its consolidated financial statements
or alternatively, in management’s
discussion and analysis of financial
condition and results of operations
described in Item 9 of Form 1–A in
reports on Form 1–K and Form 1–SA
required to be filed during the fiscal
year in which the first bona fide sale of
the subject securities is completed.
However, the issuer must provide the
disclosures in a footnote to its
consolidated financial statements in its
annual and semiannual reports
beginning with its annual report filed on
Form 1–K for the fiscal year during
which the first bona fide sale of the
subject securities is completed.
*
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■ 21. Amend Form 1–SA (referenced in
§ 239.92) by revising Item 3(e) to read as
follows:
Note: The text of Form 1–SA does not, and
this amendment will not, appear in the Code
of Federal Regulations.
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC 20549
FORM 1–SA
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INFORMATION TO BE INCLUDED IN
REPORT
*
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Item 3. Financial Statements
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*
(e) Financial Statements of and
Disclosures About Other Entities. The
circumstances described below may
require you to file financial statements
of, or provide disclosures about, other
entities. These financial statements and
disclosures may be unaudited.
(1) Financial Statements of and
Disclosures About Guarantors and
Issuers of Guaranteed Securities. The
requirements of Rule 3–10 of Regulation
S–X are applicable to financial
statements of a subsidiary that issues
securities guaranteed by the ‘‘parent
company,’’ as that term is defined in
Rule 3–10 of Regulation S–X, or
guarantees securities issued by the
parent company. However, the reference
in Rule 3–10(a) of Regulation S–X to ‘‘an
issuer or guarantor of a guaranteed
security that is registered or being
registered is required to file financial
statements required by Regulation S–X
with respect to the guarantee or
guaranteed security’’ instead refers to
‘‘an issuer or guarantor of a guaranteed
security that is qualified or being
qualified pursuant to Regulation A is
required to file financial statements
required by Item 3 of Form 1–SA with
respect to the guarantee or guaranteed
security.’’ The parent company must
also provide the disclosures required by
Rule 13–01 of Regulation S–X. The
parent company may elect to provide
these disclosures in a footnote to its
consolidated financial statements or
alternatively, in management’s
discussion and analysis of financial
condition and results of operations
described in Item 9 of Form 1–A in
reports on Form 1–K and Form 1–SA
required to be filed during the fiscal
year in which the first bona fide sale of
the subject securities is completed.
However, the parent company must
provide the disclosures in a footnote to
its consolidated financial statements in
its annual and semiannual reports
beginning with its annual report filed on
Form 1–K for the fiscal year during
which the first bona fide sale of the
subject securities is completed.
(2) Disclosures About Affiliates
Whose Securities Collateralize an
Issuance. Disclosures about an issuer’s
affiliates whose securities collateralize
any class of securities being offered
must be provided as required by Rule
13–02 of Regulation S–X. The issuer
may elect to provide these disclosures
in a footnote to its consolidated
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financial statements or alternatively, in
management’s discussion and analysis
of financial condition and results of
operations described in Item 9 of Form
1–A in reports on Form 1–K and Form
1–SA required to be filed during the
fiscal year in which the first bona fide
sale of the subject securities is
completed. However, the issuer must
provide the disclosures in a footnote to
its consolidated financial statements in
its annual and semiannual reports
beginning with its annual report filed on
Form 1–K for the fiscal year during
which the first bona fide sale of the
subject securities is completed.
PART 240—GENERAL RULES AND
REGULATIONS, SECURITIES
EXCHANGE ACT OF 1934
22. The authority citation for part 240
continues to read in part as follows:
■
Any issuer of a guaranteed security, or
guarantor of a security, that is permitted
to omit financial statements by § 210.3–
10 (Rule 3–10 of Regulation S–X) of this
chapter is exempt from the requirements
of 15 U.S.C. 78m(a) (Section 13(a) of the
Act) or 78o(d) (Section 15(d) of the Act).
PART 249—FORMS, SECURITIES
EXCHANGE ACT OF 1934
24. The authority citation for part 249
continues to read in part as follows:
■
Authority: 15 U.S.C. 78a et seq. and 7201
et seq.; 12 U.S.C. 5461 et seq.; 18 U.S.C. 1350;
Sec. 953(b), Pub. L. 111–203, 124 Stat. 1904;
Sec. 102(a)(3), Pub. L. 112–106, 126 Stat. 309
(2012); Sec. 107, Pub. L. 112–106, 126 Stat.
313 (2012), and Sec. 72001, Pub. L. 114–94,
129 Stat. 1312 (2015), unless otherwise
noted.
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*
25. Amend Form 20–F (referenced in
§ 249.220f) by revising Instruction 1 to
Item 8 to read as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j,
77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn,
77sss, 77ttt, 78c, 78c–3, 78c–5, 78d, 78e, 78f,
78g, 78i, 78j, 78j–1, 78k, 78k–1, 78l, 78m,
78n, 78n–1, 78o, 78o–4, 78o–10, 78p, 78q,
78q–1, 78s, 78u–5, 78w, 78x, 78ll, 78mm,
80a-20, 80a–3, 80a–29, 80a–37, 80b–3, 80b–
4, 80b–11, 7201 et seq.; and 8302; 7 U.S.C.
2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C.
1350; and Pub. L. 111–203, 939A, 124 Stat.
1887 (2010); and secs. 503 and 602, Pub. L.
112–106, 126 Stat. 326 (2012), unless
otherwise noted.
■
*
Instructions to Item 8:
1. This item refers to the company,
but note that under Rules 3–05, 3–09,
*
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*
23. Revise § 240.12h–5 to read as
follows:
■
Financial Statement
Requirement &
Omission of Subsidiary Issuer and
Guarantor Financial
Statements.
Rule Structure & Eligible Issuer and Guarantor Structures.
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§ 240.12h–5 Exemption for subsidiary
issuers of guaranteed securities and
subsidiary guarantors.
VerDate Sep<11>2014
Note: The text of Form 20–F does not, and
this amendment will not, appear in the Code
of Federal Regulations.
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC 20549
FORM 20–F
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49685
3–10, 3–14, 13–01, and 13–02 of
Regulation S–X, you also may have to
provide financial statements or financial
information for entities other than the
issuer. In some cases, you may have to
provide financial statements for a
predecessor. See the definition of
‘‘predecessor’’ in Exchange Act Rule
12b-2 and Securities Act Rule 405.
*
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By the Commission.
Dated: July 24, 2018.
Brent J. Fields,
Secretary.
Note: The following appendix will not
appear in the Code of Federal Regulations.
Appendix
Financial Disclosures About Guarantors and
Issuers of Guaranteed Securities and
Affiliates Whose Securities Collateralize a
Registrant’s Securities
For ease of reference, set forth below is a
table summarizing the main features of
existing Rule 3–10 and Rule 3–16 and the
proposed rules. This is only a summary of
certain requirements contained in the
Commission’s rules and regulations, as well
as a summary of certain proposed rules; it is
not a substitute for the rules and regulations
or for the proposed rules. Registrants should
refer to the existing rules and to the proposed
rule text for the full requirements and the
description of those requirements in the
release. The changes we are proposing
include amending both rules and relocating
part of Rule 3–10 and all of Rule 3–16 to
proposed Rules 13–01 and 13–02,
respectively.
Summary of existing Rule 3–10
Summary of proposed rules
Rule 3–10(a) states that every issuer of a registered security that is
guaranteed and every guarantor of a registered security must file
the financial statements required for a registrant by Regulation
S–X.
Rules 3–10(b)–(f) set forth five exceptions to this general rule, which
permit the omission of separate financial statements of subsidiary
issuers and guarantors when certain conditions are met, including
that the parent company provides the Alternative Disclosures.
Rules 3–10(b) through (f) set forth the five exceptions. Each exception specifies the eligible structures to which it applies, and the
conditions that must be met. In each case, the parent company
must provide the Alternative Disclosures.
Eligible issuer and guarantor structures:
• A finance subsidiary issues securities that its parent company
guarantees (Rule 3–10(b));
• an operating subsidiary issues securities that its parent company guarantees (Rule 3–10(c));
• a subsidiary issues securities that its parent company and
one or more other subsidiaries of its parent company guarantee (Rule 3–10(d));
• a parent company issues securities that one of its subsidiaries guarantees (Rule 3–10(e)); or
• a parent company issues securities that more than one of its
subsidiaries guarantees (Rule 3–10(f)).
Each issuer of a registered security that is guaranteed and each
guarantor of a registered security must file the financial statements
required for a registrant by Regulation S–X; however, proposed
Rule 3–10(a) would no longer contain this express statement.
Proposed Rule 3–10(a) would continue to permit the omission of
separate financial statements of subsidiary issuers and guarantors
when certain conditions are met, including that the parent company provides the Proposed Alternative Disclosures.
The proposed rules would replace the exceptions in existing Rule 3–
10(b) through (f). Proposed Rule 3–10(a) would permit the separate financial statements of a subsidiary issuer or guarantor to be
omitted if the eligibility conditions in proposed Rules 3–10(a) and
3–10(a)(1) are met and the Proposed Alternative Disclosures
specified in proposed Rule 13–01 are provided in the filing, as required by proposed Rule 3–10(a)(2). Proposed Rule 3–10(a)(1)
sets forth the eligible structures.
Eligible issuer and guarantor structures:
• The parent company issues the security or co-issues the security, jointly and severally, with one or more of its consolidated subsidiaries (Proposed Rule 3–10(a)(1)(i)); or
• a consolidated subsidiary issues the security, or co-issues it
with one or more other consolidated subsidiaries of the parent
company, and the security is guaranteed fully and unconditionally by the parent company (Proposed Rule 3–10(a)(1)(ii)).
The role of subsidiary guarantors would not be specified in the proposed categories of structures; however, the proposed rules are
intended to cover the structures permitted in existing Rules 3–
10(b) through (f).
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Summary of existing Rule 3–10
Summary of proposed rules
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Conditions to Omit
If an issuer and guarantor structure matches one of the exceptions
Separate Subsidiary
in Rules 3–10(b) through (f), the conditions in the applicable exIssuer and Guarantor
ception paragraph must be met, including:
Financial Statements.
• Consolidated financial statements of the parent company
have been filed;
• each subsidiary issuer and guarantor is ‘‘100% owned’’ by the
parent company;
• each guarantee is ‘‘full and unconditional’’ and, where there
are multiple guarantees, joint and several; and
• the parent company provides the Alternative Disclosures in its
financial statement footnotes.
Additionally, the 2000 Release states the guaranteed security must
be debt or debt-like.
Parent Company FiThe identity of the parent company will vary based on the particular
nancial Statements
corporate structure; however, the 2000 Release stated three conCondition.
ditions must be met before an entity can be considered a ‘‘parent
company,’’ including that the entity:
• Is an issuer or guarantor of the subject securities;
• is an Exchange Act reporting company, or will be one as a result of the subject Securities Act registration statement; and
• owns 100% of each subsidiary issuer or guarantor directly or
indirectly.
Ownership Condition ... The exceptions in Rules 3–10(b) through (f) require that each subsidiary issuer or guarantor must be 100% owned by the parent
company to omit its separate financial statements.
Debt or Debt-Like Security Definition:
Rule 3–10 does not define when a security is ‘‘debt or debt-like;’’
however, the 2000 Release described characteristics of a debt or
debt-like security, including:
• The issuer has a contractual obligation to pay a fixed sum at
a fixed time; and
• where the obligation to make such payments is cumulative, a
set amount of interest must be paid.
Subsidiary Guarantee
Eligibility Requirements.
The exceptions in Rule 3–10(b) through (f) specify that a guarantee
be full and unconditional and, when there are multiple guarantees,
be joint and several. The requirements are imposed on the guarantee regardless of whether the guarantor is the parent company
or a subsidiary.
Alternative Disclosures
& Proposed Alternative Disclosures.
To be eligible to omit the separate financial statements of a subsidiary issuer or guarantor, each exception in Rules 3–10(b)
through (f) requires that the parent company must provide the Alternative Disclosures in the footnotes to its consolidated financial
statements. The form and content of the Alternative Disclosures
are determined based on the facts and circumstances and are either a brief narrative or Consolidating Information. Specific elements of Consolidating Information are discussed below.
Alternative Disclosures may consist of a brief narrative instead of
Consolidating Information when:
• The subsidiary is a finance subsidiary, and the parent company is the only guarantor of the securities;
• the parent company of the subsidiary issuer has no independent assets or operations, the parent company guarantees the securities, no subsidiary of the parent company guarantees the securities, and any subsidiaries of the parent company other than the issuer are minor; and
• the parent company issuer has no independent assets or operations and all of the parent company’s subsidiaries, other
than minor subsidiaries, guarantee the securities.
The instructions for preparing Consolidating Information are specified in Rule 3–10(i). Consolidating Information includes all major
captions of the balance sheet, income statement, and cash flow
statement that are required to be shown separately in interim financial statements prepared under Article 10 of Regulation S–X.
Rules 3–10(i)(11)(i) and (ii), respectively, require disclosure of any
financial and narrative information about each guarantor if it would
be material for investors to evaluate the sufficiency of the guarantee, and disclosure of sufficient information to make the financial information presented not misleading.
Consolidating Information and Proposed
Alternative Disclosures—Level of Detail.
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The applicable conditions, set forth in proposed Rule 3–10, include:
• Consolidated financial statements of the parent company
have been filed (proposed Rule 3–10(a));
• the subsidiary issuer or guarantor is a consolidated subsidiary
of the parent company (proposed Rule 3–10(a));
• the guaranteed security is debt or debt-like (proposed Rule 3–
10(a)(1));
• the issuer and guarantor structure must match one of the eligible issuer and guarantor structures (proposed Rule 3–
10(a)(1)(i) or (ii)); and
• the parent company provides the Proposed Alternative Disclosures (proposed Rule 3–10(a)(2)).
‘‘Parent company’’ would be defined in proposed Rule 3–10(b)(1)
and require that the entity:
• Is an issuer or guarantor of the guaranteed security;
• is an Exchange Act reporting company, or will become one as
a result of the subject Securities Act registration statement;
and
• consolidates each subsidiary issuer and/or guarantor in its
consolidated financial statements.
Proposed Rule 3–10(a) would require that the subsidiary issuer or
guarantor be a consolidated subsidiary of the parent company pursuant to the relevant accounting standards already in use.
Proposed Rule 13–01(a)(3) would require, to the extent material, a
description of any factors that may affect payments to holders of
the guaranteed security, such as the rights of a non-controlling interest holder. Proposed Rule 13–01(a)(4) would require separate
disclosure of Summarized Financial Information for subsidiary
issuers and guarantors affected by those factors.
Proposed Rule 3–10(a)(1) would state explicitly that the guaranteed
security must be ‘‘debt or debt-like’’ and proposed Rule 3–10(b)(2)
would state that a guaranteed security would be considered ‘‘debt
or debt-like’’ if:
• The issuer has a contractual obligation to pay a fixed sum at
a fixed time; and
• where the obligation to make such payments is cumulative, a
set amount of interest must be paid.
The parent company’s role with respect to the guaranteed security
would determine whether the structure is eligible to provide the
Proposed Alternative Disclosures. The parent company must be
the issuer or full and unconditional guarantor of the guaranteed
security (proposed Rules 3–10(a)(1)(i) and (ii)).
If a subsidiary guarantee is not full and unconditional, or where there
are multiple guarantees, not joint and several, disclosure of such
terms and conditions would be required by proposed Rule 13–
01(a)(2), to the extent material. Proposed Rule 13–01(a)(4) would
require separate disclosure of the Summarized Financial Information for subsidiary guarantor(s) to which such terms and conditions
apply, to the extent material.
The proposed rule would replace the brief narrative form and Consolidating Information form of Alternative Disclosure with the Proposed Alternative Disclosures specified in proposed Rule 13–01.
Specific elements of the Proposed Alternative Disclosures are discussed below.
The Proposed Alternative Disclosures would be required in all cases,
to the extent material to holders of the guaranteed security (proposed Rule 13–01(a)). Additionally, proposed Rule 13–01(a)(5)
would require disclosure of any quantitative or qualitative information that would be material to making an investment decision with
respect to the guaranteed security.
The proposed rule would require the Proposed Alternative Disclosures specified in proposed Rule 13–01. Proposed Rule 13–
01(a)(4) would require, for each issuer and guarantor, Summarized Financial Information, as specified in Rule 1–02(bb) of Regulation S–X, which would include select balance sheet and income
statement line items. Disclosure of additional line items of financial
information beyond what is specified in proposed Rule 13–01(a)(4)
would be required by proposed Rule 13–01(a)(5), to the extent
material. If the disclosures required by proposed Rule 13–01(a)(4)
are omitted because they are immaterial, proposed Rule 13–
01(a)(4) requires disclosure to that effect and the reasons.
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Summary of existing Rule 3–10
Summary of proposed rules
Consolidating Information and Proposed
Alternative Disclosures—Combined
Basis.
The applicable exception in Rule 3–10(c) through (f) specifies the
columns of information that must be presented, and Rule 3–
10(i)(6) describes circumstances when additional columns are required.
To distinguish the assets, liabilities, operations, and cash flows of
the entities that are legally obligated to make payments under the
guarantee from those that are not, the columnar presentation must
show:
• A parent company’s investments in all consolidated subsidiaries based upon its proportionate share of their net assets
(Rule 3–10(i)(3)); and
• subsidiary issuer and guarantor investments in certain consolidated subsidiaries using the equity method of accounting
(Rule 3–10(i)(5).
Consolidating Information and Proposed
Alternative Disclosures—Periods to
Present.
Consolidating Information and Proposed
Alternative Disclosures—Non-Financial Disclosures.
Consolidating Information must be provided as of, and for, the same
periods as the parent company’s consolidated financial statements
(Rule 3–10(i)(2)).
Proposed Rule 13–01(a)(4) would permit the Summarized Financial
Information of each issuer and guarantor consolidated in the parent company’s consolidated financial statements to be presented
on a combined basis with the Summarized Financial Information of
the parent company. However, if information provided in response
to disclosures specified in proposed Rule 13–01 is applicable to
one or more, but not all, issuers and guarantors, proposed Rule
13–01(a)(4) would require, to the extent it is material, separate
disclosure of Summarized Financial Information for the issuers
and guarantors to which the information applies.
The proposed rule would no longer require separate disclosure of
the financial information of non-guarantor subsidiaries.
Proposed Rule 13–01(a)(4) would allow the parent company to determine which method best meets the objective of excluding the financial information of non-issuer and non-guarantor subsidiaries
from the Proposed Alternative Disclosures, so long as the selected
method is disclosed and used for all non-issuer and non-guarantor
subsidiaries for all classes of guaranteed securities for which the
disclosure is required, and is reasonable in the circumstances.
Proposed Rule 13–01(a)(4) would require Summarized Financial Information to be provided as of, and for, the most recently ended
fiscal year and year-to-date interim period, if applicable, included
in the parent company’s consolidated financial statements.
Location and Audit Requirement of Alternative Disclosures
and Proposed Alternative Disclosure.
Recently-Acquired
Subsidiary Issuers
and Guarantors.
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Rule 3–10 requires certain non-financial disclosures, including:
• Disclosure, if true, that each subsidiary issuer or subsidiary
guarantor is 100% owned by the parent company, that all
guarantees are full and unconditional, and where there is
more than one guarantor, that all guarantees are joint and
several (Rules 3–10(i)(8)(i)–(iii);
• restricted net assets (Rule 3–10(i)(10); and
• certain types of restrictions on the ability of the parent company or any guarantor to obtain funds from their subsidiaries
(Rule 3–10(i)(9).
Rules 3–10(i)(11)(i) and (ii), respectively, require disclosure of any financial and narrative information about each guarantor if it would
be material for investors to evaluate the sufficiency of the guarantee, and disclosure of sufficient information to make the financial information presented not misleading.
The exceptions in Rules 3–10(b) through (f) require the Alternative
Disclosures to be included in the notes to the parent company’s
consolidated financial statements. Rule 3–10(i)(2) requires Consolidating Information to be audited for the same periods that the
parent company financial statements are required to be audited.
If a parent company acquires a new subsidiary issuer or guarantor,
Rule 3–10(g) requires the parent company to provide one year of
audited pre-acquisition financial statements of the newly-acquired
issuer or guarantor (and, if applicable, unaudited interim financial
statements) when the:
• Parent company acquires the new subsidiary during or subsequent to one of the periods for which financial statements are
presented in a Securities Act registration statement filed in
connection with the offer and sale of the debt securities;
• subsidiary is deemed ‘‘significant’’ (Rule 3–10(g)(1)(ii); and
• subsidiary is not reflected in the audited consolidated results
of the parent company for at least nine months of the most
recent fiscal year (Rule 3–10(g)(1)).
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Proposed Rules 13–01(a)(1) through (3) would require disclosures,
to the extent material, about the issuers and guarantors, the terms
and conditions of the guarantees, and how the issuer and guarantor structure and other factors may affect payments to holder of
the guaranteed securities. Additionally, proposed Rule 13–01(a)(5)
would require disclosure of any facts and circumstances specific
to particular issuers and guarantors that would be material to holders of the guaranteed security that are not specifically required by
proposed Rules 13–01(a)(1) through (3).
The note to proposed Rule 13–01(a) would allow the parent company to provide the Proposed Alternative Disclosures in a footnote
to its consolidated financial statements or alternatively, in MD&A in
its registration statement covering the offer and sale of the subject
securities and any related prospectus, and in Exchange Act reports on Form 10–K, Form 20–F, and Form 10–Q required to be
filed during the fiscal year in which the first bona fide sale of the
subject securities is completed. If a parent company elects to provide the disclosures in its audited financial statements, the Proposed Alternative Disclosures would be required to be audited. If
not otherwise included in the consolidated financial statements or
in MD&A, the parent company would be required to include the
Proposed Alternative Disclosures in its prospectus immediately following ‘‘Risk Factors,’’ if any, or otherwise, immediately following
pricing information described in Item 503(c) of Regulation S–K.
The parent company would be required to provide the Proposed
Alternative Disclosures in a footnote to its consolidated financial
statements in its annual and quarterly reports beginning with its
annual report filed on Form 10–K or Form 20–F for the fiscal year
during which the first bona fide sale of the subject securities is
completed.
The proposed rule would not include this requirement. Proposed
Rule 13–01(a)(5) would require information about recently-acquired subsidiary issuers and guarantors if it would be material to
an investment decision in the guaranteed security.
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Exchange Act Reporting and Continuous
Reporting Obligation.
Rule 3–16 Financial
Statements and Proposed Disclosures.
When Disclosure is
Required.
Financial and Non-Financial Disclosures.
Summary of proposed rules
Subsidiary issuers and guarantors that avail themselves of an exception that allows for the Alternative Disclosures in lieu of separate financial statements are exempt from Exchange Act reporting
by Rule 12h–5. The parent company, however, must continue to
provide the Alternative Disclosures for as long as the guaranteed
securities are outstanding. This obligation continues even if the
subsidiary issuers and guarantors could have suspended their reporting obligations under Exchange Act Rule 12h–3 or Section
15(d) of the Exchange Act, had they chosen not to avail themselves of a Rule 3–10 exception and reported separately from the
parent company.
Subsidiary issuers and guarantors that are permitted to omit their financial statements under proposed Rule 3–10 would continue to
be exempt from Exchange Act reporting under Rule 12h–5. The
proposed rule would permit a parent company to cease providing
the Proposed Alternative Disclosures if the corresponding subsidiary issuer’s or guarantor’s Section 15(d) obligation is suspended automatically by operation of Section 15(d)(1) or through
compliance with Rule 12h–3. As a continued condition of eligibility
to omit the financial statements of a subsidiary issuer or guarantor, a parent company must continue providing the Proposed Alternative Disclosures for so long as the subsidiary issuer or guarantor has a Section 12(b) reporting obligation with respect to the
guarantee or guaranteed security.
Summary of existing Rule 3–16
Summary of proposed rules
Rule 3–16(a) requires a registrant to provide separate annual and interim financial statements for each affiliate whose securities constitute a ‘‘substantial portion’’ of the collateral for any class of securities registered or being registered as if the affiliate were a separate registrant.
Rule 3–16 Financial Statements are required when an affiliate’s securities constitute a ‘‘substantial portion’’ of the collateral for the
securities registered or being registered. An affiliate’s securities
shall be deemed to constitute a ‘‘substantial portion’’ if the aggregate principal amount, par value, or book value of the securities
as carried by the registrant, or the market value of such securities,
whichever is the greatest, equals 20 percent or more of the principal amount of the secured class of securities (Rule 3–16(b)).
Rule 3–16 Financial Statements are those that would be required if
the affiliate were a separate registrant.
Under the proposed amendments, Rule 3–16 Financial Statements
would be replaced with a requirement that a registrant provide the
financial and non-financial disclosures about the affiliate(s) and the
collateral arrangement specified in proposed Rule 13–02(a).
Combined Basis ..........
Separate Rule 3–16 Financial Statements are required for each affiliate whose securities constitute a ‘‘substantial portion’’ of the collateral for securities registered or being registered.
Periods Presented .......
Rule 3–16 Financial Statements are required for the same annual
and interim periods as if the affiliate were a separate registrant. As
such, the financial statements are required to be provided for the
periods required by Rules 3–01 and 3–02 of Regulation S–X.
However, Rule 3–16 Financial Statements are not required in
quarterly reports, such as Form 10–Q.
Rule 3–16 Financial Statements are required to be audited for the
periods required by Rules 3–01 and 3–02 of Regulation S–X.
Location and Audit Requirement of the Disclosure.
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Proposed Rule 13–02(a) would require the disclosures specified in
proposed Rule 13–02(a)(1) through (4) in all cases, to the extent
material to holders of the collateralized security. Additionally, proposed Rule 13–02(a)(5) would require disclosure of any quantitative or qualitative information that would be material to making
an investment decision with respect to the collateralized security.
Proposed Rule 13–02(a)(4) would require, for each affiliate whose
securities are pledged as collateral, Summarized Financial Information, as specified in Rule 1–02(bb) of Regulation S–X, which
would include select balance sheet and income statement line
items. Disclosure of additional line items of financial information
beyond what is specified in proposed Rule 13–02(a)(4) would be
required by proposed Rule 13–02(a)(5), to the extent material. If
the disclosures required by proposed Rule 13–02(a)(4) are omitted
because they are immaterial, proposed Rule 13–02(a)(4) requires
disclosure to that effect and the reasons therefore.
Proposed Rules 13–02(a)(1) through (3) would require certain non-financial disclosures, to the extent material, about the securities
pledged as collateral, each affiliate whose securities are pledged,
the terms and conditions of the collateral arrangement, and whether a trading market exists for the pledged securities. Additionally,
proposed Rule 13–02(a)(5) would require disclosure of any other
quantitative or qualitative information that would be material to
making an investment decision with respect to the collateralized
security.
Proposed Rule 13–02(a)(4) would permit the Summarized Financial
Information of each affiliate consolidated in the registrant’s consolidated financial statements to be presented on a combined basis.
However, if information provided in response to disclosures specified in proposed Rule 13–02 is applicable to one or more, but not
all, affiliates, proposed Rule 13–02(a)(4) would require, to the extent it is material, separate disclosure of Summarized Financial Information for the affiliates to which the information applies.
Proposed Rule 13–02(a)(4) would require disclosure as of and for
the most recently ended fiscal year and interim period included in
the registrant’s consolidated financial statements. Disclosure
would be required in quarterly reports, such as Form 10–Q (proposed Rule 10–01(b)(10)).
The note to proposed Rule 13–02(a) would allow the registrant to
provide the disclosures required by this section in a footnote to its
consolidated financial statements or alternatively, in MD&A in its
registration statement covering the offer and sale of the subject
securities and any related prospectus, and in Exchange Act reports on Form 10–K, Form 20–F, and Form 10–Q required to be
filed during the fiscal year in which the first bona fide sale of the
subject securities is completed. If a registrant elects to provide the
disclosures in its audited financial statements, the proposed disclosures would be required to be audited. If not otherwise included
in the consolidated financial statements or in MD&A, the registrant
would be required to include the disclosures in its prospectus immediately following ‘‘Risk Factors,’’ if any, or otherwise, immediately following pricing information described in Item 503(c) of
Regulation S–K. The registrant would be required to provide the
disclosures in a footnote to its consolidated financial statements in
its annual and quarterly reports beginning with its annual report
filed on Form 10–K or Form 20–F for the fiscal year during which
the first bona fide sale of the subject securities is completed.
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[FR Doc. 2018–19456 Filed 10–1–18; 8:45 am]
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]]>Agencies
[Federal Register Volume 83, Number 191 (Tuesday, October 2, 2018)]
[Proposed Rules]
[Pages 49630-49689]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-19456]
[[Page 49629]]
Vol. 83
Tuesday,
No. 191
October 2, 2018
Part II
Securities and Exchange Commission
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17 CFR Parts 210, 229, 239, et al.
Financial Disclosures About Guarantors and Issuers of Guaranteed
Securities and Affiliates Whose Securities Collateralize a Registrant's
Securities; Proposed Rule
Federal Register / Vol. 83 , No. 191 / Tuesday, October 2, 2018 /
Proposed Rules
[[Page 49630]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 210, 229, 239, 240, and 249
[Release No. 33-10526; 34-83701; File No. S7-19-18]
RIN 3235-AM12
Financial Disclosures About Guarantors and Issuers of Guaranteed
Securities and Affiliates Whose Securities Collateralize a Registrant's
Securities
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: We are proposing amendments to the financial disclosure
requirements for guarantors and issuers of guaranteed securities
registered or being registered, and issuers' affiliates whose
securities collateralize securities registered or being registered in
Regulation S-X to improve those requirements for both investors and
registrants. The proposed changes are intended to provide investors
with material information given the specific facts and circumstances,
make the disclosures easier to understand, and reduce the costs and
burdens to registrants. In addition, by reducing the costs and burdens
of compliance, issuers may be encouraged to offer guaranteed or
collateralized securities on a registered basis, thereby affording
investors protection they may not be provided in offerings conducted on
an unregistered basis. Finally, by making it less burdensome and less
costly for issuers to include guarantees or pledges of affiliate
securities as collateral when they structure debt offerings, the
proposed revisions may increase the number of registered offerings that
include these credit enhancements, which could result in a lower cost
of capital and an increased level of investor protection.
DATES: Comments should be received on or before December 3, 2018.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use our internet comment form (https://www.sec.gov/rules/other.shtml); or
Send an email to [email protected]. Please include
File Number S7-19-18 on the subject line.
Paper Comments
Send paper comments to Brent J. Fields, Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.
All submissions should refer to File Number S7-19-18. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method of submission. We will post all comments on our website (https://www.sec.gov/rules/other.shtml). Comments also are available for website
viewing and printing in our Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. All comments received will be posted without
change. Persons submitting comments are cautioned that we do not redact
or edit personal identifying information from comment submissions. You
should submit only information that you wish to make publicly
available.
We or the staff may add studies, memoranda, or other substantive
items to the comment file during this rulemaking. A notification of the
inclusion in the comment file of any such materials will be made
available on our website. To ensure direct electronic receipt of such
notifications, sign up through the ``Stay Connected'' option at
www.sec.gov to receive notifications by email.
FOR FURTHER INFORMATION CONTACT: Jarrett Torno, Assistant Chief
Accountant, at (202) 551-3400, or John Fieldsend, Special Counsel, at
(202) 551-3430, in the Division of Corporation Finance, 100 F Street
NE, Washington, DC 20549.
SUPPLEMENTARY INFORMATION: The Commission is proposing to amend
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\1\ 17 CFR 210.1-01 through 210.13.02.
\2\ 17 CFR 229.10 through 229.1208.
\3\ 15 U.S.C. 77a et seq.
\4\ 15 U.S.C. 78a et seq.
------------------------------------------------------------------------
Commission reference CFR citation (17 CFR)
------------------------------------------------------------------------
Regulation S-X: \1\
Rule 3-10............................ 210.3-10
Rule 3-16............................ 210.3-16
Rule 8-01............................ 210.8-01
Rule 8-03............................ 210.8-03
Rule 10-01........................... 210.10-01
Rule 13-01........................... 210.13-01
Rule13-02............................ 210.13-02
Regulation S-K: \2\
Item 504............................. 229.504
Item 1100............................ 229.1100
Item 1112............................ 229.1112
Item 1114............................ 229.1114
Item 1115............................ 229.1115
Securities Act of 1933 (Securities
Act): \3\
Form F-1............................. 239.31
Form F-3............................. 239.33
Form 1-A............................. 239.90
Form 1-K............................. 239.91
Form 1-SA............................ 239.92
Securities Exchange Act of 1934
(Exchange Act): \4\
Rule 12h-5........................... 240.12h-5
Form 20-F............................ 249.220f
------------------------------------------------------------------------
Table of Contents
I. Introduction
A. Background
B. Scope of Proposals
II. Rule 3-10 of Regulation S-X
A. Background
B. Overview of the Existing Requirements
C. Parent Company Financial Statements
D. 100% Owned
E. Full and Unconditional Guarantees
F. Exceptions
G. Consolidating Information
H. Securities to Which Rule 3-10 Applies
I. Recently-Acquired Subsidiary Issuers and Guarantors
J. Exchange Act Reporting Requirements
III. Proposed Amendments to Rule 3-10 and Partial Relocation to Rule
13-01
A. Overarching Principle
B. Overview of the Proposed Amendments
C. Conditions To Omit the Financial Statements of a Subsidiary
Issuer or Guarantor
1. Eligibility Conditions
a. Parent Company Financial Statements Condition
b. Consolidated Subsidiary Condition
c. Debt or Debt-Like Securities Condition
d. Eligible Issuer and Guarantor Structures Condition
i. Role of Parent Company
(A) Parent Company Obligation Is Not Limited or Conditional
(B) Parent Company as Issuer or Co-Issuer
(C) Parent Company as Full and Unconditional Guarantor
ii. Role of Subsidiary Guarantors
(A) Subsidiary Guarantee Release Provisions
iii. Treatment of Currently Eligible Issuer and Guarantor
Structures Under Proposed Rule 3-10
(A) Finance Subsidiary Issuer of Securities Guaranteed by Its
Parent Company
(B) Obligated Parent Company and Single Obligated Subsidiary
(C) Obligated Parent Company and Multiple Obligated Subsidiaries
2. Disclosure Requirements
a. Financial Disclosures
i. Level of Detail
ii. Presentation on a Combined Basis
iii. Periods to Present
b. Non-Financial Disclosures
c. When Disclosure Is Required
d. Location of Proposed Alternative Disclosures and Audit
Requirement
e. Recently-Acquired Subsidiary Issuers and Guarantors
f. Continuous Reporting Obligation
D. Application of Proposed Amendments to Certain Types of
Issuers
1. Foreign Private Issuers
2. Smaller Reporting Companies
[[Page 49631]]
3. Offerings Pursuant to Regulation A
4. Issuers of Asset-Backed Securities--Third Party Financial
Statements
IV. Rule 3-16 of Regulation S-X
V. Proposed Amendments to Rule 3-16 and Relocation to Rule 13-02
A. Overarching Principle
B. Overview of the Proposed Changes
C. Financial Disclosures
1. Level of Detail
2. Presentation on a Combined Basis
3. Periods to Present
D. Non-Financial Disclosures
E. When Disclosure Is Required
F. Application of Proposed Amendments to Certain Types of
Issuers
1. Foreign Private Issuers
2. Smaller Reporting Companies
3. Offerings Pursuant to Regulation A
VI. General Request for Comment
VII. Economic Analysis
A. Introduction
B. Baseline and Affected Parties
1. Market Participants
2. Market Conditions
C. Anticipated Economic Effects
1. Proposed Amendments to Rule 3-10 and Partial Relocation to
Rule 13-01
a. Eligibility Conditions To Omit Financial Statements of
Subsidiary Issuer or Guarantor
b. Disclosure Requirements
i. Financial and Non-Financial Disclosures
ii. When Disclosure Is Required
iii. Location of Proposed Alternative Disclosures and Audit
Requirement
iv. Recently Acquired Subsidiary Issuers and Guarantors
v. Continuous Reporting Obligation
2. Proposed Amendments to Rule 3-16 and Relocation to Rule 13-02
a. Financial Disclosures
i. Level of Detail
ii. Presentation on a Combined Basis
iii. Periods to Present
b. Non-Financial Disclosures
c. When Disclosure Is Required
D. Anticipated Effects on Efficiency, Competition, and Capital
Formation
E. Consideration of Reasonable Alternatives
1. Alternative to Proposed Amendments to Existing Rule 3-10
2. Alternatives Common to Proposed Amendments to Existing Rule
3-10 and Existing Rule 3-16
F. Request for Comment
VIII. Paperwork Reduction Act
A. Background
B. Summary of the Proposed Amendments Impact on Collection of
Information
1. Rule 3-10
2. Rule 3-16
C. Burden and Cost Estimates for the Proposed Amendments
D. Request for Comment
IX. Small Business Regulatory Enforcement Fairness Act
X. Initial Regulatory Flexibility Act Analysis
A. Reasons for, and Objectives of, the Proposing Action
B. Legal Basis
C. Small Entities Subject to the Proposed Rules
D. Reporting, Recordkeeping, and Other Compliance Requirements
E. Duplicative, Overlapping, or Conflicting Federal Rules
F. Significant Alternatives
G. Request for Comment
XI. Statutory Authority
Text of Proposed Rule and Form Amendments
I. Introduction
A. Background
We are proposing changes to the disclosure requirements in Rules 3-
10 and 3-16 of Regulation S-X to better align those requirements with
the needs of investors and to simplify and streamline the disclosure
obligations of registrants. Rule 3-10 requires financial statements to
be filed for all issuers and guarantors of securities that are
registered or being registered, but also provides several exceptions to
that requirement. These exceptions are typically available for
individual subsidiaries of a parent company \5\ when certain conditions
are met and the consolidated financial statements of that parent
company are filed. Rule 3-16 requires a registrant to provide separate
financial statements for each affiliate whose securities constitute a
substantial portion of the collateral for any class of registered
securities as if the affiliate were a separate registrant. The changes
we are proposing include amending both rules and relocating part of
Rule 3-10 and all of Rule 3-16 to new Rules 13-01 and 13-02 in
Regulation S-X, respectively.\6\ These changes are intended to provide
investors with the information that is material given the specific
facts and circumstances, make the disclosures easier to understand, and
reduce the costs and burdens to registrants.
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\5\ The identity of the parent company depends on the particular
corporate structure. See additional discussion in Section II.C,
``Parent Company Financial Statements Condition.''
\6\ Proposed Rules 13-01 and 13-02 would contain financial and
non-financial disclosure requirements for certain types of
securities registered or being registered that, while material to
investors, need not be included in the audited and unaudited
financial statements.
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This proposal results from an ongoing, comprehensive evaluation of
our disclosure requirements.\7\ As part of that evaluation, in
September 2015, the Commission issued a Request for Comment on the
Effectiveness of Financial Disclosures About Entities Other Than the
Registrant (``Request for Comment'').\8\ The Request for Comment sought
feedback on, among other things, the financial disclosure requirements
in Regulation S-X for certain entities other than the registrant,
including the requirements in Rules 3-10 and 3-16. More specifically,
the Commission solicited comment on how investors use the disclosures
required by these rules to make investment decisions; the challenges
that registrants face in providing the required disclosures; and
potential changes to these requirements that could enhance the
information provided to investors and promote efficiency, competition,
and capital formation.
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\7\ The staff, under its Disclosure Effectiveness Initiative, is
reviewing the disclosure requirements in Regulations S-K and
Regulation S-X and is considering ways to improve the disclosure
regime for the benefit of both companies and investors. The goal is
to comprehensively review the requirements and make recommendations
on how to update them to facilitate timely, material disclosure by
companies and shareholders' access to that information.
\8\ Release No. 33-9929 (Sept. 25, 2015) [80 FR 59083 (Oct. 1,
2015)].
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In response, we received approximately 50 comment letters.\9\ About
half of these comment letters addressed Rule 3-10,\10\ and nearly as
many addressed Rule 3-16.\11\ Additionally, prior to issuing the
Request for Comment, one comment letter was submitted, in response to
the staff's Disclosure Effectiveness Initiative, that addressed Rules
3-10 and 3-16.\12\ These comments were
[[Page 49632]]
considered carefully in developing these proposals.
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\9\ Comments that we received in response to the Request for
Comment are available at https://www.sec.gov/comments/s7-20-15/s72015.shtml. References to comment letters in this release refer to
the comments on the Request for Comment unless otherwise specified.
\10\ See, e.g., letters from Association of the Bar of the City
of New York (Nov. 30, 2015) (``AB-NYC''); Anuradha RK (Nov. 23,
2015) (``Anuradha''); BDO USA, LLP (Dec. 7, 2015) (``BDO''); Cahill
Gordon & Reindel LLP (Nov. 30, 2015) (``Cahill''); California Public
Employees' Retirement System (Nov. 30, 2015) (``CalPERS''); Center
for Audit Quality (Nov. 25, 2015) (``CAQ''); CFA Institute (Mar. 2,
2016) (``CFA''); Comcast Corporation (Dec. 11, 2015) (``Comcast'');
Covenant Review, LLC (Nov. 30, 2015) (``Covenant''); Davis Polk &
Wardwell LLP (Nov. 30, 2015) (``Davis Polk''); Deloitte & Touche LLP
(Nov. 23, 2015) (``DT''); Ernst & Young LLP (Nov. 20, 2015)
(``EY''); FedEx Corporation (``Nov. 30, 2015) (``FedEx''); General
Motors Company (Nov. 30, 2015) (``GM''); Grant Thornton LLP (Dec. 1,
2015) (``Grant''); Headwaters Incorporated (Nov. 30, 2015)
(``Headwaters''); KPMG LLP (Nov. 30, 2015) (``KPMG''); Medtronic plc
(Nov. 30, 2015) (``Medtronic''); Noble Corporation plc (Dec. 1,
2015) (``Noble-UK''); PricewaterhouseCoopers LLP (Nov. 30, 2015)
(``PwC''); RSM US LLP (Nov. 30, 2015) (``RSM''); Securities Industry
and Financial Markets Association (Nov. 30, 2015) (``SIFMA'');
Simpson Thacher & Bartlett LLP (Nov. 30, 2015) (``Simpson''); U.S.
Chamber of Commerce, Center for Capital Markets Competitiveness
(Nov. 30, 2015) (``Chamber''); and WhiteWave Foods Company (Nov. 30,
2015) (``WhiteWave'').
\11\ See, e.g., letters from Anuradha, BDO, Cahill, CalPERS,
CAQ, CFA, Covenant, Davis Polk, DT, EY, KPMG, PwC, SIFMA, and
Chamber.
\12\ See letter from Disclosure Effectiveness Working Group of
the Federal Regulation of Securities Committee and the Law and
Accounting Committee of the Business Law Section of the American Bar
Association (Nov. 14, 2014) (``ABA-Committees''), https://www.sec.gov/comments/disclosure-effectiveness/disclosureeffectiveness.shtml.
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B. Scope of Proposals
We are proposing changes to the disclosure requirements contained
in Rules 3-10 and 3-16. These rules represent a discrete, but
important, subset of the Regulation S-X disclosure requirements.\13\
Both rules affect disclosures made in connection with registered debt
offerings \14\ and subsequent periodic reporting.\15\ We believe that
revising these rules would reduce the cost of compliance for
registrants and encourage potential issuers to conduct registered debt
offerings or private offerings with registration rights. The proposed
amendments would benefit investors by simplifying and streamlining the
disclosure provided to them about registered transactions and improve
transparency in the market to the extent more offerings are
registered.\16\ In addition, if the proposed changes reduce the burden
associated with providing guarantees or pledges of affiliate securities
as collateral,\17\ investors may benefit from access to more registered
offerings that are structured to include such enhancements and,
accordingly, the additional protections that come with Section 11
liability for disclosures made in those offerings.
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\13\ Until 2000, the disclosure requirements for guarantors and
issuers of guaranteed securities registered or being registered and
those for affiliates whose securities collateralized securities
registered or being registered were included in the same rule. The
Commission separated those disclosure requirements in 2000 because
of the significant change made to the structure and substance of the
disclosure requirements for guarantors and issuers of guaranteed
securities registered or being registered. See Financial Statements
and Periodic Reports for Related Issuers and Guarantors, Release No.
33-7878 (Aug. 4, 2000) [65 FR 51691 (Aug. 24, 2000)] (``2000
Release''). The Commission kept these new disclosure requirements in
Rule 3-10 and moved the disclosure requirements for affiliates whose
securities collateralize securities registered or being registered
to new Rule 3-16. The substance of the requirements moved to Rule 3-
16 were unchanged. See Separate Financial Statements Required by
Regulation S-X, Release No. 33-6359 (Nov. 6, 1981) [46 FR 56171
(Nov. 16, 1981)].
\14\ In practice, pledges of affiliate securities as collateral
are almost always for debt securities. However, the requirements of
Rule 3-16 are applicable to any security registered or being
registered, whether or not in the form of debt.
\15\ The proposed amendments will not affect the presentation of
registrants' consolidated financial statements prepared in
accordance with U.S. GAAP or International Financial Reporting
Standards (``IFRS'') as issued by the International Accounting
Standards Board in registration statements and Exchange Act periodic
reports, such as Form 10-K. The proposed amendments are focused on
the supplemental information about subsidiary issuers and guarantors
as well as affiliates whose securities are pledged as collateral.
\16\ In a recent report to Congress, the Commission's Division
of Economic Risk Analysis determined that capital raising activity
in the registered debt market was approximately $1.3 trillion in
2016. See U.S. Sec. & Exch. Comm'n, Div. of Econ. & Risk Analysis,
Access to Capital and Market Liquidity 96 (Aug. 2017) [hereinafter
Access to Capital and Market Liquidity Report], https://www.sec.gov/files/access-to-capital-and-market-liquidity-study-2017.pdf. In
2016, debt offerings under Securities Act Rule 144A raised
approximately $562.8 billion, based on staff analysis of data from
the SDC Platinum (Thomson Reuters) database.
\17\ Currently, registrants often structure debt agreements to
release affiliate securities pledged as collateral if the disclosure
requirements of Rule 3-16 would be triggered, thereby depriving
investors of that collateral protection. See additional discussion
below. Registrants may cease structuring offerings to release such
collateral if disclosure burdens are reduced by the proposed
amendments, which would benefit investors.
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II. Rule 3-10 of Regulation S-X
A. Background
A guarantee of a debt or debt-like security (``debt security'')
\18\ is a separate security under the Securities Act \19\ and, as a
result, offers and sales of these guarantees \20\ must be either
registered or exempt from registration. If the offer and sale is
registered, the issuer of the debt security and the guarantor \21\ must
each file its own audited annual and unaudited interim \22\ financial
statements required by Regulation S-X. Additionally, the offer and sale
of the securities pursuant to a Securities Act registration statement
causes the issuer and guarantor to become subject to reporting under
Section 15(d) of the Exchange Act.\23\ Reporting under Section 15(d)
requires filing periodic reports that include audited annual and
unaudited interim financial statements for at least the fiscal year in
which the related Securities Act registration statement became
effective.\24\
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\18\ Rule 3-10 exceptions are available to issuers and
guarantors of guaranteed securities that are ``debt or debt-like.''
The 2000 Release stated, in part, ``[t]he characteristics that
identify a guaranteed security as debt or debt-like for this purpose
are: the issuer has a contractual obligation to pay a fixed sum at a
fixed time; and where the obligation to make such payments is
cumulative, a set amount of interest must be paid.'' See Section
III.A.4 of the 2000 Release and additional discussion in Section
II.H, ``Securities to which Rule 3-10 Applies.''
\19\ See Section 2(a)(1) of the Securities Act.
\20\ These securities, while separately identified in the
Securities Act, are typically purchased by investors together with
the related debt security and are held together while outstanding.
\21\ The issuer and guarantor structures contemplated by Rule 3-
10 can comprise multiple issuers and multiple guarantors. For
example, a parent can co-issue a security with one of its
subsidiaries that several of its other subsidiaries guarantee.
\22\ A foreign private issuer need only provide interim period
disclosure in certain registration statements.
\23\ See 15 U.S.C. 78o(d).
\24\ The duty to file under Section 15(d) is automatically
suspended as to any fiscal year, other than the fiscal year within
which the registration statement became effective, if, at the
beginning of such fiscal year, the securities of each class to which
the registration statement relates are held of record by less than
300 persons. See Section 15(d)(1) of the Exchange Act.
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When the Commission amended Rule 3-10 in 2000, it recognized that
``[t]here are circumstances, however, where full Securities Act and
Exchange Act disclosure by both the issuer and the guarantors may not
be useful to an investment decision and, therefore, may not be
necessary.'' \25\ Common examples are when: (1) A parent company offers
its own securities that its subsidiary guarantees; and (2) a subsidiary
offers securities that its parent company fully and unconditionally
guarantees. In these and similar situations, in which a parent company
and one or more of its subsidiaries serve as issuers and/or guarantors
of guaranteed securities, we believe the disclosure requirements
generally have been guided by an overarching principle: The
consolidated financial statements of the parent company are the
principal source of information for investors when evaluating the debt
security and its guarantee together.\26\ This principle is grounded in
the idea that the investment is in the consolidated enterprise when:
(1) The parent company is fully obligated as either issuer or full and
unconditional guarantor of the security; \27\ (2) the parent company
controls each subsidiary issuer and guarantor, including having the
ability to direct all debt-paying activities; \28\ and (3) the
financial information of each subsidiary issuer and guarantor is
included as part of the consolidated financial statements of the parent
company.\29\ In these
[[Page 49633]]
circumstances, we believe full Securities Act and Exchange Act
disclosures for each subsidiary issuer and guarantor are generally not
material for an investor to make an informed investment decision about
a guaranteed security. Instead, we believe information included in the
consolidated disclosures about the parent company, as supplemented with
details about the issuers and guarantors, is sufficient. These
disclosures help an investor understand how the consolidated entities
within the enterprise support the obligation.
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\25\ See Section I of the 2000 Release.
\26\ Parent company consolidated financial statements must be
filed in all instances where the omission of financial statements of
subsidiary issuers and guarantors are permitted under existing Rule
3-10. See paragraph (4) in each of Rules 3-10(b)-(f).
\27\ Typically, all of a parent company's subsidiaries support
the parent company's debt-paying ability. However, in the event of
default, the holders of debt without the benefit of guarantees are
comparatively disadvantaged. In the event of default, a holder of a
debt security issued by a parent company can make claims for payment
directly against the issuer and guarantors. The assets of non-issuer
and non-guarantor subsidiaries typically would be accessible only by
the holder indirectly through a bankruptcy proceeding. In such a
proceeding, without a direct guarantee, the claims of the holder
would be structurally subordinate to the claims of other creditors,
including trade creditors of the non-issuer and non-guarantor
subsidiaries.
\28\ Debt-paying activities typically include, but are not
limited to, the use of the subsidiary issuer's and guarantor's
assets and the timing and amount of distributions.
\29\ A parent company that prepares its financial statements in
accordance with U.S. Generally Accepted Accounting Principles
(``U.S. GAAP''), would apply Accounting Standards Codification
(``ASC'') 810, Consolidation, in determining whether to consolidate
a subsidiary issuer or guarantor. A parent company that qualifies as
a foreign private issuer and prepares its financial statements in
accordance with IFRS would apply IFRS 10, Consolidated Financial
Statements.
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B. Overview of the Existing Requirements
Rule 3-10(a) states the general rule that every issuer of a
registered security that is guaranteed and every guarantor of a
registered security must file the financial statements required for a
registrant by Regulation S-X. The rule also sets forth five exceptions
to this general rule.\30\ Each exception specifies conditions that must
be met, including, in each case, that the parent company provide
certain disclosures (``Alternative Disclosures''). If the conditions
are met, separate financial statements of each qualifying subsidiary
issuer and guarantor may be omitted. Only one of the five exceptions
can apply to any particular offering and the subsequent Exchange Act
reporting.
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\30\ See Rules 3-10(b)-(f) of Regulation S-X. See Section II.F,
``Exceptions,'' below.
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Two primary conditions, included in each of the exceptions, must be
satisfied for a subsidiary issuer or guarantor to be eligible to omit
its separate financial statements:
Each subsidiary issuer and guarantor must be ``100%
owned'' by the parent company; and
each guarantee must be ``full and unconditional.''
The form and content of the Alternative Disclosures are determined
based on the facts and circumstances and can range from a brief
narrative to highly-detailed condensed consolidating financial
information (``Consolidating Information''). Subsidiary issuers and
guarantors that are permitted to omit their separate financial
statements under Rule 3-10 are also automatically exempt from Exchange
Act reporting under Exchange Act Rule 12h-5. The parent company,
however, must continue to provide the Alternative Disclosures for as
long as the guaranteed securities are outstanding.\31\
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\31\ See Section III.C.1 of the 2000 Release and additional
discussion in Section II.J, ``Exchange Act Reporting Requirements.''
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Recently acquired subsidiary issuers and guarantors are addressed
separately within Rule 3-10. Rule 3-10(g) \32\ requires the Securities
Act registration statement of a parent company filed in connection with
issuing guaranteed debt securities to include one year of audited, and,
if applicable, unaudited interim pre-acquisition financial statements
for recently-acquired subsidiary issuers and guarantors that are
significant and have not been reflected in the parent company's audited
results for at least nine months of the most recent fiscal year.
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\32\ Rule 3-10(g) of Regulation S-X.
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C. Parent Company Financial Statements
Each of the exceptions in Rule 3-10 requires the parent company to
file its financial statements, but Rule 3-10 does not address when an
issuer or guarantor is, in fact, the ``parent company'' because, as
noted in the 2000 Release, the identity of the parent company will vary
based on the particular corporate structure.\33\ The 2000 Release
identified three conditions that must be met before an entity can be
considered the ``parent company'' for purposes of Rule 3-10, including
that the entity owns 100% of each subsidiary issuer or guarantor
directly or indirectly.\34\
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\33\ See Section III.A.6. of the 2000 Release.
\34\ The three conditions for an entity to be considered the
``parent company'' are that the entity: (1) Is an issuer or
guarantor of the subject securities; (2) is an Exchange Act
reporting company, or will become one as a result of the subject
Securities Act registration statement; and (3) owns 100% of each
subsidiary issuer or guarantor directly or indirectly. See id. A
number of examples illustrating when an entity is or is not the
parent company were included in an appendix to the 2000 Release. See
id. at Appendix C.
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D. 100% Owned
Rule 3-10(h)(1) defines a subsidiary as ``100% owned'' if all of
its outstanding voting shares are owned, either directly or indirectly,
by its parent company. A subsidiary not in corporate form is ``100%
owned'' if the sum of all interests are owned, either directly or
indirectly, by its parent company, except that the following are not
included in the sum of all interests owned: (1) Securities that are
guaranteed by its parent, and, if applicable, other 100%-owned
subsidiaries of its parent; and (2) securities that guarantee
securities issued by its parent and, if applicable, other 100%-owned
subsidiaries of its parent.\35\ This condition was adopted so the risks
associated with an investment in the parent company and its subsidiary
would be ``identical.'' \36\ A subsidiary issuer or guarantor with any
third party ownership interest would fail to meet this condition and
not be eligible for an exception in Rule 3-10. This condition would
also not be met if a subsidiary issued securities convertible into its
voting securities to someone other than the parent company.\37\
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\35\ The 2000 Release states that ``[u]nincorporated entities
operate differently than corporations. For example, in a limited
liability corporation, the ability to vote can be separated from the
ability to manage the financial affairs of the entity.'' See Section
III.A.1.a.ii of the 2000 Release. In recognition of such
differences, separate definitions of 100% owned were included in
existing Rule 3-10(h)(1) for corporate and non-corporate entities.
\36\ See Section III.A.1.a.i.(A) of the 2000 Release.
\37\ See id.
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E. Full and Unconditional Guarantees
Rule 3-10(h)(2) defines a guarantee as ``full and unconditional''
if, when an issuer of a guaranteed security has failed to make a
scheduled payment, the guarantor is obligated to make the scheduled
payment immediately and, if the guarantor does not, any holder of the
guaranteed security may immediately bring suit directly against the
guarantor for payment of all amounts due and payable. There can be no
conditions, beyond the issuer's failure to pay, to the guarantor's
payment obligation.\38\ The condition that all guarantees be ``full and
unconditional'' was adopted to limit the availability of Alternative
Disclosures to situations where the
[[Page 49634]]
payment obligations of the issuer and guarantor are essentially
identical.\39\
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\38\ For example, a guarantee is not full and unconditional if
it is not operative until some time after default or if the amount
the guarantor is obligated to pay differs from the amount the issuer
must pay. As the payment obligation does not fall uniformly across
the issuer and related guarantors before enforceability of the
guarantee, each party in that structure must provide separate
financial statements. See Section III.A.1.b.i. of the 2000 Release.
However, a guarantee can meet the full and unconditional condition
if it has a fraudulent conveyance ``savings clause,'' such as the
guarantee being limited to the maximum amount that can be guaranteed
without constituting a fraudulent conveyance or fraudulent transfer
under applicable insolvency laws, or if the guarantee is enforceable
to the fullest extent of the law. See Section III.A.1.b.ii. of the
2000 Release. Additionally, a guarantee can be full and
unconditional even if it has different subordination terms than the
guaranteed securities. For example, a parent company's guarantee can
be full and unconditional if the subsidiary's debt obligation ranks
senior to all of its other debt and the parent company's guarantee
ranks junior to other debt obligations of the parent company. While
different subordination terms may mean the guaranteed security
holders have different rights in the priority of payment with
respect to the issuer and guarantor, both the issuer and guarantor
remain fully liable to holders for all amounts due under the
guaranteed security. See Section III.A.1.b.iii. of the 2000 Release.
\39\ See Section III.A.1.b of the 2000 Release.
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F. Exceptions
Each of the five exceptions in the existing rule contains
conditions that, if satisfied, permit registrants to omit separate
financial statements of the subject subsidiary issuers and guarantors.
These five exceptions are:
(1) A finance subsidiary \40\ issues securities that its parent
company guarantees; \41\
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\40\ Rule 3-10(h)(7) of Regulation S-X (``A subsidiary is a
finance subsidiary if it has no assets, operations, revenues or cash
flows other than those related to the issuance, administration and
repayment of the security being registered and any other securities
guaranteed by its parent company.'').
\41\ See Rule 3-10(b) of Regulation S-X.
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(2) an operating subsidiary issues securities that its parent
company guarantees; \42\
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\42\ See Rule 3-10(c) of Regulation S-X.
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(3) a subsidiary issues securities that its parent company and one
or more other subsidiaries of its parent company guarantee; \43\
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\43\ See Rule 3-10(d) of Regulation S-X.
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(4) a parent company issues securities that one of its subsidiaries
guarantees; \44\ or
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\44\ See Rule 3-10(e) of Regulation S-X.
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(5) a parent company issues securities that more than one of its
subsidiaries guarantees.\45\
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\45\ See Rule 3-10(f) of Regulation S-X.
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In addition to the two primary conditions discussed above,
depending on which exception is applicable, additional conditions must
be satisfied, including providing Alternative Disclosures in the
footnotes to the parent company's consolidated financial statements. In
most cases, the Alternative Disclosures consist of Consolidating
Information. However, there are three situations in which the
Alternative Disclosures consist of a brief narrative.\46\ These three
situations are:
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\46\ The content of the brief narrative is specified within each
of the exceptions based on the applicable facts and circumstances.
For example, if the conditions are met, Rule 3-10(b)(4) of
Regulation S-X specifies that the narrative disclosure to be
included in a footnote to the parent company's consolidated
financial statements must state, if true, ``that the issuer is a
100%-owned finance subsidiary of the parent company and the parent
company has fully and unconditionally guaranteed the securities.''
It also requires the footnote to include ``the narrative disclosures
specified in paragraphs (i)(9) and (i)(10) of this section.''
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The subsidiary is a finance subsidiary, and the parent
company is the only guarantor of the securities;
the parent company of the subsidiary issuer has no
independent assets or operations,\47\ the parent company guarantees the
securities, no subsidiary of the parent company guarantees the
securities, and any subsidiaries of the parent company other than the
issuer are minor; \48\ and
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\47\ Rule 3-10(h)(5) of Regulation S-X (``A parent company has
no independent assets or operations if each of its total assets,
revenues, income from continuing operations before income taxes, and
cash flows from operating activities (excluding amounts related to
its investment in its consolidated subsidiaries) is less than 3% of
the corresponding consolidated amount.'').
\48\ Rule 3-10(h)(6) of Regulation S-X (``A subsidiary is minor
if each of its total assets, stockholders' equity, revenues, income
from continuing operations before income taxes, and cash flows from
operating activities is less than 3% of the parent company's
corresponding consolidated amount.'').
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the parent company issuer has no independent assets or
operations and all of the parent company's subsidiaries, other than
minor subsidiaries, guarantee the securities.
G. Consolidating Information
When the brief narrative disclosure is not permitted, Rule 3-10
requires the inclusion of Consolidating Information in the financial
statements. Consolidating Information is detailed financial information
consisting of a columnar footnote presentation of each category of
parent and subsidiaries as issuer, co-issuers, guarantor(s), or non-
guarantor(s) that sums to the consolidated amounts. The presentation
must include all major captions of the balance sheet, income statement,
and cash flow statement that are required to be shown separately in
interim financial statements prepared under 17 CFR 210.10-1 (``Article
10'' of Regulation S-X'').\49\ In order to distinguish the assets,
liabilities, operations, and cash flows of the entities that are
legally obligated to make payments under the guarantee from those that
are not, the columnar presentation must show: (1) A parent company's
investments in all consolidated subsidiaries based upon its
proportionate share of their net assets; \50\ and (2) subsidiary issuer
and guarantor investments in certain consolidated subsidiaries using
the equity method of accounting.\51\
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\49\ Rule 10-01(a) of Regulation S-X.
\50\ See Rule 3-10(i)(3) of Regulation S-X.
\51\ See Rule 3-10(i)(5) of Regulations S-X. Investments in the
following subsidiaries are required to be presented under the equity
method within Consolidating Information: non-guarantor subsidiaries;
subsidary issuers or subsidiary guarantors that are not 100% owned
and/or whose guarantee is not full and unconditional; subsidiary
guarantors whose guarantee is not joint and several with the
guarantees of other subsidiaries; and subsidiary guarantors with
differences in domestic or foreign laws that affect the
enforceability of the guarantees. The equity method is used
primarily to ensure that a subsidiary guarantor does not
consolidate, within this presentation, its own non-guarantor
subsidiary. The equity method of accounting is described in ASC 323.
Investments--Equity Method and Joint Ventures, for registrants that
apply U.S. GAAP and in International Accounting Standards (``IAS'')
28, Investments in Association and Joint Ventures, for foreign
private issuers that apply IFRS.
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Consolidating Information must be provided as of, and for, the same
periods as the parent company's consolidated financial statements and
must be audited for the same periods that the parent company financial
statements are required to be audited.\52\ In addition to requiring
disclosures about restricted net assets,\53\ as well as certain types
of restrictions on the ability of the parent company or any guarantor
to obtain funds from their subsidiaries,\54\ the instructions specify
that the disclosure may not omit information about each guarantor that
would be material for investors to evaluate the sufficiency of the
guarantee, and that the disclosure must include sufficient information
so as to make the financial information presented not misleading.
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\52\ Rule 3-10(i)(2) of Regulation S-X.
\53\ Rule 3-10(i)(10) of Regulation S-X.
\54\ Rule 3-10(i)(9) of Regulation S-X.
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H. Securities to Which Rule 3-10 Applies
The exceptions to the general rule in existing Rules 3-10(b)
through (f) are available only to issuers and guarantors of debt
securities.\55\ In the 2000 Release, the Commission explained the
circumstances under which a guaranteed security should be considered
``debt or debt-like'' and described certain characteristics of such a
security. Generally, the substance of the security's obligation will
dictate eligibility for Rule 3-10 rather than the form or title of the
security. The characteristics that identify a guaranteed security as
debt or debt-like are: (1) The issuer has a contractual obligation to
pay a fixed sum at a fixed time; and (2) where the obligation to make
such payments is cumulative, a set amount of interest must be paid.\56\
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\55\ The 2000 Release states that ``modified financial
information permitted by paragraphs (b)-(f) will be available only
for guaranteed debt and debt-like instruments.'' See Section
III.4.b.i. of the 2000 Release. As discussed below, we are proposing
to state this requirement in the rule for clarity.
\56\ The Commission provided implementation guidance for certain
types of securities such as preferred securities, trust preferred
securities, and convertible debt or debt-like securities. See
Section III.4.b.i and ii of the 2000 Release.
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I. Recently-Acquired Subsidiary Issuers and Guarantors
If a parent company acquires a new subsidiary issuer or guarantor
that otherwise qualifies for one of the
[[Page 49635]]
exceptions in Rules 3-10(c) through (f), the parent company may be
required to provide one year of audited pre-acquisition financial
statements of the newly-acquired issuer or guarantor and, if
applicable, unaudited interim financial statements. This requirement is
triggered when: (1) A parent company acquires the new subsidiary during
or subsequent to one of the periods for which financial statements are
presented in a Securities Act registration statement filed in
connection with the offer and sale of the debt securities; (2) the
subsidiary is deemed significant; and (3) the subsidiary is not
reflected in the audited consolidated results of the parent company for
at least nine months of the most recent fiscal year.\57\ A subsidiary
is significant if its net book value or purchase price, whichever is
greater, is 20 percent or more of the principal amount of the
securities being registered.\58\ The financial statements of the
recently-acquired subsidiary must conform to the requirements of
Regulation S-X because, as an issuer of a security or provider of a
guaranty, it is an issuer. These include the requirement that an audit
be performed in accordance with the standards of the Public Company
Accounting Oversight Board (``PCAOB'') by an auditor registered with
the PCAOB.\59\
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\57\ Rule 3-10(g)(1) of Regulation S-X.
\58\ Rule 3-10(g)(1)(ii) of Regulation S-X.
\59\ In certain circumstances, pre-acquisition financial
statements of a recently-acquired subsidiary that were previously
provided by a parent company may not meet the requirements of Rule
3-10(g). For example, a parent company may provide on Form 8-K pre-
acquisition financial statements of a subsidiary required by 17 CFR
210.3-05 (``Rule 3-05 of Regulation S-X'') that may be audited in
accordance with U.S. generally accepted auditing standards or
audited by an auditor not registered with the PCAOB. If the parent
company later files a registration statement for the offer and sale
of its securities that are guaranteed by that same recently acquired
subsidiary, those previously filed pre-acquisition financial
statements would not meet the requirements of Rule 3-10(g). The
parent company would then be required to file pre-acquisition
financial statements of that recently acquired subsidiary guarantor
audited in accordance with the standards of the PCAOB by an auditor
registered with the PCAOB, or request pre-filing relief from the
staff.
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J. Exchange Act Reporting Requirements
Issuers and guarantors availing themselves of an exception that
allows for the Alternative Disclosures in lieu of separate financial
statements are exempt from Exchange Act reporting by Exchange Act Rule
12h-5. The parent company, however, must continue to provide the
Alternative Disclosures for as long as the guaranteed securities are
outstanding.\60\ This obligation continues even if the subsidiary
issuers and guarantors could have suspended their reporting obligations
under 17 CFR 240.12h-3 (``Rule 12h-3'') or Section 15(d) of the
Exchange Act,\61\ had they chosen not to avail themselves of a Rule 3-
10 exception and reported separately from the parent company.
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\60\ See Section III.C.1 of the 2000 Release and Rule 3-10(a).
\61\ See 15 U.S.C. 78o(d).
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A subsidiary issuer or guarantor that initially meets the
requirements but subsequently ceases to satisfy Rule 12h-5 must begin
separately reporting under the Exchange Act. It must present the
financial statements required by Regulation S-X in a separate periodic
report at the time the next report is due and may no longer rely on its
parent company's provision of Alternative Disclosures in the parent
company's periodic reports.
III. Proposed Amendments to Rule 3-10 and Partial Relocation to Rule
13-01
A. Overarching Principle
We believe that investors in guaranteed securities would be best
served by continuing to adhere to the overarching principle upon which
existing Rule 3-10 is based, namely that investors in guaranteed debt
securities rely primarily on the consolidated financial statements of
the parent company and supplemental details about the subsidiary
issuers and guarantors when making investment decisions.\62\ Although
the existing rules provide investors with information about issuers of
guaranteed debt and guarantors of those securities, our experience
since the adoption of these rules in 2000 suggests the requirements
could be improved for the benefit of both investors and registrants
while adhering to the overarching principle. In this regard, the
existing rules impose certain eligibility restrictions and disclosure
requirements that may require unnecessary detail, thereby shifting
investor focus away from the consolidated enterprise towards individual
entities or groups of entities and may pose undue compliance burdens
for registrants. For example, a parent company is not eligible, under
the existing rule, to provide the Alternative Disclosures if a
subsidiary issuer or guarantor is 99% instead of 100% owned by its
parent company. As another example, the use of a brief narrative
instead of Consolidating Information is not available if the total
assets of either the parent company or non-issuer and non-guarantor
subsidiaries of the parent company exceed 3% of the parent company's
consolidated total assets. In both cases, slight variations from the
conditions set forth in the rule lead to substantially different
disclosure outcomes despite the investments being substantially the
same. More broadly, the volume of the Consolidating Information and
level of detail required can undermine the overarching principle.
Consolidating Information typically occupies multiple pages of a parent
company's financial statements, is composed of detailed information
that may not be material for investors in making an investment
decision, and could distract from the financial information of the
obligated entities that is most likely to be material. In addition,
according to one commenter, debt agreements are often structured to
either meet or avoid the requirements of Rule 3-10, which may result in
a guarantor structure that is less beneficial to investors.\63\ Another
commenter stated that the ``burdensome requirements'' of the existing
rule ``[lead] to issuers electing to do more unregistered as opposed to
registered deals.'' \64\ We are proposing amendments to address the
challenges posed by the current rules in an effort to improve the
disclosures to investors, encourage more registered offerings, and
facilitate debt structures where the provision of guarantees is less
burdensome.
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\62\ See discussion in Section II.A, ``Background.''
\63\ See letter from DT.
\64\ See letter from Davis Polk.
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B. Overview of the Proposed Amendments
Under the proposed amendments, the rules would continue to permit
the omission of separate financial statements of subsidiary issuers and
guarantors when certain conditions are met and the parent company
provides supplemental financial and non-financial disclosure about the
subsidiary issuers and/or guarantors and the guarantees (``Proposed
Alternative Disclosures''). Similar to the existing rule, proposed Rule
3-10 would provide the conditions that must be met in order to omit
separate subsidiary issuer or guarantor financial statements. Proposed
Rule 13-01 would specify the disclosure requirements for the
accompanying Proposed Alternative Disclosures. The proposed amendments
would:
Replace the condition that a subsidiary issuer or
guarantor be 100% owned by the parent company with a condition that it
be consolidated in the parent company's consolidated financial
statements;
replace Consolidating Information with summarized
financial information,
[[Page 49636]]
as defined in 17 CFR 210.1-02,\65\ (``Summarized Financial
Information'') of the issuers and guarantors (together, ``Obligor
Group''), which may be presented on a combined basis, and reduce the
number of periods presented;
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\65\ Rule 1-02(bb)(1) of Regulation S-X.
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expand the qualitative disclosures about the guarantees
and the issuers and guarantors;
eliminate quantitative thresholds for disclosure and
require disclosure of additional information that would be material to
holders of the guaranteed security;
permit the Proposed Alternative Disclosures to be provided
outside the footnotes to the parent company's audited annual and
unaudited interim consolidated financial statements in the registration
statement covering the offer and sale of the subject securities and any
related prospectus, and in certain Exchange Act reports filed shortly
thereafter;
require that the Proposed Alternative Disclosures be
included in the footnotes to the parent company's consolidated
financial statements for annual and quarterly reports beginning with
the annual report for the fiscal year during which the first bona fide
sale of the subject securities is completed;
eliminate the requirement to provide pre-acquisition
financial statements of recently-acquired subsidiary issuers and
guarantors; and
require the Proposed Alternative Disclosures for as long
as the issuers and guarantors have an Exchange Act reporting obligation
with respect to the guaranteed securities rather than for so long as
the guaranteed securities are outstanding.
The proposed amendments would simplify and streamline the rule
structure in several ways. Most significantly, under proposed Rules 3-
10(a) and 3-10(a)(1) there would be only a single set of eligibility
criteria that would apply to all issuer and guarantor structures
instead of having separate sets of criteria in each of the five
exceptions in existing Rules 3-10(b) through (f). Similarly, the
requirements for the Proposed Alternative Disclosures would be included
in a single location within proposed Rule 13-01, rather than spread
among the multiple paragraphs of existing Rule 3-10. We believe these
changes would simplify the rule structure and facilitate compliance.
Request for Comment
1. Would the proposed amendments to existing Rule 3-10 result in an
increase in the number of registered debt offerings that include
guarantees? Why or why not? How would increasing the number of
registered debt offerings that include guarantees affect investors and
issuers?
2. What factors do issuers consider when deciding whether to engage
in a registered debt offering or an offering in the private market? Do
issuers structure registered debt offerings to not include guarantees
because of concerns about compliance with existing Rule 3-10? If so,
what are the specific concerns? Are issuers choosing to engage in
private debt offerings that include guarantees? If so, what exemptions
or safe harbors are issuers using? If these issuers are relying on 17
CFR 230.144A (``Rule 144A''), do these offerings typically include
registration rights, or are they offered pursuant to Rule 144A without
registration rights? Why or why not?
3. To what type of investors are issuers of registered debt
offerings selling or marketing their securities--Qualified
Institutional Buyers (``QIBs''), other institutional investors, or
retail investors? What is the typical investor break down in this
regard?
4. What factors do issuers consider in determining whether to
structure a debt offering to include guarantees, and how are they
considered?
5. How do investors use the Alternative Disclosures under existing
Rule 3-10? For example, how do retail investors, institutional
investors, or third parties, such as financial analysts, use the
information? How would these investors use the Proposed Alternative
Disclosures?
6. Would the proposed amendments to existing Rule 3-10 improve the
disclosures provided to investors? If so, how? Are there other changes
to the rule that we should consider that would improve disclosures to
investors? If so, what are they and how would they improve disclosure?
7. Would the proposed amendments to existing Rule 3-10 make the
rule less burdensome and, thereby, encourage issuers to structure debt
offerings to include guarantees? Are there other changes to the rule
that we should consider that would reduce compliance burdens for
issuers but continue to provide the material information investors need
to make informed investment decisions?
8. Would the proposed amendments to existing Rule 3-10 remove
disclosures that investors or financial analysts rely on? If so, which
disclosures? Would the removal of such disclosures have an effect on
investor participation in registered debt offerings that include
guarantees?
9. What effects do registered debt offerings have on the covenants
contained in the related indentures? Do private debt offerings
typically contain more or fewer covenants in the related indentures?
Why or why not? Would an issuer's offering of debt contain more
covenants if offered privately than if offered publicly? Why or why
not? What effects would the proposed rules have on the covenants
contained in the related indentures?
10. Are there alternative approaches to disclosures about
guarantors and guarantees that would benefit investors? If so, what are
they and why? How would investors use the disclosures under these
alternative approaches?
C. Conditions To Omit the Financial Statements of a Subsidiary Issuer
or Guarantor
Under the proposed rules, the financial statements of a subsidiary
issuer or guarantor could be omitted if the eligibility conditions
contained in proposed Rules 3-10(a) and 3-10(a)(1) are met and the
Proposed Alternative Disclosures specified in proposed Rule 13-01 are
provided in the filing, as required by proposed Rule 3-10(a)(2). As
proposed, the eligibility conditions would be that:
The consolidated financial statements of the parent
company have been filed;
the subsidiary issuer or guarantor is a consolidated
subsidiary of the parent company;
the guaranteed security is a debt security; and
one of the following eligible issuer and guarantor
structures is applicable:
[cir] The parent company issues the security or co-issues the
security, jointly and severally, with one or more of its consolidated
subsidiaries; or
[cir] a consolidated subsidiary issues the security or co-issues
the security with one or more other consolidated subsidiaries of the
parent company, and the security is guaranteed fully and
unconditionally by the parent company.
1. Eligibility Conditions
a. Parent Company Financial Statements Condition
Proposed Rule 3-10 would continue to require the filing of the
parent company's consolidated financial statements. Additionally, under
the proposed amendments, ``parent company'' would still be defined as
in the 2000 Release, with one change. The first two conditions would
continue to be that the entity is: (1) An issuer or guarantor of the
securities; and (2) an Exchange Act reporting company, or will become
one as a result of the subject Securities Act registration
[[Page 49637]]
statement. However, the third condition, that the entity owns, directly
or indirectly, 100% of each subsidiary issuer and guarantor, would no
longer be required for an entity to be considered the parent
company.\66\ Instead, the third condition would be that the entity
consolidates each subsidiary issuer and guarantor in its consolidated
financial statements.\67\ For clarity, the definition of ``parent
company'' would be included in proposed Rule 3-10(b)(1), stating that
the parent company is the entity that meets the three aforementioned
conditions.
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\66\ See Section III.A.6. of the 2000 Release.
\67\ See Section III.C.1.b, ``Consolidated Subsidiary,'' below.
---------------------------------------------------------------------------
Consistent with the note to existing Rule 3-10(a)(2), the financial
statements of an entity that is not an issuer or guarantor of the
registered security could not be substituted for those of the parent
company. For example, it would not be appropriate to file, in
substitution for the financial statements of the parent company,
financial statements of an entity that files Exchange Act reports but
is not an issuer or guarantor of the securities being registered even
if the financial statements of that entity are virtually identical to
those of the parent company, because the security holders cannot
enforce payment of the obligation against that particular entity.
Because we have included the definition of parent company in proposed
Rule 3-10(b)(1), which clearly states that the parent company must be
an issuer or guarantor of the guaranteed security, we do not believe
the note to existing Rule 3-10(a)(2) is necessary and have removed it
from the proposed rule.
Request for Comment
11. Is the proposed definition of ``parent company'' included in
proposed Rule 3-10(b)(1) sufficiently clear? Why or why not? Are there
other modifications to the proposed definition of ``parent company''
that would be appropriate? If so, what are they and why should they be
included?
12. Are there other definitions of ``parent company'' that may
differ from our proposed definition? If so, which definitions and what
are the similarities or differences? How would any such differences
affect issuers' ability to apply our rule? Should we make any
modifications to the proposed definition of ``parent company'' in light
of those other definitions?
13. Should the proposed rule include a requirement similar to the
note to existing Rule 3-10(a)(2) that the financial statements of an
entity that is not an issuer or guarantor of the registered security
could not be substituted for those of the parent company, or does the
proposed definition of ``parent company'' render such a requirement
unnecessary?
b. Consolidated Subsidiary Condition
The 2000 Release states that the Commission was adopting the
existing rule's definition of 100% owned ``because it assures investors
in the guaranteed securities that there is no competing common equity
interest in the assets or revenues of the subsidiary. This allows
investors to evaluate the creditworthiness of the parent and subsidiary
as a single, indivisible business.'' \68\ The Commission explained that
the risks associated with an investment in a parent company and its
subsidiary issuers and/or guarantors would need to be identical to
justify the use of the Alternative Disclosures in lieu of separate
financial statements of each of those subsidiaries, and if a third
party holds an interest in a subsidiary, those risks are not
identical.\69\
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\68\ See Section III.A.1.a.i.(A) of the 2000 Release.
\69\ See id.
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A number of commenters suggested that existing Rule 3-10's 100%-
owned condition be replaced,\70\ suggesting various alternative
conditions.\71\ One commenter recommended permitting guarantor
subsidiaries to be majority-owned instead of 100% owned, explaining
that any risks associated with a minority investor could be addressed
through disclosure,\72\ and another stated that ``as long as a
registrant controls the subsidiary, a third party minority equity
interest in the subsidiary's assets and earnings would not affect the
subsidiary's creditworthiness from a debt holder's perspective.'' \73\
One commenter recommended retaining the requirement.\74\
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\70\ See, e.g., letters from ABA-Committees, AB-NYC, Chamber,
Comcast, EY, and SIFMA.
\71\ For example, some commenters recommended permitting
subsidiary issuers and guarantors to be ``wholly-owned'' by the
parent company as that term is defined in Rule 1-02(aa) of
Regulation S-X, which states ``[t]he term wholly owned subsidiary
means a subsidiary substantially all of whose outstanding voting
shares are owned by its parent and/or the parent's other wholly
owned subsidiaries.'' See letters from ABA-Committees, AB-NYC, and
EY.
\72\ See letter from SIFMA.
\73\ See letter from Comcast.
\74\ See letter from CalPERS.
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We continue to believe that a subsidiary issuer or guarantor should
be controlled by the parent company and consolidated into the financial
statements of the parent company to be eligible to omit its financial
statements. However, having considered commenters' suggestions and our
experience since the adoption of the existing rule, it appears that the
existence of non-controlling ownership interests in the subsidiary
issuer or guarantor does not necessarily mean that separate financial
statements are warranted.
We note that the existence of non-controlling interest holders
generally does not alter the fundamental nature of the investment such
that it should be evaluated similar to multiple investments in
different issuers. Specifically, we believe that where a parent company
is obligated as issuer or full and unconditional guarantor of a
guaranteed security and it controls and includes the subsidiary
issuer(s) and guarantor(s) in its consolidated financial statements,
there is sufficient financial unity between the parent company and the
related subsidiary with respect to the guaranteed debt security such
that the consolidated financial statements of that parent company and
the Proposed Alternative Disclosures would enable investors to evaluate
and sufficiently assess the risks associated with an investment in such
guaranteed debt security. In the event of default on the debt security,
there could be circumstances where non-controlling interest holders may
have the potential to influence certain matters affecting payments to
holders of the guaranteed debt security. However, as one commenter
suggested,\75\ such risks, when material, can be addressed through
disclosures tailored to those facts and circumstances \76\ rather than
requiring separate financial statements of the subsidiary issuer or
guarantor.
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\75\ See letter from SIFMA.
\76\ See proposed Rules 13-01(a)(3) and (4).
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Proposed Rule 3-10(a) would require the subsidiary issuer or
guarantor to be a consolidated subsidiary of the parent company
pursuant to the relevant accounting standards already in use.\77\ This
proposed change would eliminate the distinction between subsidiaries in
corporate form and those in other than corporate form, applying a
consistent eligibility condition across entities. Also, certain
subsidiary issuers and guarantors that are currently not eligible to
omit their financial statements under existing Rule 3-10, such as
consolidated subsidiary issuers or guarantors that have issued
securities convertible into
[[Page 49638]]
their own voting shares, would be eligible to omit their financial
statements. The proposed amendments would instead require the parent
company to provide disclosures that address the material risks, if any,
associated with non-controlling interests in the subsidiary issuer or
guarantor, including any risks arising from securities issued by the
subsidiary that may be convertible into voting shares and may cause the
percentage of non-controlling interest to increase, and to separately
provide Summarized Financial Information attributable to those
subsidiaries.
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\77\ For example, a parent company that prepares its financial
statements in accordance with U.S. GAAP would apply ASC 810,
Consolidation, and a parent company that qualifies as a foreign
private issuer and prepares its financial statements in accordance
with IFRS would apply IFRS 10, Consolidated Financial Statements.
---------------------------------------------------------------------------
Specifically, proposed Rule 13-01(a)(3) would require, to the
extent material, a description of any factors that may affect payments
to holders of the guaranteed security, such as the rights of a non-
controlling interest holder. In addition, proposed Rule 13-01(a)(4)
would require separate disclosure of Summarized Financial Information
for subsidiary issuers and guarantors affected by those factors. For
example, if, through its ability to exercise significant influence \78\
over a subsidiary guarantor, a non-controlling interest holder could
materially affect payments to holders of the guaranteed security, the
parent company would be required to disclose those factors and the
Summarized Financial Information attributable to that subsidiary
guarantor. Because this disclosure would highlight the material
repayment risks and financial information associated with consolidated
issuers and guarantors with non-controlling interests, it may no longer
be necessary to categorically prohibit such issuers and guarantors from
being eligible to omit their financial statements under proposed Rule
3-10.
---------------------------------------------------------------------------
\78\ See ASC 323, Investments--Equity Method and Joint Ventures.
Representation on the board of directors, participation in policy-
making processes, and extent of ownership by an investor in relation
to the concentration of other shareholdings are among the ways
listed in ASC 323-10-15-6 that may indicate the ability to exercise
significant influence over operating and financial policies of an
investee.
---------------------------------------------------------------------------
Request for Comment
14. Should the proposed rule use consolidation of the subsidiary
issuer or guarantor under the applicable accounting standards as an
eligibility condition? If not, what relationship between the parent
company and subsidiary issuer or guarantor should the proposed rule use
and why?
15. Would using consolidation of the subsidiary issuer or guarantor
under the applicable accounting standards as an eligibility condition
allow investors or financial analysts to adequately understand the
credit risk of such subsidiary issuer or guarantor? Would the proposed
use of consolidation allow investors or financial analysts to
adequately understand these credit risks in lieu of the subsidiary
issuer or guarantor's financial statements? Why or why not?
16. Should the proposed condition that each issuer and guarantor be
a consolidated subsidiary of the parent company be limited such that it
would not be available to certain types of entities? If so, what
entities and why? For example, should an entity be ineligible if it is
consolidated in the parent company's financial statements for reasons
other than the parent company holding the majority of voting interests?
\79\
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\79\ Such circumstances may arise when, in accordance with ASC
810, Consolidation, the entity is a variable interest entity and the
parent company is its primary beneficiary.
---------------------------------------------------------------------------
17. Should a consolidated subsidiary that has issued and
outstanding debt that is convertible into its own voting shares not be
eligible to omit its financial statements under the proposed rule? Why
or why not? Should a consolidated subsidiary that has issued and
outstanding debt that is convertible into its own voting shares, which,
upon conversion, would result in the parent company losing control of
that subsidiary, not be eligible to omit its financial statements under
the proposed rule? Why or why not? Should a consolidated subsidiary
that has issued and outstanding debt that is convertible into its own
voting shares, which, upon conversation, would result in the parent
company owning less than a particular percentage of the voting shares
of that subsidiary, not be eligible to omit its financial statements
under the proposed rule? If so, what should that percentage be and why?
18. Would any entities that meet the 100%-owned condition under
existing Rule 3-10 not meet the proposed condition that an issuer or
guarantor be a consolidated subsidiary of the parent company? If so,
what are they and why would they not meet this condition?
c. Debt or Debt-Like Securities Condition
As discussed above,\80\ the exceptions in existing Rules 3-10(b)
through (f) are available only to issuers and guarantors of debt
securities. We continue to believe the exceptions provided in Rule 3-10
should only be available for guaranteed debt and guaranteed preferred
securities that have payment terms that are substantially the same as
debt. In order to provide clarity, proposed Rule 3-10(a)(1) would state
explicitly that the guaranteed security must be ``debt or debt-like.''
---------------------------------------------------------------------------
\80\ See Section II.H, ``Securities to which Rule 3-10
Applies.''
---------------------------------------------------------------------------
For additional clarity, proposed Rule 3-10(b)(2) would specify when
a guaranteed security would be considered ``debt or debt-like.''
Consistent with the guidance provided in the 2000 Release,\81\ a
guaranteed security would be considered ``debt or debt-like'' under the
proposed rule if:
---------------------------------------------------------------------------
\81\ See Section III.A.4 of the 2000 Release.
---------------------------------------------------------------------------
The issuer has a contractual obligation to pay a fixed sum
at a fixed time; and
where the obligation to make such payments is cumulative,
a set amount of interest must be paid.
As is currently the case, the substance of the security's
obligation will determine the availability of relief under Rule 3-10
rather than the form or title of the security. Accordingly, the
proposed rule would clarify consistent with the 2000 Release,\82\ that:
---------------------------------------------------------------------------
\82\ See Section III.A.4.b.i of the 2000 Release.
---------------------------------------------------------------------------
Neither the form of the security nor its title will
determine whether a security is debt or debt-like. Instead, the
substance of the obligation created by the security will be
determinative; and
The phrase ``set amount of interest'' is not intended to
mean ``fixed amount of interest. '' Floating and adjustable rate
securities, as well as indexed securities, may meet the criteria
specified in paragraph (b)(2)(ii) as long as the payment obligation is
set in the debt instrument and can be determined from objective indices
or other factors that are outside the discretion of the obligor.
Request for Comment
19. Should the proposed rule expressly state that the guaranteed
security must be ``debt or debt-like'' and include a definition of that
term? Why or why not?
20. Should we modify the proposed definition of ``debt or debt-
like''? If so, why, and how should it be modified?
21. Should we provide any additional guidance or instructions to
the proposed definition of ``debt or debt-like''? If so, why, and what
additional guidance or instructions would be appropriate?
d. Eligible Issuer and Guarantor Structures Condition
Under the existing rule, an issuer and guarantor structure is
eligible if it matches one of the specific issuer and guarantor
structures in Rule 3-10(b) through (f). If an issuer or guarantor
structure does not match one of those
[[Page 49639]]
specific issuer and guarantor structures, it is ineligible, and the
subsidiary issuers and guarantors must file separate financial
statements. Eligibility would still be based on qualifying issuer and
guarantor structures under the proposed amendments to Rule 3-10.
However, the proposed amendments would simplify and streamline the
existing rule by replacing the specific issuer and guarantor structures
permitted under the five exceptions in existing Rules 3-10(b) through
(f) with a broader two-category framework. Under this framework, an
issuer and guarantor structure would be eligible if:
The parent company issues the security or co-issues the
security, jointly and severally, with one or more of its consolidated
subsidiaries;\83\ or
---------------------------------------------------------------------------
\83\ Proposed Rule 3-10(a)(1)(i).
---------------------------------------------------------------------------
a consolidated subsidiary issues the security, or co-
issues it with one or more other consolidated subsidiaries of the
parent company, and the security is guaranteed fully and
unconditionally by the parent company.\84\
---------------------------------------------------------------------------
\84\ Proposed Rule 3-10(a)(1)(ii).
---------------------------------------------------------------------------
In a change from the existing exceptions, the status of subsidiary
guarantors would not be specified in the proposed categories of
eligible issuer and guarantor structures. Although one or more other
subsidiaries of the parent company may, and we expect often would,
guarantee the security, we believe the eligibility of an issuer and
guarantor structure should depend on the role of the parent company.
Accordingly, as discussed further in Section III.C.1.d.ii, ``Role of
Subsidiary Guarantors'' below, separate financial statements of
consolidated subsidiary guarantors may be omitted for each issuer and
guarantor structure that is eligible under the proposed rule if the
other conditions of proposed Rule 3-10 are met.
i. Role of Parent Company
Under the proposed amendments, the parent company's role as issuer,
co-issuer, or full and unconditional guarantor with respect to the
guaranteed security would determine whether the issuer and guarantor
structure is eligible. Below we further describe conditions that a
parent company must meet under the proposed rule.
(A) Parent Company Obligation Is Not Limited or Conditional
Because the parent company's consolidated financial statements
serve as the primary source of information for investors, we believe
the parent company's obligation as either issuer or guarantor of the
guaranteed security should not be conditional or limited. If the parent
company's obligation was limited or conditional, focusing on the parent
company's financial statements may not be sufficient for investors to
evaluate the investment. For example, if a subsidiary issued securities
guaranteed by its parent company, but that parent company's obligation
under the guarantee's terms was less than the subsidiary's obligation,
the parent company's financial statements supplemented with the
Proposed Alternative Disclosures would not be sufficient. Instead, the
separate financial statements of the subsidiary issuer would likely be
material for investors to make an informed investment decision.
Therefore, under the proposed amendments, the ability to provide the
Proposed Alternative Disclosures in lieu of separate subsidiary issuer
and guarantor financial statements would only be available when the
parent company's obligation is not limited or conditional.
Request for Comment
22. Should the eligibility of an issuer and guarantor structure
under the proposed rule require the parent company's obligation not to
be limited or conditional? Why or why not?
23. Are there circumstances where the parent company's consolidated
financial statements are not the primary source of information for
investors in these situations? If so, what are those circumstances, and
what other sources of information would be material in making an
investment decision?
24. Should the eligibility of an issuer and guarantor structure
continue to depend on the status of subsidiary guarantors? If so, in
what way? If not, why not?
(B) Parent Company as Issuer or Co-Issuer
Under the first category of eligible issuer and guarantor
structures in proposed Rule 3-10(a)(1)(i), the parent company must
issue the security or co-issue the security, jointly and severally,
with one or more of its consolidated subsidiaries. When acting as the
sole issuer, the parent company would be fully and unconditionally
obligated for the full amount of any scheduled payments when they come
due. Also, the parent company would be permitted to co-issue a security
with one or more of its consolidated subsidiaries, but all co-issuers
would be required to be jointly and severally liable under the
guaranteed security. This would obligate each of the parent company and
its subsidiary co-issuers to all legal responsibilities of an issuer,
including making scheduled payments on the debt security in full when
they come due. Under this category of eligible issuer and guarantor
structures, the parent company would control each consolidated co-
issuer, the financial information of the subsidiary co-issuer(s) would
be reflected in the consolidated financial statements of the parent
company, and the parent company would be fully and unconditionally
obligated to make payments in full when due under the guaranteed
security. As such, we believe the parent company's consolidated
financial statements would serve as the primary source of information
for investors in these circumstances and, if all other eligibility
conditions of the proposed rule were satisfied, that separate financial
statements of the subsidiary co-issuers would be unnecessary.
Supplemental information about the subsidiary co-issuer(s) would be
included in the Proposed Alternative Disclosures.
Request for Comment
25. Should this first category of eligible issuer and guarantor
structures under the proposed rule require the parent company to issue
or co-issue the security, jointly and severally, with one or more of
its consolidated subsidiaries? Why or why not?
26. Are there other conditions that should be included in this
first permissible category of eligible issuer and guarantor structures?
If so, what are they and why would they be appropriate?
27. If the parent company co-issues the guaranteed security with
one or more of its consolidated subsidiaries, is separate financial
information about issuer entities material to an investment decision?
If so, why?
(C) Parent Company as Full and Unconditional Guarantor
Under the second category of eligible issuer and guarantor
structures in proposed Rule 3-10(a)(1)(ii), a debt security issued by a
parent company's consolidated subsidiary, or co-issued by more than one
of the parent company's consolidated subsidiaries, must be fully and
unconditionally guaranteed by that parent company. For purposes of the
proposed rule, whether the parent company's guarantee is ``full and
unconditional'' would be determined in the same manner as in existing
Rule 3-10(h)(2) and the 2000 Release \85\ and would be included in
proposed Rule 3-10(b)(3). Under this category of eligible issuer and
guarantor structures, the
[[Page 49640]]
parent company would control each consolidated subsidiary issuer, the
financial information of the subsidiary issuer(s) would be reflected in
the consolidated financial statements of the parent company, and the
parent company would be fully and unconditionally obligated to make
payments in full when due under the guaranteed security. In these
circumstances, we believe the parent company's financial statements
would serve as the primary source of information for investors and, if
all other eligibility conditions of the proposed rule were satisfied,
that separate financial statements of the subsidiary issuers would be
unnecessary. Supplemental information about the subsidiary issuer(s) or
co-issuer(s) would be included in the Proposed Alternative Disclosures.
---------------------------------------------------------------------------
\85\ See Section III.A.1.b of the 2000 Release.
---------------------------------------------------------------------------
Request for Comment
28. Should this second category of eligible issuer and guarantor
structures under the proposed rule require parent company to fully and
unconditionally guarantee the debt security that is either issued by
that parent company's consolidated subsidiary, or co-issued by more
than one of that parent company's consolidated subsidiaries? Why or why
not?
29. Are there other conditions that should be included in this
second permissible category of eligible issuer and guarantor
structures? If so, what are they and why would they be appropriate?
30. Should we retain the existing definition of ``full and
unconditional''? Why or why not?
ii. Role of Subsidiary Guarantors
As noted above,\86\ one or more consolidated subsidiaries of the
parent company could, and we expect often would, guarantee the
securities in either of the two proposed eligible categories of issuer
and guarantor structures. Existing Rule 3-10(b) through (f) specify the
permissible roles of subsidiary guarantors in an issuer and guarantor
structure and also impose certain conditions, such as the guarantees
being full and unconditional and, where there are multiple guarantees,
being joint and several.\87\ A few commenters specifically addressed
the conditions that subsidiary guarantees be ``full and unconditional''
and ``joint and several.'' One commenter recommended the elimination of
these conditions. According to this commenter, investors place less
reliance on a guarantee that is not full and unconditional as a source
of credit, and accordingly, financial statements of such a guarantor
are even less important to an investor and should not be required.\88\
Instead, the commenter recommended requiring separate disclosure of
those subsidiaries providing lesser guarantees. Another commenter
stated that the existing condition should remain unchanged.\89\
---------------------------------------------------------------------------
\86\ See Section III.C.1.d, ``Eligible Issuer and Guarantor
Structures Condition.''
\87\ Where there are multiple subsidiary guarantors, and the
guarantee of one or more subsidiaries is not joint and several with
other subsidiary guarantors, or as applicable, with the parent
company's guarantee, note 4 to existing Rule 3-10(d) and note 3 to
existing Rule 3-10(f) permit the use of Consolidating Information in
lieu of providing separate financial statements of that subsidiary
guarantor so long as each subsidiary whose guarantee is not joint
and several is included in a separate column of the Consolidating
Information.
\88\ See letter from SIFMA.
\89\ See letter from CalPERS.
---------------------------------------------------------------------------
The 2000 Release stated that the Commission was adopting the
definition of ``full and unconditional,'' which was applicable to the
guarantees of both subsidiaries and the parent company, with the
intention of limiting the availability of the Alternative Disclosures
to those situations where the payment obligations of the issuer and
guarantor are essentially identical.\90\ We continue to believe it is
necessary for the guarantee of a parent company to be full and
unconditional in order to rely on its consolidated financial statements
as the primary source of information for investors. However, our
experience since adoption of the existing rule in 2000 suggests that
limitations or conditions on a subsidiary guarantee should not preclude
the use of the Proposed Alternative Disclosures when the consolidated
subsidiary guarantor is controlled by the parent company and the
subsidiary guarantor's financial information is included in the parent
company's consolidated financial statements. Instead, similar to
existing Rule 3-10's approach to subsidiary guarantees that are not
joint and several,\91\ we believe such limitations and conditions on a
subsidiary's guarantee could be highlighted for investors through
incremental financial and non-financial disclosure in the Proposed
Alternative Disclosures rather than requiring separate financial
statements of the subsidiary guarantor.
---------------------------------------------------------------------------
\90\ See Section III.A.1.b of the 2000 Release.
\91\ Each of existing Rules 3-10(d)(3) and 3-10(f)(3) specify
that all guarantees must be joint and several as a condition to
permit the omission of the separate financial statements of
subsidiary guarantors. However, if all other conditions of the
applicable exception paragraph are met, Note 4 to existing Rule 3-
10(d) and Note 3 to existing Rule 3-10(f) permit the omission of the
separate financial statements of a subsidiary guarantor whose
guarantee is not joint and several so long as the Consolidating
Information includes a separate column for each such subsidiary
guarantor.
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Under the proposed rule, because the role of the parent company
determines whether an issuer and guarantor structure is eligible, the
role of subsidiary guarantors would be irrelevant for determining
overall eligibility. As a result, the subsidiary guarantors' role in
the issuer and guarantor structure would not need to be specified and
the aforementioned conditions (the guarantees being full and
unconditional and, where there are multiple guarantees, being joint and
several) would no longer be imposed on subsidiary guarantors.
Regardless, as stated in proposed Rule 3-10(a), if a subsidiary
guarantor is consolidated in its parent company's consolidated
financial statements, and the other conditions of proposed Rule 3-10
are met, including providing the disclosures about that subsidiary and
its guarantee as specified in proposed Rule 13-01, the subsidiary's
financial statements could be omitted.
The role of subsidiary guarantors and their guarantees would affect
the required disclosure under the proposed rule. For example, the
subsidiary guarantors would be required to be identified pursuant to
proposed Rule 13-01(a)(1), and if the guarantees of those subsidiaries
were not full and unconditional, disclosure of the limitations and
conditions would be required by proposed Rule 13-01(a)(2), to the
extent material.\92\ Furthermore, proposed Rule 13-01(a)(4) would
require separate disclosure of Summarized Financial Information
applicable to subsidiary guarantors whose guarantees were not full and
unconditional, to the extent material.\93\
---------------------------------------------------------------------------
\92\ See discussion in Section III.C.2.b, ``Non-Financial
Disclosures.''
\93\ See discussion in Section III.C.2.a.ii, ``Presentation on a
Combined Basis.''
---------------------------------------------------------------------------
Request for Comment
31. Would the proposed changes improve the disclosures for
investors? Why or why not?
32. Proposed Rule 3-10(a)(1)(ii) specifies only that the parent
company guarantee must be full and unconditional. Should the
requirement that a guarantee be full and unconditional also extend to
subsidiary guarantors? Why or why not?
33. Where there is more than one subsidiary guarantor, or when the
parent company and one or more of its subsidiaries guarantees the
security, should all guarantees be joint and several to be eligible to
omit separate financial statements of subsidiary guarantors? Why or why
not?
[[Page 49641]]
(A) Subsidiary Guarantee Release Provisions
One of the conditions a subsidiary guarantor must meet under the
existing rule is that its guarantee must be full and unconditional. A
subsidiary's guarantee may have the characteristics of a full and
unconditional guarantee at its inception except that there may be
contractual provisions permitting the subsidiary to be released from
that guarantee under certain circumstances. Such release provisions
could cause the subsidiary's guarantee to fail to meet the requirement
that the guarantee be full and unconditional because the potential
elimination of the guarantee is a condition beyond the issuer's failure
to pay. The staff has previously provided guidance that, under certain
circumstances, a subsidiary whose guarantee could be released should be
able to rely on existing Rule 3-10 so long as all other required
conditions of the rule are met.\94\ Several commenters recommended
codifying this staff guidance into our rules.\95\ As noted above,\96\
because the nature of the guarantee of a subsidiary guarantor does not
affect whether the issuer and guarantor structure is eligible under the
proposed rule, a subsidiary guarantee would no longer be required to be
full and unconditional. As such, the existence of subsidiary guarantee
release provisions would not prevent that subsidiary guarantor from
omitting its financial statements. However, to the extent material,
such release provisions would be required to be disclosed pursuant to
proposed Rule 13-01(a)(2) \97\ and separate disclosure of Summarized
Financial Information applicable to that subsidiary guarantor would be
required by proposed Rule 13-01(a)(4).\98\
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\94\ See U.S. Sec. & Exch. Comm'n, Div. of Corp. Fin., Financial
Reporting Manual Section 2510.5, https://www.sec.gov/divisions/corpfin/cffinancialreportingmanual.pdf (last updated Dec. 1, 2017).
These circumstances include, for example, when: (1) the subsidiary
is sold or sells all of its assets; (2) the subsidiary is declared
``unrestricted'' for covenant purposes; (3) the subsidiary's
guarantee of other indebtedness is terminated or released; (4) the
requirements for legal defeasance or covenant defeasance or to
discharge the indenture have been satisfied; (5) the rating on the
parent's debt securities is changed to investment grade; or (6) the
parent's debt securities are converted or exchanged into equity
securities. The staff guidance also indicates that subsidiary
guarantees with such release provisions should not be characterized
as full and unconditional without disclosure describing any
qualifications to the subsidiary guarantees (e.g., the circumstances
in which they could be released). If the proposed changes described
herein are adopted, this staff interpretation would no longer be
applicable.
\95\ See, e.g., letters from ABA-Committees, AB-NYC, and EY.
\96\ See Section III.C.1.d.ii, ``Role of Subsidiary
Guarantors.''
\97\ See discussion in Section III.C.2.b, ``Non-Financial
Disclosures.''
\98\ See discussion in Section III.C.2.a.ii, ``Presentation on a
Combined Basis.''
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Request for Comment
34. Should the proposed rule specify that subsidiary guarantees
must be full and unconditional except that certain subsidiary release
provisions would be expressly permitted? If so, why? In this regard,
which release provisions should be permitted in the proposed rule and
why would they be appropriate?
iii. Treatment of Currently Eligible Issuer and Guarantor Structures
Under Proposed Rule 3-10
The proposed amendments are not intended to reduce the types of
entities or structures that would be able to rely on proposed Rule 3-
10. We expect issuer and guarantor structures that are currently
eligible under existing Rule 3-10 to be eligible under the two proposed
categories of eligible issuer and guarantor structures. As shown in the
table below, issuer and guarantor structures that currently fall under
existing Rules 3-10(b), (c), or (d) would be eligible to omit their
financial statements under the eligible categories in proposed Rules 3-
10(a)(1)(i) or (ii), depending on the role of the parent company as
either co-issuer or full and unconditional guarantor of the guaranteed
security. Issuer and guarantor structures that currently fall under
existing Rules 3-10(e) or (f), wherein the parent company is the sole
issuer of the guaranteed security, would be able to rely on the first
category in proposed Rule 3-10(a)(1)(i). We discuss the proposed
amendments in greater detail below.
------------------------------------------------------------------------
Existing Rule Proposed Rule
------------------------------------------------------------------------
Rules 3-10(b), 3-10(c), and 3-10(d).... Rule 3-10(a)(1)(i), if the
subsidiary co-issued the
security, jointly and
severally, with its parent.
Rule 3-10(a)(1)(ii), if the
subsidiary issued the security
that is fully and
unconditionally guaranteed by
its parent.
Rules 3-10(e) and 3-10(f).............. Rule 3-10(a)(1)(i).
------------------------------------------------------------------------
(A) Finance Subsidiary Issuer of Securities Guaranteed by Its Parent
Company
Existing Rule 3-10(b) applies when a ``finance subsidiary,'' as
that term is defined in existing Rule 3-10(h)(7), issues securities
guaranteed by its parent company. This exception was included to
address situations where a parent company directs one of its
subsidiaries to issue debt securities that the parent company
guarantees, and that subsidiary ``has no assets, operations, revenues,
or cash flows other than those related to the issuance, administration,
and repayment of the security and any other securities guaranteed by
its parent.'' \99\ In such cases, the Commission has determined that
detailed financial information about the finance subsidiary is unlikely
to be material to an investment decision. Instead, an investor would
look to the consolidated financial statements of the parent company
that guaranteed the debt to evaluate the investment in the guaranteed
security and generally not need additional information other than a
brief narrative describing the arrangement.
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\99\ See Section III.A.6 of the 2000 Release.
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Because the proposed amendments to Rule 3-10 do not focus on the
role and nature of the subsidiary as a condition to eligibility, the
proposed amendments would no longer require a subsidiary issuer or
guarantor to be designated as a ``finance subsidiary'' in any
particular circumstances. Likewise, the proposed amendments would
remove the definition of ``finance subsidiary'' from the existing rule,
since it is not otherwise used in Regulation S-X. However, a finance
subsidiary used to issue a debt security guaranteed by the parent
company, would be addressed by proposed Rule 3-10(a)(1)(ii) or, if the
security were to be co-issued, jointly and severally, with its parent,
proposed Rule 3-10(a)(1)(i) would apply. We believe eliminating the
provisions that apply only to finance subsidiaries, together with the
other proposed changes, would simplify the rules while
[[Page 49642]]
ensuring that they remain appropriately available for finance
subsidiary arrangements. Furthermore, we generally expect detailed
financial disclosures about those subsidiaries would not be material,
given the nature and amounts of those subsidiaries' assets and
operations.\100\ While a parent company would be permitted to omit
immaterial detailed financial disclosures, all other disclosures
required by proposed Rule 13-01, such as the non-financial disclosures
specified in proposed Rule 13-01(a)(1) though (3), would be required,
to the extent material.
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\100\ See discussion and example within Section III.C.2.c,
``When Disclosure is Required.''
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Request for Comment
35. Should we eliminate the ``finance subsidiary'' exception as
proposed? Would the proposed elimination of the ``finance subsidiary''
exception under existing Rule 3-10(b) result in supplemental financial
information about the finance subsidiary and its parent company being
required under the proposed rule where it would not be required under
the existing rule? If so, in what circumstances? Would such financial
information be material to investors? Why or why not?
(B) Obligated Parent Company and Single Obligated Subsidiary
Existing Rule 3-10(c) applies when an ``operating subsidiary''
issues securities guaranteed by its parent company. Existing Rule 3-
10(h)(8) defines an ``operating subsidiary'' to differentiate it from a
``finance subsidiary.'' Since the proposed amendments would remove the
``finance subsidiary'' distinction and definition, proposed Rule 3-10
likewise would no longer need to refer to or define ``operating
subsidiary.'' The operating subsidiary structure of existing Rule 3-
10(c) would be covered in the issuer and guarantor structure in
proposed Rule 3-10(a)(1)(ii) if the security were to be issued by the
subsidiary or proposed Rule 3-10(a)(1)(i) if the security were to be
co-issued, jointly and severally, with its parent company as
contemplated in existing Note 3 to Rule 3-10(c).
Existing Rule 3-10(e) applies to a single subsidiary guarantor of
securities issued by the parent company of that subsidiary. This
structure would be included in the issuer and guarantor structure in
proposed Rule 3-10(a)(1)(i). As discussed above,\101\ the requirement
in the existing rule that the subsidiary guarantor's guarantee be full
and unconditional would not be a condition of eligibility under the
proposed rule, but disclosure of any material limitations or conditions
to the subsidiary guarantee would be required pursuant to proposed Rule
13-01(a)(2).
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\101\ See Sections III.C.1.d.ii, ``Role of Subsidiary
Guarantors.''
---------------------------------------------------------------------------
(C) Obligated Parent Company and Multiple Obligated Subsidiaries
Existing Rule 3-10(d) applies to a subsidiary that issues
securities guaranteed by its parent company and one or more other
subsidiaries of that parent company. Existing Rule 3-10(f) applies to
multiple subsidiary guarantors of securities issued by the parent
company of those subsidiaries. Both of these existing exceptions
involve more than one of the parent company's subsidiaries that are
obligated as guarantor or issuer of the guaranteed security, and
require that all guarantees be joint and several as well as full and
unconditional. For issuer and guarantor structures currently included
in Rule 3-10(d), proposed Rule 3-10(a)(1)(ii) would apply if the
guaranteed security were issued by a subsidiary and proposed Rule 3-
10(a)(1)(i) would apply if the guaranteed security were co-issued,
jointly and severally, with its parent company as contemplated in
existing Note 3 to Rule 3-10(d). Proposed Rule 3-10(a)(1)(i) would
apply to parent company issuer and subsidiary guarantor structures
currently included in Rule 3-10(f).
As discussed above,\102\ while subsidiaries' guarantees would no
longer be required to be full and unconditional or joint and several,
and would not affect whether an issuer and guarantor structure is
eligible under the proposed rule, the terms and conditions of the
subsidiary guarantee, including any limitations and conditions, would
be required to be disclosed as part of proposed Rule 13-01(a)(2), to
the extent material.
---------------------------------------------------------------------------
\102\ See Section III.C1.d.ii, ``Role of Subsidiary
Guarantors.''
---------------------------------------------------------------------------
Finally, under existing Rule 3-10, issuer and guarantor structures
that include more than one subsidiary co-issuer do not explicitly fall
into the existing exceptions. Currently, under those circumstances, a
registrant would generally seek pre-filing relief from the Commission
staff.\103\ Multiple subsidiary co-issuers should not change the
analysis as to what financial statement disclosures should be provided
to investors, because, consistent with the other proposed eligible
issuer and guarantor structures, the parent company controls each
consolidated co-issuer, the financial information of the subsidiary co-
issuers would be reflected in the consolidated financial statements of
the parent company, and the parent company would be fully and
unconditionally obligated to make payments in full when due under the
guaranteed security. Therefore, proposed Rule 3-10(a)(1)(i) would apply
to such structures if the subsidiaries co-issued the guaranteed
securities jointly and severally with the parent company. Proposed Rule
3-10(a)(1)(ii) would apply if the parent company is a full and
unconditional guarantor of securities co-issued by the subsidiaries.
---------------------------------------------------------------------------
\103\ Upon request, pursuant to its delegated authority under 17
CFR 210.3-13 (``Rule 3-13 of Regulation S-X''), the staff has
permitted the omission of separate subsidiary issuer and guarantor
financial statements for issuer and guarantor structures that
included more than one subsidiary co-issuer, provided the other
conditions of existing Rule 3-10 were met.
---------------------------------------------------------------------------
Request for Comment
36. Would any issuer and guarantor structures that are currently
eligible under existing Rule 3-10 no longer be eligible under the
proposed amendments? If so, what specific structures would not be
eligible and why?
37. Should any issuer and guarantor structures that would be
eligible under the proposed categories be disallowed? Should any issuer
and guarantor structures that are ineligible under the proposed
categories be allowed? If so, which ones and why?
2. Disclosure Requirements
Under existing Rule 3-10, one of the conditions to omitting
separate financial statements of a subsidiary issuer or guarantor is
providing the Alternative Disclosures in the footnotes to the parent
company's consolidated financial statements. We are proposing to retain
the requirement to provide Alternative Disclosures, with modifications,
as we believe the disclosures are an important supplement to the
consolidated parent company disclosures. If the eligibility conditions
in proposed Rule 3-10(a) and (a)(1) are satisfied, a parent company
must include the Proposed Alternative Disclosures specified in proposed
Rule 13-01 in the relevant filing, but could omit the separate
financial statements of subsidiary issuers and guarantors.\104\ The
proposed amendments would streamline and simplify the rule by including
the Proposed Alternative Disclosures in a single location within
proposed Rule 13-01 rather than having such requirements in multiple
paragraphs.
[[Page 49643]]
The proposed amendments are described below.
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\104\ This requirement is specified in proposed Rule 3-10(a)(2).
---------------------------------------------------------------------------
a. Financial Disclosures
The Consolidating Information currently required by existing Rule
3-10 provides highly-detailed financial information about individual
issuers and guarantors or groups of issuers and guarantors within the
consolidated parent company, as well as non-guarantor subsidiaries.
Several commenters cited various challenges registrants face in
preparing Consolidating Information, such as the complexities of the
disclosures; that registrants' books and records often are not
maintained on a basis that facilitates the preparation of the
disclosures; that extensive manual processes are often necessary; and
the difficulty, time, and costs to prepare the disclosures.\105\ A
number of commenters \106\ suggested aligning the disclosure
requirements of Rule 3-10 with disclosure practices of issuers and
guarantors in the private debt markets that comply with Securities Act
Rule 144A.\107\ Some commenters stated that the type of information
included in debt offerings under Rule 144A, which is less detailed than
what is required by Consolidating Information, provides all the
material information necessary for investors to make informed
investment decisions.\108\ For example, one commenter stated that the
typical offering memorandum in a Rule 144A offering includes revenues,
operating income (or a similar metric) when available, assets and
liabilities of the issuers and guarantors as a consolidated group, and
the non-guarantor subsidiaries as a consolidated group.\109\ Another
commenter stated that it was ``not aware of a single Rule 144A offering
that has ever included [Rule 3-10]. . .financial statements that were
not otherwise already available'' and that the Consolidating
Information is ``routinely omitted in unregistered offerings.'' \110\
---------------------------------------------------------------------------
\105\ See letters from ABA-Committees, Anuradha, BDO, Cahill,
CAQ, DT, EY, FedEx, GM, Grant, Headwaters, KPMG, Medtronic, and
Noble-UK.
\106\ See letters from ABA-Committees, Davis Polk, EY, PwC, and
SIFMA.
\107\ The majority of private debt offerings are conducted using
Rule 144A, and 99% of Rule 144A offerings are debt offerings.
Additionally, although most Regulation D offerings are equity
offerings, a significant number include debt securities. See Access
to Capital and Market Liquidity Report, at p. 38; Scott Bauguess et
al., U.S. Sec. & Exch. Comm'n, Div. of Econ. & Risk Analysis,
Capital Raising in the U.S.: An Analysis of the Market for
Unregistered Securities Offerings, 2009-2014 (Oct. 2015), https://www.sec.gov/dera/staff-papers/white-papers/30oct15_white_unregistered_offering.html.
\108\ See, e.g., letters from ABA-Committees, Cahill, and Davis
Polk.
\109\ See letter from Cahill.
\110\ See letter from Davis Polk.
---------------------------------------------------------------------------
Prior to the adoption of existing Rule 3-10 in 2000, under Staff
Accounting Bulletin No. 53 (1983) (``SAB 53''), subsidiary issuers were
``permitted to include summarized financial information,'' \111\ which
was presented for each subsidiary issuer or guarantor and did not
exclude the financial information of non-guarantor subsidiaries
consolidated by those subsidiary issuers and guarantors. In discussing
its reasons in the 2000 Release for requiring Consolidating Information
instead of summarized financial information, the Commission highlighted
that the summarized financial information in SAB 53 did not allow for
the more complete and independent assessment of a subsidiary's
financial condition that may be necessary in the case of ``more
complex'' guarantee structures.\112\ Additionally, the Commission noted
that SAB 53 disclosures could result in a high number of sets of
summarized financial information, which would be burdensome for the
parent company and would not likely be useful to investors.\113\
---------------------------------------------------------------------------
\111\ See Section III.A.3.a of the 2000 Release.
\112\ In the 2000 Release, the Commission stated that SAB 53
``did not contemplate more complex guarantee structures where
investors must assess the subsidiary's financial condition more
completely and independently of its parent company and other
subsidiaries of its parent company,'' and also stated that
``summarized financial information is inadequate for this purpose.
For example, although cash flow information is significant in
assessing creditworthiness, summarized financial information
includes no cash flow information.'' See id.
\113\ In discussing the use of the summarized financial
information in SAB 53 to address disclosures involving multiple
guarantors, the Commission, in the 2000 Release, stated ``[m]any
structures presented to the staff involved a subsidiary issuer, a
parent company guarantor, multiple subsidiary guarantors, and
multiple subsidiaries that are not guarantors. Other structures
involved more than 100 subsidiary guarantors. [SAB 53 disclosures in
such structures would have included]. . .more than 100 sets of
summarized financial information. Not only would that disclosure
have been burdensome for the registrant to provide, it is unlikely
to have been useful to investors.'' See Section III.A.3.a of the
2000 Release. Other reasons cited by the Commission for requiring
Consolidating Information in the 2000 Release are discussed in
Sections III.C.2.a.i, ``Level of Detail,'' and III.C.2.a.ii,
``Presentation on a Combined Basis,'' below.
---------------------------------------------------------------------------
In considering changes to the existing Rule 3-10 disclosure
requirements, we have sought to improve the disclosure provided to
investors by focusing on the material information needed to make an
informed investment decision while reducing the cost and burdens for
registrants in providing the information. Our experience since the
adoption of the existing Rule 3-10 in 2000 suggests that the level of
information required by Consolidating Information, although detailed,
could be better focused on what is material to an investment decision.
Additionally, we believe that many of the reasons for requiring
Consolidating Information instead of summarized financial information
highlighted by the Commission in the 2000 Release could be addressed
without requiring the use of Consolidating Information, thereby
addressing the concerns noted above regarding the burdens associated
with issuers' preparation of Consolidating Information.
Accordingly, as discussed below,\114\ the financial disclosure
requirements in proposed Rule 13-01 are tailored to the type of
material information, in addition to the parent company's consolidated
financial statements, that we believe investors in registered offerings
need to make informed investment decisions about guaranteed debt
securities. In seeking to identify the material information investors
need, we have considered commenters' suggestion that we look to the
disclosures provided in the Rule 144A debt markets. In this regard, we
note that the proposed disclosures would be more detailed than that
typically provided in exempt offerings, in which investors have the
ability to request additional information from potential issuers when
they deem it necessary, such as additional financial information about
the issuers and guarantors or qualitative disclosures pertaining to the
issuer and guarantor structure. Under the proposed revisions,
registrants would:
---------------------------------------------------------------------------
\114\ See Section III.C.2.a.i, ``Level of Detail.''
---------------------------------------------------------------------------
Be required to provide Summarized Financial Information
rather than Consolidating Information;
be required to provide disclosure about the Obligor Group
without financial information of non-obligated entities (financial
information of each issuer and guarantor could be combined into a
single column); and
be permitted to reduce the number of periods presented.
As a result of the proposed revisions, the instructions for
preparing Consolidating Information in existing Rule 3-10(i) would be
eliminated.
i. Level of Detail
Unless a brief narrative is permitted, existing Rule 3-10 requires
Consolidating Information, which includes all major captions of the
balance sheet, income statement, and cash flow statement that Article
10 of Regulation S-X requires to be shown
[[Page 49644]]
separately in interim financial statements. As noted above, a number of
commenters recommended reducing the level of detail in financial
disclosures by replacing the Consolidating Information with summarized
financial information in the notes to the parent company's financial
statements.\115\
---------------------------------------------------------------------------
\115\ See letters from BDO, CAQ, DT, EY, Grant, and KPMG.
---------------------------------------------------------------------------
The Commission stated in the 2000 Release that Consolidating
Information ``provides the same level of detail about the financial
position, results of operations, and cash flows of subsidiary issuers
and subsidiary guarantors that investors are accustomed to obtaining in
interim financial statements of a registrant.'' \116\ In our
experience, this level of detail about subsidiary issuers and
guarantors occupies multiple pages of a parent company's financial
statements, potentially obscuring important information contained
therein.\117\ We believe the required supplemental financial
information about issuers and guarantors should instead be focused on
the information that is most likely to be material to an investment
decision. If additional line items beyond those specifically required
are material to an investment decision, they would be required to be
disclosed as well. Proposed Rule 13-01(a)(4) would therefore require
Summarized Financial Information, which would include select balance
sheet and income statement line items. Disclosure of additional line
items of financial information beyond what is specified in proposed
Rule 13-01(a)(4) would be required by proposed Rule 13-01(a)(5), to the
extent they are material to an investment decision. For example, if a
material amount of reported revenues of the obligated entities are
derived from transactions with related parties, such as other non-
issuer and non-guarantor subsidiaries of the parent company, disclosure
of such related party revenues would be required. This Summarized
Financial Information and any additional disclosures that would be
required based on materiality would supplement the parent company's
consolidated financial statements and would simplify compliance and
reduce costs for preparers, while providing investors with more
streamlined and easier to understand financial information that is
material to an investment decision.
---------------------------------------------------------------------------
\116\ See Section III.A.3.a of the 2000 Release.
\117\ See also letter from BDO (``In some cases, the value of
the alternative disclosure may be overshadowed by its multi-column
voluminous nature.'').
---------------------------------------------------------------------------
While investors are provided cash flow information at the parent
company consolidated level, supplemental cash flow information about
subsidiary issuers and guarantors is not typically included in
disclosures provided in the Rule 144A debt markets.\118\ This leads us
to believe that investors in a registered offering look primarily to a
parent company's consolidated cash flow information to assess
creditworthiness where the parent is the primary obligor or its
guarantor obligation is full and unconditional. Based on this
observation, and the difficulties and significant costs associated with
the preparation of cash flow information for inclusion in Consolidating
Information highlighted by several commenters,\119\ supplemental cash
flow information would not be a required disclosure under the proposed
rule.
---------------------------------------------------------------------------
\118\ See letters from ABA-Committees, Cahill, Davis Polk, and
PwC.
\119\ See, e.g., letter from GM (``There are many challenges
when preparing the Consolidating Information, in particular the
consolidating statement of cash flows. Our underlying books and
records are not based on a guarantor/non-guarantor structure, and
due to a centralized cash management function numerous intercompany
transactions exist. These factors complicate the preparation of
Consolidating Information prepared `as if' the registrant was a
stand-alone entity. These intercompany transactions require
extensive analysis and manual reclassification adjustments to permit
the preparation of the Consolidating Information, resulting in
excessive complexity and effort relative to the limited benefits of
providing this information to investors.''). See also letters from
ABA-Committees, CAQ, Grant, KPMG, and PwC.
---------------------------------------------------------------------------
Request for Comment
38. Should the Proposed Alternative Disclosures require Summarized
Financial Information rather than Consolidating Information? Would the
Summarized Financial Information, along with the other disclosures
required by proposed Rule 13-01, provide the financial information
investors need to make an informed investment decision with respect to
the guaranteed security?
39. How would issuers and investors be affected by requiring
Summarized Financial Information? Are there particular items in
Consolidating Information that investors need to make informed
investment decisions that would not be provided separately through
Summarized Financial Information? Is there any such financial
information that underwriters would still require? If so, what would be
the effect on the costs associated with the offering?
40. Would additional line items of financial information beyond
what would be required by Summarized Financial Information help
investors make informed investment decisions? If so, what line items
and why? For example, should the proposed rule specifically require
supplemental summarized cash flow information resulting from operating,
financing, and investing activities? Would issuers face challenges in
providing such information?
41. Do investors need summarized cash flow information about
issuers and guarantors in addition to the parent company's consolidated
cash flow statements to make informed investment decisions about
guaranteed securities? If so, how is it used? If not, why not?
ii. Presentation on a Combined Basis
Consolidating Information distinguishes the assets, liabilities,
operations, and cash flows of each category of parent and subsidiaries
as issuer, guarantor, or non-guarantor. Comments varied with respect to
whether and how the financial information of the entities in the
issuers and guarantors should be grouped. Some commenters suggested
permitting disclosure of financial information of either the Obligor
Group or the non-obligated entities as groups,\120\ other commenters
recommended requiring disclosure of both groups separately,\121\ and
another commenter suggested several possible groupings.\122\ Other
commenters stated that investors use the existing Rule 3-10 disclosures
to evaluate separately the likelihood of payment by the issuer and
guarantors.\123\
---------------------------------------------------------------------------
\120\ See, e.g., letters from BDO and EY.
\121\ See, e.g., letters from CAQ and KPMG.
\122\ This commenter suggested the Commission consider
summarized financial information related only to: (1) The issuers
separately and the combined guarantor subsidiaries separately; (2)
the issuers and guarantors on a combined basis; or (3) the guarantor
subsidiaries. See letter from DT.
\123\ See, e.g., letters from CalPERS and CFA.
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The Commission observed in the 2000 Release that there were
``complex guarantee structures where investors must assess the
subsidiary's financial condition more completely and independently of
its parent company and other subsidiaries of its parent company.''
\124\ The Commission also stated that it was ``requiring [Consolidating
Information] because it clearly distinguishes the assets, liabilities,
revenues, expenses, and cash flows of the entities that are legally
obligated under the indenture from those that are not'' and ``[i]t also
facilitates analysis of trends affecting subsidiary issuers and
subsidiary guarantors and relationships among the various components of
a consolidated
[[Page 49645]]
organization.'' \125\ We continue to believe it is important to clearly
distinguish in the supplemental financial information the entities
obligated under the guaranteed security from those that are not
obligated. Along with some commenters, however, we believe investors
focus largely on whether payment will be made in full on the dates
specified in the guaranteed security, rather than whether payment comes
from an issuer or one or more guarantors in the same consolidated
group.\126\ We therefore believe that it is appropriate for our
disclosure rules to focus on the obligated entities as a group, and
that the parent company should be able to provide financial disclosures
that convey information about the Obligor Group on a combined, rather
than disaggregated, basis. Accordingly, the proposed rule would permit
the parent company to present the Summarized Financial Information of
the parent company issuer or guarantor, each consolidated subsidiary
issuer, and each consolidated subsidiary guarantor, on a combined
basis. Proposed Rule 13-01(a)(4) would require intercompany
transactions between issuers and guarantors presented on a combined
basis to be eliminated.
---------------------------------------------------------------------------
\124\ See Section III.A.3.a of the 2000 Release.
\125\ See id.
\126\ See, e.g., letters from BDO and EY.
---------------------------------------------------------------------------
We recognize that there may be circumstances in which separate
financial information about certain issuers and guarantors is material
to an investment decision. Accordingly, when information provided in
response to proposed Rule 13-01 is applicable to one or more, but not
all, issuers and guarantors, proposed Rule 13-01(a)(4) would require,
to the extent it is material, separate disclosure of Summarized
Financial Information for the issuers and guarantors to which the
information applies. For example, if a subsidiary's guarantee were
limited to a particular dollar amount, disclosure of that limitation
would be required by proposed Rule 13-01(a)(2). In that case, separate
disclosure of the Summarized Financial Information specified in
proposed Rule 13-01(a)(4) would be required for that subsidiary
guarantor, if material.
Because non-guarantor subsidiaries are not obligated to make
payments as either issuer or guarantor, we do not believe separate
supplemental disclosure of their financial information as required
under the existing rule is likely to be material to an investment
decision. As such, the proposed rule would no longer require separate
disclosure of the financial information of non-guarantor subsidiaries.
In order to present the assets, liabilities, and operations of the
Obligor Group accurately, it is necessary to exclude the financial
information of subsidiaries not obligated under the guaranteed
security. Within Consolidating Information under the existing rule, a
parent company should present investments in all subsidiaries based
upon their proportionate share of the subsidiary's net assets,\127\ and
subsidiary issuer or guarantor columns should present investments in
certain subsidiaries, including but not limited to non-guarantor
subsidiaries, under the equity method of accounting.\128\ This
presentation avoids presenting the financial information of a non-
issuer or non-guarantor subsidiary as though it were an issuer or
guarantor. We continue to believe that the financial information of
non-issuer and non-guarantor subsidiaries should be excluded from the
Summarized Financial Information of the Obligor Group, even if those
non-issuer and non-guarantor subsidiaries would be consolidated by an
issuer or guarantor. We have included a corresponding requirement in
proposed Rule 13-01(a)(4). However, the proposed rule would allow the
parent company to determine which method best meets the objective of
excluding the financial information of non-issuer and non-guarantor
subsidiaries from the Proposed Alternative Disclosures, so long as the
selected method is disclosed and used for all non-issuer and non-
guarantor subsidiaries for all classes of guaranteed securities for
which the disclosure is required, and is reasonable in the
circumstances.\129\ For example, the parent company could exclude the
assets, liabilities, and operations of non-issuer and non-guarantor
subsidiaries by using the equity method of accounting for those
subsidiaries.
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\127\ See Rule 3-10(i)(3) of Regulation S-X.
\128\ See Rule 3-10(i)(5) of Regulation S-X.
\129\ This proposed amendment may result in decreased
comparability in the combined Summarized Financial Information of
the Obligor Group between parent companies that elect to use
different methods of excluding the financial information of their
non-issuer and non-guarantor subsidiaries. In proposing this change,
we considered the costs to the parent company of requiring the use
of a specific method of accounting for non-issuer and non-guarantor
subsidiaries to remove their financial information from the combined
Obligor Group, particularly if that parent company's systems are not
designed to readily produce such information. See, e.g., letters
from CAQ, EY, Grant, KPMG, and PwC (highlighting the challenges of
this requirement under the existing rule). We expect any decrease of
comparability to be limited, as most line items required to be
disclosed in Summarized Financial Information would be unaffected by
the use of different methods for this purpose (e.g., current assets,
current liabilities, net sales or gross revenues and gross profit).
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As discussed above,\130\ separate disclosure of the Summarized
Financial Information of one or more subsidiary issuers or guarantors
may be necessary under the proposed rule. In this case, the same method
of excluding a non-issuer's or non-guarantor's financial information
from the Summarized Financial Information of the Obligor Group would
also be required for the subsidiary issuers or guarantors whose
financial information is presented separately. For example, if a
subsidiary's guarantee is limited and its Summarized Financial
Information is presented separately from that of the combined Obligor
Group, that subsidiary guarantor's financial information should be
excluded from the Obligor Group information consistent with the method
selected for excluding the financial information of non-issuer and non-
guarantor subsidiaries from the Obligor Group information.
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\130\ See Section III.C.2.a.ii, ``Presentation on a Combined
Basis.''
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Request for Comment
42. Should we permit the financial disclosure of the Obligor Group
to be combined within the proposed Summarized Financial Information?
Why or why not? If not, what groupings of issuers and guarantors should
be required or permitted, and why? How would this impact the
information for investment decisions? Are there specific circumstances
where separate information should be required?
43. Does presentation of the financial information of non-guarantor
subsidiaries provide investors with information they need to make
informed investment decisions? Do investors use the financial
information of non-obligated entities as part of their investment
analyses? For example, do investors consider ratios or any similar
derivation of the information from the non-obligated entities? If so,
how is it used and in what circumstances? Should Summarized Financial
Information of the non-obligated entities also be provided? Why or why
not?
44. Should we require a specific method of accounting (e.g., the
equity method) to be used to exclude the financial information of non-
obligated subsidiaries from the Summarized Financial Information of the
Obligor Group instead of permitting the parent company to choose? If
so, what method should we require, and why? If not, why? If we do not
prescribe a specific
[[Page 49646]]
method, should we limit the permissible methods to those concepts
included within U.S. GAAP, or IFRS, as applicable? Alternatively,
should we limit the permissible methods to concepts included within
U.S. GAAP, or IFRS, as applicable, only when the Proposed Alternative
Disclosures are placed in the parent company's financial statements?
How would allowing different methods affect the disclosures for
investors?
iii. Periods To Present
In addition to the parent company's consolidated information, the
supplemental information included in the Proposed Alternative
Disclosures would help facilitate an investor's evaluation of whether
the entities in the Obligor Group have the ability to make payments as
required under the guaranteed security, including what assets are
available to satisfy those obligations. We believe the required periods
of Summarized Financial Information of the Obligor Group should be
based on the most recent financial information. Instead of the periods
specified in 17 CFR 210.3-01 and 210.3-02 (``Rules 3-01 and 3-02 of
Regulation S-X'') required by the existing rule, the proposed rule
would require Summarized Financial Information only as of, and for, the
most recently completed fiscal year and year-to-date interim period
(``interim period''), if applicable. When used in conjunction with the
parent company's consolidated financial statements, we believe the most
recent full fiscal year and interim period should provide investors the
additional information that is material to an investment decision in
the guaranteed security and would eliminate unnecessary compliance
costs for registrants.
Commenters recommended limiting disclosure to the current year,
citing challenges recasting prior period information for circumstances
such as legal-entity mergers and discontinued operations.\131\ A number
of commenters stated that interim reporting of the Proposed Alternative
Disclosures should only be required if material changes have occurred
since the most recent annual period that is required to be
presented.\132\ However, we believe that the most recent interim period
should be provided so that investors can make decisions based on the
most recent information available.
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\131\ See letters from Medtronic and PwC.
\132\ See letters from BDO, CAQ, CFA, Comcast, DT, EY, GM,
Grant, KPMG, and Medtronic. In making this suggestion, several of
these commenters made reference to Rule 10-01(a)(5) of Regulation S-
X, which allows registrants to apply judgment and omit details of
accounts which have not changed significantly in amount or
composition since the end of the most recently completed fiscal
year. See Rule 10-01(a)(5) of Regulation S-X.
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Lastly, because Item 1 of Part I of Form 10-Q \133\ requires a
registrant to provide the information required by Rule 10-01 of
Regulation S-X, we are proposing to add Rule 10-01(b)(9) to require
compliance with Rules 3-10 and 13-01.
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\133\ 17 CFR 249.308a.
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Request for Comment
45. What periods of presentation are material for investors when
evaluating the credit risk of the Obligor Group?
46. Should the required periods of Summarized Financial Information
of the Obligor Group be based on the most recent financial information?
Why or why not? If so, what periods should be considered ``most
recent,'' and why?
47. Should we require additional periods of Summarized Financial
Information beyond the most recent fiscal year and interim period? Why
or why not? If yes, which periods and why?
48. Rather than requiring disclosure of the most recent interim
period, should the proposed rule focus on significant changes similar
to Rule 10-01(a)(5) of Regulation S-X, which allows registrants to
apply judgment and omit details of accounts that have not changed
significantly in amount or composition since the end of the most
recently completed fiscal year? Why or why not?
b. Non-Financial Disclosures
When Consolidating Information is presented, the existing rule
requires limited non-financial disclosures about the issuers and
guarantors and the guarantees,\134\ restricted net assets,\135\ and
certain types of restrictions on the ability of the parent company or
any guarantor to obtain funds from their subsidiaries.\136\ Although
the Request for Comment asked if there is different or additional
information that investors need about guarantors and issuers of
guaranteed securities, we received no comments on non-financial
disclosures.
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\134\ Existing Rules 3-10(i)(8)(i)-(iii) requires disclosure, if
true, that each subsidiary issuer or subsidiary guarantor is 100%
owned by the parent company, that all guarantees are full and
unconditional, and where there is more than one guarantor, that all
guarantees are joint and several.
\135\ Rule 3-10(i)(10) of Regulation S-X.
\136\ Rule 3-10(i)(9) of Regulation S-X.
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In addition to proposing amendments to existing Rule 3-10 for
financial disclosures, we are also proposing amendments to require
specific non-financial disclosures. We are proposing these amendments
to enhance the information provided about subsidiary issuers and
guarantors, particularly in light of our proposal to require Summarized
Financial Information for these subsidiaries. Proposed Rules 13-
01(a)(1) through (3) would require certain disclosures, to the extent
material,\137\ about the issuers and guarantors, the terms and
conditions of the guarantees, and how the issuer and guarantor
structure and other factors may affect payments to holders of the
guaranteed securities. Although a parent company must provide narrative
disclosure under the existing requirements, we believe the proposed
requirements would result in enhanced narrative disclosures that would
improve investor understanding of the issuers, guarantors, and
guarantees, and make the financial disclosures they accompany easier to
understand. While the proposed requirements are composed of the items
we believe are most likely to be material to an investor, there may be
additional facts and circumstances specific to particular issuers and
guarantors that would be material to holders of the guaranteed
security. In that case, similar to existing Rule 3-10(i)(11),\138\
proposed Rule 13-01(a)(5) would require disclosure of those facts and
circumstances.\139\ Additionally, when a non-financial disclosure is
applicable to one or more, but not all, issuers and guarantors,
proposed Rule 13-01(a)(4) would require, to the extent it is material,
separate disclosure of Summarized Financial Information for the issuers
and guarantors to which it applies.\140\
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\137\ See discussion within Section III.C.2.c, ``When Disclosure
is Required.''
\138\ Existing Rule 3-10(i)(11)(i) specifies that the parent
company ``[m]ay not omit any financial and narrative information
about each guarantor if the information would be material for
investors to evaluate the sufficiency of the guarantee,'' and
existing Rule 3-10(i)(11)(ii) states that the disclosure ``[s]hall
include sufficient information so as to make the financial
information presented not misleading.''
\139\ See discussion within Section III.C.2.c, ``When Disclosure
is Required.''
\140\ See discussion within Section III.C.2.ii, ``Presentation
on a Combined Basis.''
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Request for Comment
49. Are the proposed non-financial disclosures material to an
investment decision? Should we explicitly require any non-financial
disclosures in addition to what is proposed? If so, what information
and why?
c. When Disclosure Is Required
One of the conditions that must be met under existing Rule 3-10 to
be eligible to omit the financial statements of a subsidiary issuer and
guarantor is
[[Page 49647]]
providing the Alternative Disclosures. If certain numerical thresholds
are met, including that the parent company has ``no independent assets
or operations'' and that all non-issuer and non-guarantor subsidiaries
are ``minor,'' \141\ the Alternative Disclosures may take the form of a
brief narrative in lieu of detailed Consolidating Information, but some
type of the Alternative Disclosures is always required.\142\ Under
these thresholds, minor changes in circumstances can result in
dramatically different disclosures being required. A number of
commenters indicated that these thresholds are unnecessarily
restrictive.\143\
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\141\ Rules 3-10(h)(5) and (6) specify the numerical thresholds
that must not be exceeded for a parent company to have ``no
independent assets or operations,'' and for a subsidiary to be
``minor,'' respectively. See additional discussion above in Section
II.F, ``Exceptions.''
\142\ See discussion of existing requirements in Section II.F,
``Exception Paragraphs.''
\143\ See letters from ABA-Committees, AB-NYC, CAQ, DT, EY,
FedEx, KPMG, and PwC.
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Instead of using the existing rule's numerical thresholds to
determine the form and content of disclosure, we believe investors
should receive all disclosures specified in the proposed rule, unless
such information is immaterial. As such, the proposed amendments would
eliminate the ``no independent assets or operations'' and ``minor''
numerical thresholds, as well as the brief narrative form of
Alternative Disclosures, and instead require financial and non-
financial disclosures to the extent material to holders of the
guaranteed security.\144\ For example, under the proposed rule, the
Summarized Financial Information of the Obligor Group could be omitted
if the parent company's consolidated financial statements do not differ
in any material respects from the Obligor Group.\145\ As another
example, if a finance subsidiary issues securities that are guaranteed
by its parent company, the Summarized Financial Information could be
omitted because the finance subsidiary has no independent material
debt-paying ability and has no material assets or operations other than
those related to the issuance, administration, and repayment of the
guaranteed security. While the disclosures specified in proposed Rule
13-01(a)(1) through (4) may be omitted if immaterial to holders of the
guaranteed security, for clarity, proposed Rule 13-01(a)(4) requires
the registrant to disclose a statement that those financial disclosures
have been omitted and the reason(s) why the disclosures are not
considered to be material.
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\144\ This requirement is specified in proposed Rule 13-01(a).
Whether a disclosure specified in proposed Rule 13-01 may be omitted
or whether additional disclosure would be required by proposed Rule
13-01(a)(5), discussed below, depends on whether the disclosure
would be material to a reasonable investor. The Supreme Court in TSC
v. Northway held that a fact is material if there is ``a substantial
likelihood that the disclosure of the omitted fact would have been
viewed by the reasonable investor as having significantly altered
the `total mix' of information made available.'' See TSC Indus.,
Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976).
\145\ For example, a parent company issuer could have guarantor
subsidiaries as well as non-guarantor subsidiaries. If the non-
guarantor subsidiaries are immaterial such that the combined
Summarized Financial Information of the Obligor Group was not
materially different from the corresponding amounts in the parent
company's consolidated financial statements, Summarized Financial
Information could be omitted. However, if at a later time, non-
guarantor subsidiaries become a larger part of the parent company's
business such that the combined Summarized Financial Information of
the Obligor Group is materially different from the corresponding
amounts in the parent company's consolidated financial statements,
the parent company would then be required to provide such Summarized
Financial Information.
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Existing Rules 3-10(i)(11)(i) and (ii), respectively, require
disclosure of any financial and narrative information about each
guarantor if it would be material for investors to evaluate the
sufficiency of the guarantee, and disclosure of sufficient information
to make the financial information presented not misleading. This
disclosure is required when Consolidating Information is disclosed.
While we have proposed specific financial and non-financial
disclosures, there may be other information about the guarantees,
issuers, and guarantors that could be material to holders of the
guaranteed security. Accordingly, proposed Rule 13-01(a)(5) would
require disclosure of any information that would be material to holders
of the guaranteed security, rather than the sufficiency of the
guarantee as stated in the existing rule. This requirement would apply
in all cases, including when the proposed Summarized Financial
Information is omitted in accordance with the proposed rule.
Request for Comment
50. Should we eliminate the existing numerical thresholds for
disclosure, such as the parent company having ``no independent assets
or operations'' and/or that all non-issuer and non-guarantor
subsidiaries are ``minor,'' and instead use a materiality standard to
determine the appropriate level of disclosure? Would this cause
difficulty in practice? If so, what are those difficulties and how can
they be avoided? Would further guidance be necessary? If so, please
explain what guidance is needed. Would the elimination of the numerical
thresholds and use of a materiality standard result in a loss of
material information that investors currently use to analyze these
securities? If so, what material information would be lost and would it
be material information necessary for an investor's investment
decision? Would this principles-based approach result in different
levels of disclosure provided by issuers who, for example, may be in
similar industries or have similar operations? If so, how would
investors view such differences in making investment decisions?
51. Should any additional disclosures be specifically required if
default on the guaranteed security reaches a certain level of
likelihood? If so, what type of disclosures and when should they be
provided?
52. Are the proposed rules sufficiently clear about what
disclosures should be provided and when? If not, how should the rules
be revised to ensure clarity?
d. Location of Proposed Alternative Disclosures and Audit Requirement
The primary source of financial information provided to investors--
the consolidated financial statements of the parent company--is
required to be audited as specified in Regulation S-X.\146\ Existing
Rule 3-10 requires the Alternative Disclosures to be included in the
notes to the parent company's consolidated financial statements,
thereby requiring them to be audited for the same periods. A few
commenters specifically addressed whether the Alternative Disclosures,
as revised by their suggestions, should be audited, and those
recommendations were mixed.\147\
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\146\ Rules 3-01 and 3-02 of Regulation S-X.
\147\ For example, one commenter suggested its recommended
disclosures be provided on an unaudited basis, see letter from
WhiteWave, whereas another commenter suggested requiring, on an
audited basis, the type of information typically included on an
unaudited basis in offering memoranda for Rule 144A debt offerings.
See letter from ABA-Committees.
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The Proposed Alternative Disclosures would provide incremental
detail as a supplement to the parent company's audited annual and
unaudited interim consolidated financial statements to facilitate an
analysis of the parts of the consolidated enterprise that are obligated
to make payments as issuers or guarantors. We believe the supplemental
nature of this information supports providing parent companies with the
flexibility to provide the Proposed Alternative Disclosures inside or
outside of the consolidated financial statements in registration
statements covering the offer and sale of the guaranteed debt
securities and any
[[Page 49648]]
related prospectus, as well as annual and quarterly Exchange Act
periodic reports required to be filed during the fiscal year in which
the first bona fide sale of the subject securities is completed. This
proposed optionality should reduce costs and burdens for parent
companies and reduce the potential for delay in offerings that exists
under the existing rule due to the need to prepare audited Alternative
Disclosures. Parent companies using this proposed option to provide the
disclosures outside the consolidated financial statements may be able
to register guaranteed debt offerings and go to market more quickly
than under the existing rule. This may allow parent companies to more
promptly access favorable market conditions. If a parent company elects
to provide the Proposed Alternative Disclosures outside its audited
financial statements, the disclosures would be required in specified
prominent locations in its offering documents and periodic reports.
Accordingly, the note to proposed Rule 13-01(a) would allow the
parent company to provide the Proposed Alternative Disclosures in a
footnote to its consolidated financial statements or, alternatively, in
management's discussion and analysis of financial condition and results
of operations (``MD&A''),\148\ in its registration statement covering
the offer and sale of the subject securities and any related
prospectus, and in Exchange Act reports on Forms 10-K and 10-Q \149\
required to be filed during the fiscal year in which the first bona
fide sale of the subject securities is completed. If a parent company
elects to provide the disclosures in its audited financial statements,
the Proposed Alternative Disclosures would be required to be
audited.\150\ If not otherwise included in the consolidated financial
statements or in the MD&A, the parent company would be required to
include the Proposed Alternative Disclosures in its prospectus
immediately following ``Risk Factors,'' if any, or otherwise,
immediately following pricing information described in 17 CFR
229.503(c) (``Item 503(c) of Regulation S-K''). Beginning with the
parent company's annual report filed on Form 10-K for the fiscal year
during which the first bona fide sale of the subject securities is
completed, however, the parent company would be required to provide the
Proposed Alternative Disclosures in a footnote to its consolidated
financial statements in its annual and quarterly reports.
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\148\ See 17 CFR 229.303 (Item 303 of Regulation S-K).
\149\ These proposed amendments also apply to foreign private
issuers and issuers offering securities pursuant to 17 CFR 230.251
through 230.263 (``Regulation A'') and the forms applicable to such
entities. See Section III.D, ``Application of Proposed Amendments to
Certain Types of Issuers,'' below.
\150\ Regardless of where the Proposed Alternative Disclosures
are presented in the filing, U.S. GAAP requires disclosure in the
financial statements of the pertinent rights and privileges of the
various securities outstanding. See ASC 470-10-50-5 and ASC 505-10-
50-3.
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The increased flexibility that would be afforded to the parent
company in choosing where to locate the Proposed Alternative
Disclosures during the fiscal year in which the first bona fide sale of
the subject securities is completed gives rise to certain disclosure
location considerations. If the parent company were to elect to provide
the Proposed Alternative Disclosures in its financial statements,
consistent with the existing rule, the disclosures would be subject to
annual audit, interim review, and internal control over financial
reporting requirements. By doing so, investors and other users may
benefit to the extent that they consider the information included in
the financial statements more reliable because it is subject to these
audit and other requirements. Also consistent with the existing rule,
Proposed Alternative Disclosures located in the financial statements
would be subject to XBRL tagging requirements.\151\ The parent company
may incur additional costs to comply with these tagging requirements,
whereas investors and other users may benefit from more readily-
available information in structured formats.
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\151\ On June 28, 2018, the Commission adopted rule and form
amendments to require filers, on a phased in basis, to use the
Inline XBRL format for financial statement information and risk/
return summary information. See Inline XBRL Filing of Tagged Data,
Release No. 33-10514 (Jun. 28, 2018).
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In contrast, if the parent company were to elect to provide the
Proposed Alternative Disclosures outside its financial statements
during this time period, it would not incur costs to comply with these
requirements, but investors would not benefit from the enhanced
reliability of information included in the financial statements. In
addition, the safe harbor under the Private Securities Litigation
Reform Act of 1995 (``PSLRA'') would not be available for the
disclosures if provided in the financial statements, but would be
available for disclosure provided in other sections of the filing, such
as the MD&A.\152\ If the safe harbor is available, a parent company may
be more likely to supplement its disclosures, which would benefit
investors. When provided outside of the financial statements, the
Proposed Alternative Disclosures would be subject to the parent
company's disclosure controls and procedures and related certification
requirements.
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\152\ Public Law 104-67, 109 Stat. 737 (1995). Since the PSLRA
does not provide a safe harbor for forward-looking information
located within the financial statements, a parent company presenting
the Proposed Alternative Disclosures in its financial statements may
be less likely to voluntarily supplement those disclosures with
forward-looking information as compared with disclosures made
outside the financial statements. However, a parent company retains
the option of providing forward-looking information outside its
financial statements so that such information is covered by the safe
harbor.
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Request for Comment
53. Should the proposed rule permit the parent company to provide
the Proposed Alternative Disclosures outside its financial statements
in the proposed circumstances described above? Alternatively, should
the parent company be permitted to provide the Proposed Alternative
Disclosures outside its financial statements in all circumstances? What
are the potential benefits or concerns for investors and issuers with
either approach?
54. Would requiring the Proposed Alternative Disclosures to be
included in a footnote to the parent company's audited annual and
unaudited interim financial statements beginning with its annual report
filed on Form 10-K or Form 20-F for the fiscal year during which the
first bona fide sale of the guaranteed securities is completed be
useful to investors? If so, why? If not, why not? What are the
potential benefits or concerns for investors and issuers with either
approach?
55. Would requiring the Proposed Alternative Disclosures to be
audited or reviewed present costs or challenges for parent companies?
If so, what are they? For example, would it cause delays in the
offering process?
56. Should the proposed rule specify where in a filing the Proposed
Alternative Disclosures must appear if the parent company chooses not
to include them in its financial statements? Why or why not? If yes,
are the locations required by the note to proposed Rule 13-01(a)
appropriate? If so, why? If not, why not? Where should the Proposed
Alternative Disclosures be disclosed, and why is that location
appropriate?
57. Would issuers be more likely to voluntarily provide
supplemental information in addition to the required Proposed
Alternative Disclosures to the extent the PSLRA applied to such
supplemental information? Why or why not? What would that additional
supplemental information be?
[[Page 49649]]
58. Should the proposed rule instead require the Proposed
Alternative Disclosures to be provided in the parent company's
financial statements in the subject registration statement and
subsequent Exchange Act periodic reports for the fiscal year in which
the first bona fide sale of the subject securities is completed, but
permit the parent company to provide the Proposed Alternative
Disclosures outside its financial statements in subsequent Exchange Act
periodic reports? If so, why? If not, why not? Does the answer change
the larger the parent company is? Why or why not? Would investors and
issuers benefit from such a requirement? Why or why not? Should the
Proposed Alternative Disclosures be required to be included in the
parent company's financial statements for a different period of time
before the parent company is permitted to provide them outside its
financial statements? If so, what time period and why?
59. Should the note to proposed Rule 13-01(a) apply differently to
emerging growth companies? \153\ Why or why not? For example, should
there be different filings or periods of time if the parent company is
an emerging growth company? If so, what should be different and why?
How would investors and issuers be affected?
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\153\ 17 CFR 230.405 (``Rule 405'') under the Securities Act
defines an emerging growth company as an issuer that had total gross
revenues of less than $1.07 billion during its most recently
completed fiscal year. It retains that status for five years after
its initial public offering unless its revenues rise above $1.07
billion, it issues more than $1 billion of non-convertible debt in a
three year period, or it qualifies as a large accelerated filer
pursuant to 17 CFR 240.12b-2 (``Rule 12b-2'') under the Exchange
Act.
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e. Recently-Acquired Subsidiary Issuers and Guarantors
Existing Rule 3-10(g) requires pre-acquisition audited financial
statements of a recently acquired subsidiary issuer or guarantor in
certain circumstances. One commenter noted that the information
provided for recently acquired subsidiary issuers and guarantors is
more detailed than the information required for the other subsidiary
issuers and guarantors.\154\ Another commenter made a similar
observation but also noted that these financial statements will only be
included at the time the issuers and guarantors are first registering
the guaranteed security, at which time the probability of the guarantee
being invoked would usually be remote.\155\ Several commenters
recommended eliminating the requirement to provide audited pre-
acquisition financial statements of recently-acquired issuers and
guarantors but differed on whether any other disclosure should be
provided, and, if so, what type.\156\
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\154\ See letter from DT.
\155\ See letter from PwC.
\156\ See, e.g., letters from CAQ, DT, EY, Grant, KPMG, PwC, and
SIFMA. A few commenters recommended rescinding the requirement
altogether. See letters from EY and SIFMA. Several commenters
suggested requiring disclosure about recently acquired issuer and
guarantor subsidiaries to mirror what is required for other issuer
and guarantor subsidiaries (i.e., form and content of Alternative
Disclosures). See letters from CAQ, DT, Grant, KPMG, and PwC.
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Commenters also noted that, in addition to being presented with a
far greater level of detail than is required for existing subsidiary
issuers and guarantors in the Alternative Disclosures under existing
Rule 3-10, these pre-acquisition audited financial statements are
burdensome and costly for preparers.\157\ Additionally, Rule 3-05 of
Regulation S-X already requires pre-acquisition audited financial
statements of an acquired business to be provided if it exceeds
specified thresholds of significance,\158\ which one commenter
indicated is sufficient for investors.\159\
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\157\ See, e.g., letters from PwC (stating that a ``company can
incur significant costs and effort to prepare such financial
statements that will never be required again'') and EY (''The
requirements to provide separate pre-acquisition financial
statements of recently acquired guarantors under S-X Rule 3-10(g)
are unnecessary and potentially burdensome.''). See also letters
from CAQ, DT, Grant, and KPMG.
\158\ Rule 3-05 of Regulation S-X specifies requirements for
pre-acquisition financial statements of an acquired or to be
acquired significant ``business.'' Registrants determine whether a
``business'' has been acquired by applying Rule 11-01(d) of
Regulation S-X, and whether an acquisition is significant by using
the investment, asset, and income tests described in Rule 1-02(w) of
Regulation S-X. If the parent company is a smaller reporting
company, 17 CFR 210.8-04 (``Rule 8-04 of Regulation S-X'') specifies
requirements for pre-acquisition financial statements of an acquired
or to be acquired significant business, including the tests used to
determine if an acquisition is significant. Recently-acquired
subsidiary issuers and guarantors would typically be considered a
``business'' because separate entities, subsidiaries, or divisions
are presumed to be businesses. The requirements of Rule 3-05 of
Regulation S-X overlap with Rule 3-10(g) if a parent company files a
registration statement in connection with the offering of guaranteed
debt or debt-like securities and acquires a subsidiary issuer or
guarantor. However, the significance test under Rule 3-10(g)
measures significance based on the purchase price of the recently
acquired subsidiary issuer or guarantor relative to the size of the
offering, which often results in a requirement to provide financial
statements at a far lower level of significance than under Rule 3-05
of Regulation S-X. The proposed elimination of Rule 3-10(g) would
generally result in an investor receiving pre-acquisition financial
statements of a recently-acquired subsidiary issuer or guarantor
only if it exceeded the thresholds of significance specified in Rule
3-05 of Regulation S-X or 8-04 of Regulation S-X, as applicable.
\159\ See letter from SIFMA.
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Based on these observations, and our belief that existing
requirements under Rule 3-05 of Regulation S-X provide sufficient
information in this context, we do not believe the pre-acquisition
financial statements of recently-acquired subsidiary issuers and
guarantors required by existing Rule 3-10(g) are necessary. We are
therefore proposing to delete existing Rule 3-10(g). Although we are
not proposing to require specific disclosures about recently-acquired
subsidiary issuers and guarantors in lieu of pre-acquisition financial
statements, information about these recently-acquired subsidiaries
would be required if material to an investment decision in the
guaranteed security pursuant to proposed Rule 13-01(a)(5).
Due to the proposed deletion of Rule 3-10(g), we also propose a
conforming change to remove paragraph (b) of Rule 12h-5.\160\
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\160\ If the proposed removal of paragraph (b) of existing Rule
12h-5 is adopted, a subsidiary issuer or guarantor that was
previously required to provide pre-acquisition financial statements
pursuant to existing Rule 3-10(g) but was exempt from Exchange Act
reporting by paragraph (b) of existing Rule 12h-5 would continue to
be exempt from Exchange Act reporting through proposed Rule 12h-5.
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Request for Comment
60. Should we eliminate the existing requirement to provide pre-
acquisition financial statements of recently-acquired subsidiary
issuers and guarantors? Why or why not? Alternatively, should the
proposed rule require some other type of disclosure about recently-
acquired subsidiary issuers and guarantors instead of pre-acquisition
financial statements? If so, what type of disclosure and in what
instances should it be required? For example, should disclosure of pre-
acquisition financial information about recently-acquired subsidiary
issuers and guarantors mirror that of existing subsidiary issuers and
guarantors?
f. Continuous Reporting Obligation
An issuer of securities is required to file Exchange Act reports
with the Commission under Section 13(a), with respect to any class of
securities registered pursuant to Sections 12(b) or 12(g), or for any
class of securities for which it has a reporting obligation under
Section 15(d) of the Exchange Act.\161\ Section 12(b) registration is
required only for so long as the class of securities is listed for
trading on a
[[Page 49650]]
national securities exchange.\162\ An issuer incurs a Section 15(d)
reporting obligation for each class of securities that is the subject
of a Securities Act registration statement that becomes effective or is
required to be updated under Securities Act Section 10(a)(3).\163\
Section 15(d)(1) \164\ provides that if, at the beginning of any
subsequent fiscal year, the securities of any class to which the
registration statement relates are held of record by fewer than 300
persons, or in the case of a bank, a savings and loan holding
company,\165\ or bank holding company,\166\ by fewer than 1,200
persons, the registrant's Section 15(d) reporting obligation is
automatically suspended with respect to that class.\167\ Rule 12h-3
permits registrants to suspend a Section 15(d) reporting obligation at
any time during a fiscal year provided the conditions of the rule are
met.\168\
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\161\ Section 12(g) registration is triggered when an issuer
exceeds specified asset and ownership thresholds with respect to a
class of equity securities and does not apply to securities subject
to Rule 3-10.
\162\ Accordingly, Section 12(b) reporting obligations are
terminated when, for example, the class no longer qualifies for
exchange listing or the registrant determines to no longer list the
securities on a national securities exchange.
\163\ 15 U.S.C. 78 j(a)(3).
\164\ 15 U.S.C. 78o(d)(1).
\165\ As that term is defined in Section 10 of the Home Owners'
Loan Act, 12 U.S.C. 1461.
\166\ As that term is defined in Section 2 of the Bank Holding
Company Act of 1956, 12 U.S.C. 1841.
\167\ The automatic statutory suspension of an issuer's Section
15(d) reporting obligation is not available as to any fiscal year in
which the issuer's Securities Act registration statement becomes
effective or is required to be updated pursuant to Section 10(a)(3)
of the Securities Act.
\168\ Rule 12h-3 provides that the duty to file reports under
Section 15(d) for a class of securities is suspended immediately
upon the filing of a certification on Form 15, provided that the
issuer has fewer than 300 holders of record, fewer than 500 holders
of record where the issuer's total assets have not exceeded $10
million on the last day of each of the preceding three years, or, in
the case of a bank, a savings and loan holding company, or a bank
holding company, 1,200 holders of record; the issuer has filed its
Section 13(a) reports for the most recent three completed fiscal
years, and for the portion of the year immediately preceding the
date of filing the Form 15 or the period since the issuer became
subject to the reporting obligation; and a registration statement
has not become effective or was required to be updated pursuant to
Exchange Act Section 10(a)(3) during the fiscal year.
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The Commission explained in the 2000 Release that the parent
company must continue to provide the Alternative Disclosures in its
periodic reports for as long as the subject securities are
outstanding.\169\ This disclosure requirement continues to apply to the
parent company even if the reporting obligation of its subsidiary
issuer or guarantor with respect to the subsidiary's guaranteed
securities or subsidiary's guarantees could be suspended under either
Section 15(d) or Rule 12h-3 of the Exchange Act.
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\169\ See Section III.C.1 of the 2000 Release (``The parent
company periodic reports must include the modified financial
information permitted by paragraphs (b) through (f) of Rule 3-10.
The parent company periodic reports must contain this information
for as long as the subject securities are outstanding.'').
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A number of commenters indicated that a parent company should be
able to cease providing the Alternative Disclosures for its subsidiary
issuers and guarantors at the same time that a subsidiary's reporting
obligation under Section 15(d) of the Exchange Act with respect to the
subject security could be suspended.\170\ Some of these commenters
noted that requiring a parent company to continue providing the
Alternative Disclosures once its subsidiary issuers' and guarantors'
obligations to file reports could be suspended under Section 15(d) or
Rule 12h-3 is inconsistent with other reporting rules.\171\ One
commenter stated, the ``disparate treatment is illogical, and should be
harmonized by expressly allowing registrants to cease providing the
information called for by the Rule 3-10 accommodations when the
[reporting obligation related to the] guaranteed security is
[suspended] pursuant to Section 15(d) of the Exchange Act.'' \172\
Additionally, some commenters \173\ stated that this requirement
unnecessarily burdens registrants and ``acts as a disincentive for
registrants to engage in public debt offerings as opposed to offerings
under Rule l44A or pursuant to other Securities Act exceptions.'' \174\
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\170\ See letters from ABA-Committees, BDO, CAQ, Chamber, DT,
EY, KPMG, PwC, SIFMA, and Simpson.
\171\ See letters from ABA-Committees, DT, EY, PwC, SIFMA, and
Simpson (noting that a continuous reporting obligation appears
inconsistent with the reporting obligation of a registrant that
provides separate financial statements because that registrant may
stop providing the separate financial statements, even if the debt
is outstanding).
\172\ See letter from SIFMA.
\173\ See letters from DT and Simpson.
\174\ See letter from Simpson.
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We are proposing that a parent company be permitted to cease
providing the Proposed Alternative Disclosures if the corresponding
subsidiary issuer's or guarantor's Section 15(d) obligation is
suspended automatically by operation of Section 15(d)(1) or through
compliance with Rule 12h-3. To implement this change, the proposed rule
would eliminate the statement in existing Rule 3-10(a) that ``[e]very
issuer of a registered security that is guaranteed and every guarantor
of a registered security must file the financial statements required
for a registrant by Regulation S-X.'' As proposed, if a subsidiary
issuer or guarantor is required to file financial statements required
by Regulation S-X with respect to the guarantee or guaranteed security,
the subsidiary may omit such financial statements if it complies with
conditions set forth in proposed Rule 3-10. The parent company would be
able to cease providing the Proposed Alternative Disclosures for a
subsidiary issuer or guarantor that is not required to file financial
statements required by Regulation S-X with respect to the guarantee or
guaranteed security.
As described above, Section 12(b) registration is required for so
long as a class of securities is listed for trading on a national
securities exchange. As a continued condition of eligibility to omit
the financial statements of a subsidiary issuer or guarantor, a parent
company must continue providing the Proposed Alternative Disclosures
for so long as the subsidiary issuer or guarantor has a Section 12(b)
reporting obligation with respect to the guarantee or guaranteed
security. If the subsidiary issuer's or guarantor's reporting
obligation with respect to the guarantee or guaranteed security is
terminated under Section 12(b), the parent may cease providing the
Alternative Disclosures once the subsidiary issuer's and guarantor's
Section 15(d) obligation is suspended automatically by operation of
Section 15(d)(1) or through compliance with Rule 12h-3.
Under the proposed rule, which is consistent with the 2000
Release,\175\ if a subsidiary issuer or guarantor with an Exchange Act
reporting obligation for the guaranteed securities would initially be
eligible to omit its financial statements, because it would meet the
requirements of proposed Rule 3-10 and could rely on proposed Rule 12h-
5, but later ceased to satisfy those requirements (e.g., it ceases to
be a consolidated subsidiary of the parent company), that subsidiary
would then be required to begin filing Exchange Act reports for the
period during which it ceased to satisfy the requirements of proposed
Rule 3-10.\176\ Also, the subsidiary would be required to present the
financial statements that are required by Regulation S-X at the time a
report is due, and would not be able to present the Proposed
Alternative Disclosures that proposed Rule 3-10 would have allowed it
to present for historical periods.
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\175\ See Section III.C.3. of the 2000 Release.
\176\ Additionally, a subsidiary issuer or guarantor should
consider promptly filing a Form 8-K or a Form 6-K to report this
change in circumstance.
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[[Page 49651]]
Request for Comment
61. Would the proposed changes to Rule 3-10(a) achieve the intended
result of permitting a parent company to cease providing the Proposed
Alternative Disclosures if each subsidiary issuer's and guarantor's
reporting obligation is suspended automatically by operation of Section
15(d)(1) or through compliance with Rule 12h-3? If not, why, and what
changes are necessary to achieve that result?
62. We expect that the proposed changes to both eligibility to
provide the Proposed Alternative Disclosures and the content of the
Proposed Alternative Disclosures would reduce the burden on a parent
company's periodic reporting. In light of these proposed changes,
should we continue to require the parent company to provide the
Proposed Alternative Disclosures in its periodic reports for as long as
the subject securities are outstanding? Why or why not?
63. If the proposed amendments are adopted, should there be a
phase-in period for parent companies that provide the Alternative
Disclosures under existing Rule 3-10 in reliance on Rule 12h-5? If so,
why would such a phase-in be needed? How long should that phase-in
period be? Should it begin with the beginning of the first fiscal year
after adoption of the proposals? Should we permit early adoption? If
so, why or why not?
64. Should the proposed rule include a requirement to provide
current notification to investors when a subsidiary issuer or guarantor
fails to meet the conditions of proposed Rule 3-10 and must begin
reporting pursuant to the Exchange Act? If so, what should that
requirement be? If not, why not?
D. Application of Proposed Amendments to Certain Types of Issuers
Rule 3-10's requirements apply to several categories of issuers,
including foreign private issuers,\177\ smaller reporting companies
(``SRCs''),\178\ and issuers offering securities pursuant to Regulation
A. The proposed amendments also would apply to these types of issuers,
because, for the reasons discussed above, we believe investors would
benefit from the simplified and improved disclosures that would result
from the proposed amendments and the cost of providing the disclosures
would be reduced for these types of issuers. In certain circumstances,
Rule 3-10 also applies to the financial information of third parties
provided by issuers of asset-backed securities (``ABS''). We also
believe the proposed amendments should be extended to the financial
information of such third parties for the reasons discussed above.
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\177\ See 17 CFR 230.405, 240.3b-4 (defining ``foreign private
issuer'').
\178\ See 17 CFR 230.405, 240.12b-2 (defining ``smaller
reporting company'').
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Request for Comment
65. Should the proposed changes to Rule 3-10 also apply to these
types of issuers? If so, why? If not, why not? Do investors in
guaranteed securities issued by these types of issuers require
additional, different, or less information to make informed investment
decisions than would be required by the proposed rule? If so, what
information and why?
66. How frequently do these types of issuers issue guaranteed
securities? Is there a reason to believe they may offer them more often
under the proposed rules? Why or why not?
67. Are other conforming changes to the proposed rules necessary
for them to apply to these types of issuers? If so, what changes are
necessary and why?
68. Should the proposed amendment that would permit the parent
company to provide the Proposed Alternative Disclosures outside the
footnotes to its audited annual and unaudited interim consolidated
financial statements in its registration statement covering the offer
and sale of the guaranteed securities and any related prospectus, and
in Exchange Act annual and quarterly reports required to be filed
during the fiscal year in which the first bona fide sale of the subject
securities is completed apply differently to these types of issuers?
Why or why not? For example, are there different filings or periods of
time that the parent company should be permitted to provide the
Proposed Alternative Disclosures outside of its financial statements
for these types of issuers? As another example, should the proposed
rule prescribe different locations outside the financial statements
where the Proposed Alternative Disclosures should be provided for these
types of issuers? In each case, what are they and why? How would
investors and issuers be affected?
1. Foreign Private Issuers
Under the proposal, foreign private issuers would continue to be
required to comply with Rule 3-10, and would also be required to comply
with proposed Rule 13-01. As foreign private issuers would be required
to provide the disclosures specified in proposed Rule 13-01,
Instruction 1 to Item 8 of Form 20-F would be amended to specifically
require compliance with proposed Rule 13-01. We are also proposing
amendments to conform Forms F-1 and F-3 to the streamlined structure of
proposed Rule 3-10(a). General Instruction I.B of Form F-1 and the note
to General Instruction I.A.5 of Form F-3 contain eligibility
requirements for the use of these forms applicable to issuers and
guarantors of guaranteed securities that are majority-owned
subsidiaries. Rather than the current form language stating that Rule
3-10 specifies the financial statements that are required, we are
proposing to amend these forms to instead state that the requirements
of Rule 3-10 are applicable to financial statements for those
subsidiary issuers or guarantors.
Existing Rule 3-10(a)(3) includes a reference, solely for
convenience, directing foreign private issuers to Item 8.A of Form 20-F
rather than having them go first to Rules 3-01 and 3-02 of Regulation
S-X to determine the periods for which financial statements are
required.\179\ We propose to simplify the rule by deleting this
reference.
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\179\ Rule 3-01(h) of Regulation S-X and Rule 3-02(d) of
Regulation S-X direct foreign private issuers to Item 8.A of Form
20-F.
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Also, existing Rule 3-10(i)(12) requires a parent company that
prepares its financial statements on a comprehensive basis other than
U.S. GAAP or IFRS as issued by the International Accounting Standards
Board to reconcile Consolidating Information to U.S. GAAP. Because of
the supplemental nature of the Proposed Alternative Disclosures and the
requirement in Item 18 of Form 20-F that the parent company's
consolidated financial statements be reconciled to U.S. GAAP, we do not
believe continuing to include a requirement to reconcile the financial
information included in the Proposed Alternative Disclosures to U.S.
GAAP is necessary. Although the reconciliation requirement would be
eliminated, proposed Rule 13-01(a)(5) would require the parent company
to disclose any other quantitative or qualitative information that
would be material to making an investment decision with respect to the
guaranteed security.
Request for Comment
69. Should a parent company that prepares its financial statements
on a comprehensive basis other than U.S. GAAP or IFRS as issued by the
International Accounting Standards Board be required to reconcile the
proposed financial disclosures specified in proposed Rule 13-01(a)(4)
to U.S. GAAP, similar to the requirement of existing Rule 3-10(i)(12)?
If so, why? If not, why not?
[[Page 49652]]
2. Smaller Reporting Companies
Note 3 to Rule 8-01 of Regulation S-X requires compliance with
existing Rule 3-10 if the subsidiary of an SRC issues securities
guaranteed by the SRC or the subsidiary guarantees securities issued by
the SRC, except that the periods presented are those required by 17 CFR
210.8-02 (``Rule 8-02 of Regulation S-X''). Because the subsidiary
issuer or guarantor is itself a registrant, it is required to file
financial statements meeting the requirements of Regulation S-X. Such
financial statements may be prepared in accordance with 17 CFR 210.8-01
through 210.8-08 (Article 8 of Regulation S-X) so long as the
subsidiary issuer or guarantor qualifies as an SRC.\180\ Consistent
with the existing rule, if the conditions of proposed Rule 3-10 are
satisfied, the subsidiary issuer's or guarantor's financial statements
may be omitted. While the substance of this requirement would not
change, we are proposing amendments to Note 3 to Rule 8-01 to conform
it to the streamlined structure of proposed Rule 3-10(a). Rather than
stating that the subsidiary issuer or guarantor of the SRC issuer or
guarantor must present financial statements as required by existing
Rule 3-10, Note 3 to Rule 8-01 would instead state that the
requirements of proposed Rule 3-10 are applicable to financial
statements of the subsidiary issuer or guarantor. In addition, we are
proposing to add a sentence to Note 3 to Rule 8-01 to require an SRC to
provide the disclosures specified in proposed Rule 13-01. Lastly,
because Item 1 of Part I of Form 10-Q permits an SRC to provide the
information required by Rule 8-03 of Regulation S-X if it does not
provide the information required by Rule 10-01, we are proposing to add
Rule 8-03(b)(7) to require compliance with Rules 3-10 and 13-01.
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\180\ 17 CFR 229.10(f).
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3. Offerings Pursuant to Regulation A
In connection with offerings made pursuant to Regulation A,\181\
Forms 1-A,\182\ 1-K,\183\ and 1-SA \184\ direct an entity (``Regulation
A Issuer'') to present financial statements of a subsidiary that issues
securities guaranteed by the parent company or guarantees securities
issued by the parent company as required by Rule 3-10 for the same
periods as the Regulation A Issuer's financial statements,\185\ because
under these circumstances such subsidiary issuers or guarantors would
themselves be Regulation A Issuers. Consistent with existing
requirements, if the conditions of proposed Rule 3-10 are satisfied,
the subsidiary issuer's or guarantor's financial statements may be
omitted. While the substance of this requirement would not change, we
are proposing amendments to Forms 1-A, 1-K, and 1-SA to conform the
requirements to the streamlined structure of proposed Rule 3-10(a).
Rather than stating that the subsidiary issuer or guarantor of the
parent company must present financial statements as required by
existing Rule 3-10, Forms 1-A, 1-K, and 1-SA would instead state that
the requirements of proposed Rule 3-10 are applicable to financial
statements of the subsidiary issuer or guarantor. Additionally, the
proposed amendments would modify each form to require the disclosures
specified in proposed Rule 13-01 and specify the location of the
disclosures, similar to the proposed note to Rule 13-01(a) but
consistent with the requirements of Regulation A. However, if a parent
company elects to provide the disclosures in its audited financial
statements, the Proposed Alternative Disclosures would be required to
be audited.
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\181\ 17 CFR 230.251-230.263.
\182\ 17 CFR 239.90.
\183\ 17 CFR 239.91.
\184\ 17 CFR 239.92.
\185\ Forms 1-A and 1-K also specify the audit requirements
applicable to financial statements of other entities, which includes
those of subsidiary issuers and guarantors of an issuer offering
guaranteed securities pursuant to Regulation A. We are not proposing
any changes to these audit requirements for circumstances where the
separate financial statements of subsidiary issuers and guarantors
are filed.
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4. Issuers of Asset-Backed Securities--Third Party Financial Statements
The disclosure items for issuers of ABS, set forth in Regulation
AB,\186\ specify circumstances when an ABS issuer must provide
financial information for certain third parties \187\ in its filings.
For example, under Regulation AB, financial information about
significant obligors of pool assets and guarantors of those pool assets
may be required. In lieu of providing the financial information of
certain unrelated significant obligors, if certain conditions are met,
Item 1100(c)(2) of Regulation AB permits the ABS issuer to reference
the significant obligor's Exchange Act reports (or, for certain
circumstances, its parent's Exchange Act reports) on file with the
Commission. One of these conditions is that the significant obligor
meets one of the categories of eligible significant obligors specified
in Item 1100(c)(2)(ii) of Regulation AB. Of these eligible categories,
two relate to pool assets guaranteed by a parent or subsidiary of the
significant obligor, as outlined in Items 1100(c)(2)(ii)(C) and (D).
For these two categories, Item 1100(c)(2)(ii) permits an ABS issuer to
reference Exchange Act reports containing the parent's consolidated
financial statements if the information requirements of Rule 3-10 of
Regulation S-X and certain other conditions are satisfied.
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\186\ 17 CFR 229.1100 through 229.1125.
\187\ These third parties include: (1) Significant obligors of
pool assets, 17 CFR 229.1112(b); (2) entities that provide credit
enhancement and other support, except for certain derivative
instruments, 17 CFR 229.1114(b)(2); and (3) certain derivative
instrument counterparties, 17 CFR 229.1115(b). Depending on the
specified measures of significance, the financial information
required for these third parties ranges from selected financial data
required by 17 CFR 229.301 (Item 301 of Regulation S-K) to audited
financial statements meeting the requirements of Regulation S-X
(except Rule 3-05 of Regulation S-X and 17 CFR 210.11-01 through
210.11-03 (Article 11 of Regulation S-X)).
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We are proposing conforming amendments to Items 1100(c)(2)(ii)(C)
and (D) of Regulation AB because we are proposing to relocate the
disclosure requirements associated with issuers and guarantors of
guaranteed securities to proposed Rule 13-01. Thus, rather than refer
to the information requirements of Rule 3-10, Items 1100(c)(2)(ii)(C)
and (D) would instead state that disclosures specified in proposed Rule
13-01 must be provided in the reports to be referenced and that
financial statements of the subsidiary third party or subsidiary
guarantor, as applicable, may be omitted if the requirements of
proposed Rule 3-10 are satisfied. The function of the eligible
categories in Items 1100(c)(2)(ii)(C) and (D) would not change under
the proposed revisions.
Additionally, we are proposing conforming amendments to Items 1112,
1114, and 1115 of Regulation AB and Item 504 of Regulation S-K because
the citations to Regulation S-X in those item requirements refer to
Regulation S-X as encompassing ``210.1-01 through 210.12-29.'' Those
citations would be updated to include proposed Rules 13-01 and 13-02 of
Regulation S-X.
IV. Rule 3-16 of Regulation S-X
Rule 3-16 contains requirements for affiliates whose securities are
pledged as collateral for securities registered or being registered.
Existing Rule 3-16 requires a registrant to provide separate annual and
interim \188\ financial statements for each affiliate whose
[[Page 49653]]
securities constitute a ``substantial portion'' of the collateral for
any class of securities registered or being registered as if the
affiliate were a separate registrant (``Rule 3-16 Financial
Statements'').\189\ Rule 1-02(b) of Regulation S-X defines an
``affiliate'' by stating that an ``affiliate of, or a person affiliated
with, a specific person is a person that directly, or indirectly
through one or more intermediaries, controls, or is controlled by, or
is under common control with, the person specified'' (emphasis in
original).\190\ In practice, affiliates whose securities collateralize
a registered security are almost always consolidated subsidiaries of
that registrant.
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\188\ Rule 3-16 Financial Statements are not required in
quarterly reports, such as on Form 10-Q. See Section III.A.6. of the
2000 Release.
\189\ Rule 3-16(a) of Regulation S-X. These financial statements
are required to be provided for the periods required by Rules 3-01
and 3-02 of Regulation S-X.
\190\ Rule 1-02(b) of Regulation S-X.
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Whether an affiliate's portion of the collateral is a ``substantial
portion'' is determined by comparing the highest amount among the
aggregate principal amount, par value, book value, or market value of
the affiliate's securities to the principal amount of the securities
registered or being registered. If the highest of those values equals
or exceeds 20 percent of the principal amount of the securities
registered or being registered for any fiscal year presented by the
registrant, Rule 3-16 Financial Statements are required.\191\
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\191\ Rule 3-16(b) of Regulation S-X.
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The requirements in existing Rule 3-16 have remained unchanged for
many years,\192\ and we are proposing changes to improve the
disclosures required by the rule.
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\192\ See Separate Financial Statements Required by Regulation
S-X, Release No. 33-6359 (Nov. 6, 1981) [46 FR 56171 (Nov. 16,
1981)].
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V. Proposed Amendments to Rule 3-16 and Relocation to Rule 13-02
A. Overarching Principle
Our proposed amendments to Rule 3-10 are based on the principle
that investors in guaranteed securities rely primarily on the
consolidated financial statements of the parent company as supplemented
by details about the subsidiary issuers and guarantors when making
investment decisions. Similarly, we believe that the consolidated
financial statements of the registrant are the most relevant
information for investors when making investment decisions about that
registrant's securities that are collateralized by securities of its
affiliate(s). The pledge of collateral is a residual equity interest
that could potentially be foreclosed upon only in the event of default
and almost always relates to an affiliate whose financial information
is already included in the registrant's consolidated financial
statements.\193\ While we believe information about the affiliate(s)
whose securities are pledged as collateral is material for an investor
to consider potential outcomes in the event of foreclosure, we believe
that separate financial statements of each such affiliate are not
material in most situations. Rather, we believe the nature and extent
of disclosures about the affiliate(s) and the related collateral
arrangement should be consistent with the supplemental nature of the
information and better balanced with the cost of providing such
disclosures.
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\193\ Generally, in the event of default, the holders of debt
without the benefit of a pledge of collateral are comparatively
disadvantaged. In the event of default, a holder of a debt security
can make claims for payment directly against the issuer. Unpledged
assets of an issuer's subsidiaries would generally only be
indirectly accessible to the holder through bankruptcy proceedings,
subordinate to direct claims against those subsidiaries or their
assets. A debt security that is secured by a pledge of collateral
typically allows a holder to make direct claims to that collateral
in the event of default.
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B. Overview of the Proposed Changes
Although affiliates whose securities are pledged as collateral are
not registrants with respect to the collateralized security, and are
not generally subject to the related reporting requirements, existing
Rule 3-16 requires financial statements as if the affiliates were
registrants. This requirement is more onerous than those that apply to
other forms of credit enhancements, such as the Alternative Disclosures
permitted under existing Rule 3-10 or the disclosures required by 17
CFR 210.4-08(b) (``Rule 4-08(b) of Regulation S-X'') for assets that
are pledged.\194\ Additionally, while the importance of the collateral
to an investor may vary widely from situation to situation, the
existing rule requires full, audited financial statements for the
affiliate in all circumstances when the ``substantial portion''
threshold is met, but no disclosure if the threshold is not met. For
example, Rule 3-16 Financial Statements may be required if a registrant
issues a small amount of debt securities, even though an affiliate may
be only a small percentage of the registrant's assets and operations,
but may not be required if a registrant issues a substantial amount of
debt securities, even though an affiliate constitutes a large
percentage of a registrant's assets and operations.
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\194\ Rule 4-08(b) of Regulation S-X requires disclosure of the
approximate amounts of assets mortgaged, pledged, or otherwise
subject to lien and a brief identification of the obligations
collateralized.
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A number of commenters stated that debt offerings are often
structured to avoid or limit Rule 3-16 disclosures by reducing the
amount of collateral an investor might receive in the event of default,
resulting in reduced collateral packages, or are otherwise structured
as unregistered offerings.\195\ Other commenters indicated that debt
agreements may be structured to specifically release an affiliate's
securities from collateral if and when their inclusion would trigger
the requirements of existing Rule 3-16.\196\ Another commenter
indicated that the requirements of existing Rule 3-16 often make it
uneconomical to secure publicly-offered bonds with pledges of
stock.\197\
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\195\ See, e.g., letters from ABA-Committees, Cahill, Chamber,
Davis Polk, DT, and EY.
\196\ See, e.g., letters from Covenant, Davis Polk, KPMG, and
PwC.
\197\ See letter from Davis Polk.
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We are proposing to replace the existing requirement--that a
registrant provide separate financial statements for each affiliate
whose securities are pledged as collateral--with a requirement that a
registrant provide financial and non-financial disclosures about the
affiliate(s) and the collateral arrangement as a supplement to the
registrant's consolidated financial statements. The supplemental nature
of this information, similar to the proposed disclosures for issuers
and guarantors of guaranteed securities discussed above, supports
providing registrants with the flexibility to provide the proposed
disclosures inside or outside the registrant's audited annual and
unaudited interim financial statements in registration statements
covering the offer and sale of the collateralized securities and any
related prospectus, as well as annual and quarterly Exchange Act
periodic reports required to be filed during the fiscal year in which
the first bona fide sale of the subject securities is completed.\198\
Accordingly, the
[[Page 49654]]
disclosure requirements in Rule 3-16 would be amended and relocated to
proposed Rule 13-02.
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\198\ Similar to the proposed disclosures for issuers and
guarantors of guaranteed securities discussed above, the note to
proposed Rule 13-02(a) would allow the registrant to provide the
disclosures required by this section in a footnote to its
consolidated financial statements or alternatively, in MD&A in its
registration statement covering the offer and sale of the subject
securities and any related prospectus, and in Exchange Act reports
on Form 10-K, Form 20-F, and Form 10-Q required to be filed during
the fiscal year in which the first bona fide sale of the subject
securities is completed. If not otherwise included in the
consolidated financial statements or in MD&A, the registrant would
be required to include the disclosures in its prospectus immediately
following ``Risk Factors,'' if any, or otherwise, immediately
following pricing information described in Item 503(c) of Regulation
S-K. The registrant, however, would be required to provide the
disclosures in a footnote to its consolidated financial statements
in its annual and quarterly reports beginning with its annual report
filed on Form 10-K or Form 20-F for the fiscal year during which the
first bona fide sale of the subject securities is completed. If the
registrant elects to provide the proposed disclosures in its
financial statements, the disclosures would be subject to annual
audit, interim review, internal control over financial reporting,
and XBRL tagging requirements. See Section III.C.2.d, ``Location of
Proposed Alternative Disclosures and Audit Requirement.'' These
proposed amendments would also apply to foreign private issuers and
issuers offering securities pursuant to Regulation A and the forms
applicable to such entities. See Section V.F, ``Application of
Proposed Amendments to Certain Types of Issuers,'' below.
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Additionally, instead of requiring disclosure only when the pledged
securities meet or exceed a numerical threshold relative to the
securities registered or being registered under the existing rule's
``substantial portion'' test, the proposed amendments would require
disclosure unless they are immaterial to holders of the collateralized
security. Further, the proposed changes would require disclosure of any
additional information about the collateral arrangement and each
affiliate whose security is pledged as collateral that would be
material to holders of the collateralized securities. We believe these
proposed disclosures would enable an investor to evaluate the potential
outcomes in the event of foreclosure, would reduce costs and burdens on
registrants, and may facilitate the use of debt structures that include
pledges of affiliate securities, resulting in improved collateral
packages being available to investors. The proposed disclosure
requirements are discussed further below.
Request for Comment
70. Should the proposed amendments to Rule 3-16 be based on the
approach described above? If so, why? If not, what approach should be
used and why?
71. Would the proposed amendments to existing Rule 3-16 result in
an increase in the number of registered debt offerings that include
pledges of affiliate securities as collateral? Why or why not? How
would increasing the number of registered debt offerings that include
pledges of affiliate securities affect investors and issuers?
72. Do issuers structure registered debt offerings to not include
pledges of affiliate securities as collateral because of concerns about
compliance with existing Rule 3-16? If so, what are the specific
concerns? Are issuers choosing to engage in private debt offerings that
include pledges of affiliate securities as collateral?
73. What factors do issuers consider in determining whether to
structure a debt offering to include pledges of affiliate securities as
collateral, and how are they considered?
74. How do investors use the Rule 3-16 Financial Statements? For
example, how do retail investors, institutional investors, or third
parties, such as financial analysts, use the information? How would
these investors use the proposed disclosures specified in proposed Rule
13-02?
75. Would the proposed amendments to existing Rule 3-16 improve the
disclosures provided to investors? If so, how? Are there other changes
to the rule that we should consider that would improve disclosures to
investors? If so, what are they and how would they improve disclosure?
76. Would the proposed amendments to existing Rule 3-16 make the
rule less burdensome and, thereby, encourage issuers to structure debt
offerings to include pledges of affiliate securities as collateral? Are
there other changes to the rule that we should consider that would
reduce compliance burdens for issuers but continue to provide the
material information investors need to make informed investment
decisions?
77. Would the proposed amendments to existing Rule 3-16 result in
issuers omitting disclosures that investors or financial analysts rely
on? If so, which disclosures? Would such a change in the disclosures
have an effect on investor participation in registered debt offerings
that include pledges of affiliate securities as collateral?
78. Are there alternative approaches to disclosures about
affiliates whose securities are pledged as collateral that would
benefit investors? If so, what are they and why? How would investors
use the disclosures under these alternative approaches? How would such
approaches impact issuers?
79. Should the proposed rule permit the registrant to provide the
proposed disclosures outside its financial statements in the proposed
circumstances described? Alternatively, should the registrant be
permitted to provide the proposed disclosures outside its financial
statements in all circumstances? What are the potential benefits or
concerns for investors and issuers with either approach?
80. Would requiring the proposed disclosures to be included in a
footnote to the registrant's audited annual and unaudited interim
financial statements beginning with its annual report filed on Form 10-
K or Form 20-F for the fiscal year during which the first bona fide
sale of the guaranteed securities is completed be useful to investors?
If so, why? If not, why not? What are the potential benefits or
concerns for investors and issuers with either approach?
81. Would requiring the proposed disclosures to be audited or
reviewed present costs or challenges for registrants? If so, what are
they? For example, would it cause delays in the offering process?
82. Should the proposed rule specify where in a filing the
disclosures required by proposed Rule 13-02 must appear if the
registrant chooses not to include them in its financial statements? Why
or why not? If yes, are the locations required by the Note to proposed
Rule 13-02(a) appropriate? If so, why? If not, why not? Where should
these disclosures be located and why is that location appropriate?
83. Would issuers be more likely to voluntarily provide
supplemental information in addition to the required proposed
disclosures to the extent the PSLRA applied to such supplemental
information? Why or why not?
84. Should the note to proposed Rule 13-02(a) apply differently to
emerging growth companies? Why or why not? For example, should there be
different filings or periods of time if the registrant is an emerging
growth company? If so, what should be different and why? How would
investors and issuers be affected?
C. Financial Disclosures
1. Level of Detail
Existing Rule 3-16 requires separate financial statements of each
affiliate whose securities constitute a substantial portion of the
collateral. Commenter recommendations for the type of financial
disclosure that should be provided about such affiliates were varied.
For example, one commenter expressed its support for the existing
requirements,\199\ and another suggested elimination of the existing
rule.\200\ A number of commenters recommended allowing disclosures
other than separate financial statements,\201\ and some specifically
suggested requiring summarized financial information.\202\
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\199\ This commenter supported requiring financial statements as
though the affiliate were a registrant, despite the fact that the
collateral pledge is not considered a separate security. See letter
from CalPERS.
\200\ This commenter stated that it is not aware of a single
Rule 144A offering that has included Rule 3-16 financial statements
that were not otherwise already available. See letter from Davis
Polk.
\201\ See, e.g., letters from BDO, CAQ, Chamber, Covenant, DT,
EY, KPMG, and PwC.
\202\ See, e.g., letters from ABA-Committees, BDO, Chamber, and
EY.
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The affiliates whose securities are pledged as collateral are
almost always
[[Page 49655]]
consolidated subsidiaries of the registrant, and their financial
information is thus already reflected in the registrant's consolidated
financial statements. We therefore believe the required supplemental
financial information about such affiliates should be focused on the
information that is most likely to be material to an investment
decision. As such, proposed Rule 13-02(a)(4) would require Summarized
Financial Information, a widely understood and common set of
requirements, for each such affiliate, which would include select
balance sheet and income statement line items.\203\ Disclosure of
additional line items of financial information beyond what is specified
in proposed Rule 13-02(a)(4) would be required by proposed Rule 13-
02(a)(5) if they are material to an investment decision. For example,
if a material amount of reported revenues of the affiliate(s) are
derived from transactions with related parties, such as other
subsidiaries of the registrant whose securities are not pledged as
collateral, disclosure of such related party revenues would be
required. When used in conjunction with the consolidated financial
statements of the registrant, we believe this supplemental disclosure
of select balance sheet and income statement line items of the
affiliate(s) whose securities are pledged would provide the information
investors need to evaluate the potential outcomes in the event of
foreclosure. We believe this proposed amendment also would
significantly simplify compliance efforts and reduce costs for
preparers.
---------------------------------------------------------------------------
\203\ As with proposed Rule 13-01(a)(4), the Summarized
Financial Information is the information specified in Rule 1-
02(bb)(1) of Regulation S-X.
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One commenter suggested retaining a financial statement requirement
when the affiliate is not a guarantor and is either a non-subsidiary
controlled affiliate of the registrant or a controlling affiliate of
the issuer.\204\ We are not proposing to retain such a requirement
because practice has demonstrated that affiliates whose securities are
pledged as collateral are almost always consolidated subsidiaries of
the registrant. In the rare circumstances where the affiliate is not a
consolidated subsidiary of the registrant, proposed Rule 13-02(a)(5)
would require the registrant to provide any other quantitative or
qualitative information that would be material to making an investment
decision with respect to the collateralized security.\205\ Because the
unconsolidated affiliate's financial information is not included in the
registrant's consolidated financial statements, we would expect
disclosure beyond what is specified in proposed Rule 13-02(a)(1)
through (4) to be provided in these circumstances. In this regard,
separate financial statements of the unconsolidated affiliate may be
necessary if material to an investment decision.\206\
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\204\ See letter from Cahill.
\205\ See Section V.E, ``When Disclosure is Required.''
\206\ See proposed Rule 13-02(a)(5). See also Rule 3-13 of
Regulation S-X.
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Request for Comment
85. Should the proposed rule require Summarized Financial
Information about the affiliates whose securities are pledged as
collateral rather than separate financial statements of each such
affiliate? Why or why not? Would the Summarized Financial Information,
along with the other disclosures required by proposed Rule 13-02,
provide the financial information investors need to make an informed
investment decision with respect to the collateralized security? Should
the proposed rule require a different type of information be provided
about such affiliates? How would investors use this information to
assess the value of affiliate securities pledged as collateral?
86. How would issuers and investors be affected by requiring
Summarized Financial Information? Are there particular items in Rule 3-
16 Financial Statements that investors need to make informed investment
decisions that would not be provided separately through Summarized
Financial Information? Is there any such financial information that
underwriters would still require? If so, what would be the effect on
the costs associated with the offering?
87. An affiliate whose securities are pledged as collateral for a
registrant's securities is almost always a consolidated subsidiary of
the registrant. Should our requirements specifically address the rare
circumstances where the affiliate is not a consolidated subsidiary of a
registrant? If so, what should those requirements be and why? For
example, should we require separate financial statements of such
unconsolidated affiliates?
88. Would additional line items of financial information beyond
what would be required by Summarized Financial Information help
investors make informed investment decisions? If so, what line items
and why? For example, should the proposed rule specifically require
supplemental summarized cash flow information resulting from operating,
financing, and investing activities? Would issuers face challenges in
providing such information?
89. Do investors need summarized cash flow information about
affiliates whose securities are pledged as collateral in addition to
the registrant's consolidated cash flow statements to make informed
investment decisions about collateralized securities? If so, how is it
used? If not, why not?
2. Presentation on a Combined Basis
The existing test used to determine whether the securities of an
affiliate constitute a ``substantial portion'' of the collateral for
securities registered or being registered is required to be performed
for each affiliate whose securities are pledged. The views of
commenters were mixed regarding whether financial disclosures about
affiliates whose securities are pledges should be combined. For
example, one commenter recommended financial disclosures of each
affiliate be required,\207\ another recommended that we permit
financial information to be combined in certain circumstances,\208\ and
another recommended separate or combined presentation.\209\
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\207\ See letter from PwC.
\208\ This commenter recommended that we permit the combining of
the financial information of affiliates whose ownership percentages
are essentially the same. See letter from EY.
\209\ See letter from DT.
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When the securities of more than one affiliate that is consolidated
in the registrant's financial statements are pledged as collateral, we
believe disclosure of the financial information of such affiliates on a
combined basis would provide investors with the material information
they need to assess the value of possible recoveries from the pledged
securities in a more clear and streamlined manner than if individual
sets of financial information were required for each such affiliate. We
note that the existing requirements can result in potentially confusing
disclosure about the extent of collateral. For example, when the
securities of a registrant's subsidiary (``Subsidiary A'') are pledged
as collateral and the securities of an entity consolidated by
Subsidiary A (``Subsidiary B'') are also pledged, separate Rule 3-16
Financial Statements may be required for both Subsidiary A and
Subsidiary B. In such a scenario, Subsidiary B's assets, liabilities,
operations, and cash flows would be included twice (i.e., in the
financial statements of both Subsidiary A and Subsidiary B). We believe
disclosure on a combined basis of all consolidated affiliates whose
securities are pledged would address this
[[Page 49656]]
potential confusion. Furthermore, in the event of default by the
registrant, we would expect an investor to make claims to all of the
affiliate securities that are pledged.
Accordingly, we believe an investor could more effectively and
efficiently assess the value of possible recoveries from the securities
pledged as collateral by evaluating the combined financial information
of the group of consolidated affiliates whose securities are pledged as
opposed to performing this assessment for each such affiliate
individually. As such, our proposed amendments would permit a
registrant to disclose the financial information of such consolidated
affiliates on a combined rather than individual basis. Proposed Rule
13-02(a)(4) would require intercompany transactions between affiliates
presented on a combined basis to be eliminated. Unlike the proposed
amendments to Rule 13-01, because the securities pledged as collateral
are an equity interest in that pledgor affiliate, the financial
information of all subsidiaries that would be consolidated by that
affiliate would be included in the Summarized Financial Information
presented pursuant to proposed Rule 13-02(a)(4), even if the securities
of those subsidiaries are not pledged as collateral.\210\
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\210\ Proposed Rule 13-01 prohibits combining the financial
information of non-issuer and non-guarantor subsidiaries of issuers
and guarantors with that of issuers and guarantors in the Proposed
Alternative Disclosures in order to distinguish the financial
information of entities that are legally obligated to pay from those
that are not. Proposed Rule 13-02 relates to pledged residual equity
interests in affiliates as opposed to guarantees to pay, and as
such, no similar prohibition is necessary.
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We recognize that there may be circumstances where separate
financial information about certain affiliates is material to an
investment decision. Accordingly, when the information provided in
response to proposed Rule 13-02 is applicable to one or more, but not
all, affiliates, proposed Rule 13-02(a)(4) would require, if it is
material, separate disclosure of Summarized Financial Information for
the affiliates to which it is applicable. For example, if securities of
one, but not all, of the affiliates that are pledged as collateral are
subject to a contractual or statutory delay from being transferred to
the holder of the collateralized security in the event of default,
disclosure of these facts and circumstances would be required by
proposed Rule 13-02(a)(2). In that case, proposed Rule 13-02(a)(4)
would require separate disclosure of the Summarized Financial
Information specified in proposed Rule 13-02(a)(4) for that affiliate,
if material.
Generally, a pledge of an affiliate's securities as collateral
includes all of the outstanding ownership interests in that affiliate,
which are held directly or indirectly by the entity issuing the debt
securities. There could be circumstances where either the pledge of
collateral does not include all of the outstanding ownership interests
in the affiliate held by the issuing entity, or certain ownership
interests in the affiliate are held by a third party and therefore
unpledged. In such cases, disclosure of these facts and circumstances
would be required by proposed Rule 13-02(a)(5). If such circumstances
are applicable to one or more, but not all, affiliates, proposed Rule
13-02(a)(4) would require, if it is material, separate disclosure of
Summarized Financial Information for the affiliates to which it is
applicable.
Request for Comment
90. Is separate financial information of each affiliate whose
securities are pledged as collateral material information necessary for
an investor to assess the value of the collateral? If so, why? If not,
why not? How would providing the information of each such affiliate on
a combined basis affect this assessment? Are there specific
circumstances where separate information should be required?
91. Should we permit the financial disclosure of the consolidated
affiliates whose securities are pledged as collateral to be combined
within the proposed Summarized Financial Information? Why or why not?
Alternatively, should combined disclosure of the proposed Summarized
Financial Information only be permitted under certain circumstances? If
so, under which circumstances should it be permitted and why?
3. Periods to Present
Proposed Rule 13-02(a)(4) would require the disclosure of
Summarized Financial Information as of, and for, the most recently
ended fiscal year and interim period included in the registrant's
consolidated financial statements. When used in connection with the
registrant's consolidated financial statements, we believe the most
recent full fiscal year and interim period should provide investors the
information that is material in evaluating possible recoveries from the
pledged securities of affiliate(s) in the event of default. Under the
existing rule, Rule 3-16 Financial Statements are not required in
quarterly reports, such as on Form 10-Q.\211\ One commenter suggested
that interim information may not be meaningful given it is currently
only required in certain registration statements but not in subsequent
Forms 10-Q.\212\ However, we believe that the most recent interim
period should be provided so that investors can make decisions based on
the most recent information available. As such, the disclosures would
be required in quarterly filings, such as Form 10-Q. Because Item 1 of
Part I of Form 10-Q requires a registrant to provide the information
required by Rule 10-01 of Regulation S-X, we are proposing to add Rule
10-01(b)(10) to require compliance with proposed Rule 13-02.
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\211\ See Section III.A.6 of the 2000 Release.
\212\ See letter from DT.
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Request for Comment
92. What periods of presentation of supplemental financial
information about affiliates whose securities are pledged as collateral
are material for investors when evaluating the collateralized security?
93. Should the required periods of supplemental financial
information of affiliates whose securities are pledged as collateral be
based on the most recent financial information? Why or why not? If so,
what periods should be considered ``most recent,'' and why?
94. Should the proposed rule require any additional periods of
Summarized Financial Information beyond the most recent fiscal year and
interim period? Why or why not? If yes, which periods and why?
95. Rather than requiring disclosure of the most recent interim
period, should the proposed rule focus on significant changes similar
to Rule 10-01(a)(5) of Regulation S-X, which allows registrants to
apply judgment and omit details of accounts that have not changed
significantly in amount or composition since the end of the most
recently completed fiscal year? Why or why not?
D. Non-Financial Disclosures
Under the existing rule, a registrant is not required to provide
non-financial disclosures about the affiliates and the collateral
arrangement unless they would be included as part of the Rule 3-16
Financial Statements. Although the Request for Comment asked if there
is different or additional information that investors need about
affiliates whose securities collateralize registered securities, we
received no commentary on non-financial disclosures.
In addition to proposing amendments to the financial information
required about the affiliates whose securities are pledged as
collateral, the proposed rule
[[Page 49657]]
would also require specific non-financial disclosures to be provided.
We are proposing these changes to enhance the material information
provided about the affiliates whose securities are pledged and the
pledged securities, particularly in light of our proposal to require
Summarized Financial Information for these affiliates. Proposed Rules
13-02(a)(1) through (3) would require certain non-financial
disclosures, to the extent material,\213\ about the securities pledged
as collateral, each affiliate whose securities are pledged, the terms
and conditions of the collateral arrangement, and whether a trading
market exists for the pledged securities.
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\213\ See discussion within Section V.E, ``When Disclosure is
Required.''
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We believe the proposed requirements would result in enhanced
narrative disclosures that would improve investor understanding of the
affiliates and the collateral arrangement(s), and make the financial
disclosures they accompany easier to understand. While the proposed
requirements comprise the items we believe are most likely to be
material to an investor, there may be additional facts and
circumstances specific to particular affiliates that would be material
to holders of the collateralized security. In that case, proposed Rule
13-02(a)(5) would require disclosure of those facts and
circumstances.\214\ Additionally, when a non-financial disclosure is
applicable to one or more, but not all, affiliates, proposed Rule 13-
02(a)(4) would require, if it is material, separate disclosure of
Summarized Financial Information for the affiliates to which it is
applicable.\215\
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\214\ See discussion within Section V.E, ``When Disclosure is
Required.''
\215\ See discussion within Section V.C.2, ``Presentation on a
Combined Basis.''
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Request for Comment
96. Are the proposed non-financial disclosures material to an
investment decision? Should we explicitly require any non-financial
disclosures in addition to what is proposed? If so, what information
and why?
E. When Disclosure Is Required
As discussed above,\216\ existing Rule 3-16 requires separate
financial statements for each affiliate whose securities are pledged as
collateral when those securities constitute a ``substantial portion''
of the collateral. If the numerical thresholds specified in the rule
are not met, no disclosure is required. At the same time, if the
numerical thresholds are met, Rule 3-16 Financial Statements may be
required even though the affiliate represents an insignificant portion
of the registrant's consolidated financial statements. Several
commenters recommended revising the existing ``substantial portion''
test by making the denominator the amount of the collateralized
securities originally issued, not the amount outstanding as of the
reassessment date,\217\ or raising the threshold from 20% to 50%.\218\
Another commenter suggested considering whether other indicators of
significance besides ``market value'' \219\ may be appropriate given
the challenges of performing the ``market value'' calculation as part
of determining whether the collateral constitutes a ``substantial
portion.'' \220\
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\216\ See Section IV, ``Rule 3-16 of Regulation S-X.''
\217\ See, e.g., letters from BDO, CAQ, DT, EY, KPMG, and PwC.
Several of these commenters noted that, because the denominator of
the ``substantial portion of the collateral'' test is based on the
outstanding principal balance of the registered debt, the
significance of the tested affiliates will tend to increase as the
principal obligation is reduced.
\218\ See letter from SIFMA. This commenter noted that the
introduction to existing Rule 3-16(a) states that the rule shall
apply to affiliates whose securities constitute a ``substantial''
portion of the collateral and asserted that, in other contexts,
``substantial'' is understood to be well above 20%.
\219\ Rule 3-16(b) of Regulation S-X.
\220\ See letter from DT.
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Instead of revising the existing ``substantial portion'' of
collateral test, we propose to replace this test with one based on
materiality, similar to the framework in proposed Rule 13-01.\221\
Under this approach, investors would be provided with disclosure unless
it is immaterial, whereas under the existing rule, no disclosure would
be provided unless the collateral represented a ``substantial
portion.'' We believe any incremental burden to registrants of being
required to provide the disclosures specified in proposed Rule 13-02 in
instances where the securities pledged as collateral did not meet the
``substantial portion'' numerical threshold under the existing rule is
justified by the benefit of investors receiving the disclosures
specified in proposed Rule 13-02 and the reduced costs to registrants
of providing such proposed disclosures as compared to the existing Rule
3-16 Financial Statements.
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\221\ Whether a disclosure specified in proposed Rule 13-02 may
be omitted or whether additional disclosure would be required by
proposed Rule 13-02(a)(5), as discussed below, depends on whether it
would be material to a reasonable investor. See Section III.C.2.i,
``Level of Detail,'' above.
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Proposed Rule 13-02(a) would require the disclosures specified in
proposed Rule 13-02(a)(1) through (4) to the extent material to holders
of the collateralized security. For example, under the proposed rule,
if the Summarized Financial Information of the combined affiliates
required by proposed Rule 13-02(a)(4) is not materially different from
corresponding amounts in the registrant's consolidated financial
statements, the information could be omitted. As another example, if
the securities of an affiliate pledged as collateral do not represent a
material amount of collateral to an investor, the investor would likely
not require detailed disclosures about that affiliate or the collateral
arrangement because the collateral provides little, if any, credit
support, and therefore such information could be omitted. While the
disclosures specified in proposed Rule 13-02(a)(1) through (4) may be
omitted if not material to holders of the collateralized security, for
clarity, proposed Rule 13-02(a)(4) requires the registrant to disclose
a statement that those financial disclosures have been omitted and the
reasons why the disclosures are not material.
Conversely, there may be additional information about the
collateral arrangement and affiliates beyond the financial disclosures
specified in proposed Rule 13-02(a)(4) or the non-financial disclosures
specified in proposed Rules 13-02(a)(1) through (3) that would be
material to holders of the collateralized security. Accordingly,
proposed Rule 13-02(a)(5) would require disclosure of any quantitative
or qualitative information that would be material to making an
investment decision with respect to the collateralized security. For
example, additional financial information beyond what is required by
Summarized Financial Information would be required if that information
is material to an investor that holds the collateralized security.
Request for Comment
97. Should we eliminate the existing ``substantial portion'' test
for determining whether disclosure is necessary and instead use a
materiality standard to determine the appropriate level of disclosure?
Would this cause difficulty in practice? If so, what are those
difficulties and how can they be avoided? Would further guidance be
necessary? If so, please explain what guidance is needed. Would the
elimination of the ``substantial portion'' test and use of a
materiality standard result in a loss of information that investors
currently use to analyze these securities? If so, what information
would be lost and would it be material for an investor's understanding
or an investment decision?
[[Page 49658]]
98. Should the proposed rule also permit the financial disclosures
specified in proposed Rule 13-02(a)(4) to be omitted if the amount of
collateral pledged does not exceed a specified level of significance?
Why or why not? If so, how should significance be determined, and what
should the level of significance be?
99. Should any additional disclosures be specifically required if
default on the collateralized security reaches a certain level of
likelihood? If so, what type of disclosure and when should it be
provided?
100. Are the proposed rules sufficiently clear about what
disclosures should be provided and when? If not, how should the rules
be revised to ensure clarity?
F. Application of Proposed Amendments to Certain Types of Issuers
Rule 3-16's requirements apply to several categories of issuers,
including foreign private issuers, SRCs, and issuers offering
securities pursuant to Regulation A. The proposed amendments would also
apply to these types of issuers, because, for the reasons discussed
above, we believe investors would benefit from the simplified and
improved disclosures that would result from the proposed amendments and
the cost of providing the disclosures would be reduced for these types
of issuers.
Request for Comment
101. Should the proposed changes to Rule 3-16 also apply to these
types of issuers? If so, why? If not, why not? Do investors in
securities that include pledges of affiliate securities as collateral
issued by these types of issuers require additional, different, or less
information to make informed investment decisions than would be
required by the proposed rule? If so, what information and why?
102. How frequently do these types of issuers issue securities that
include pledges of affiliate securities as collateral? Is there a
reason to believe they may offer them more often under the proposed
rules? Why or why not?
103. Are other conforming changes to the proposed rules necessary
for them to apply to these types of issuers? If so, what changes are
necessary and why?
104. Should the proposed amendment that would permit the registrant
to provide the proposed disclosures outside the footnotes to its
audited annual and unaudited interim consolidated financial statements
in its registration statement covering the offer and sale of the
collateralized securities and any related prospectus, and in Exchange
Act annual and quarterly reports required to be filed during the fiscal
year in which the first bona fide sale of the subject securities is
completed apply differently to these types of issuers? Why or why not?
For example, are there different filings or periods of time that the
registrant should be permitted to provide the proposed disclosures
outside of its financial statements for these types of issuers? As
another example, should the proposed rule prescribe different locations
outside the financial statements where the proposed disclosures should
be provided for these types of issuers? In each case, what are they and
why? How would investors and issuers be affected?
1. Foreign Private Issuers
Foreign private issuers are required to comply with existing Rule
3-16, and would continue to be required to comply with the disclosures
specified in proposed Rule 13-02. Instruction 1 to Item 8 of Form 20-F
would be amended to specifically require compliance with proposed Rule
13-02.
2. Smaller Reporting Companies
Note 4 to Rule 8-01 of Regulation S-X requires financial statements
to be presented as required by Rule 3-16 for an SRC's affiliate whose
securities constitute a substantial portion of the collateral for
securities registered or being registered, except that the periods
presented are those required by Rule 8-02 of Regulation S-X. As we are
proposing to eliminate Rule 3-16 and require the disclosures specified
in proposed Rule 13-02, SRCs would be required to comply with proposed
Rule 13-02. A corresponding change to Note 4 to Rule 8-01 is therefore
being proposed. Additionally, as proposed Rule 13-02(a)(4) specifies
the periods of Summarized Financial Information that would be required
to be presented, no reference in Note 4 to Rule 8-01 to the periods
required by Rule 8-02 of Regulation S-X is necessary and would be
removed. Lastly, because Item 1 of Part I of Form 10-Q permits a SRC to
provide the information required by Rule 8-03 of Regulation S-X if it
does not provide the information required by Rule 10-01, we are
proposing to add Rule 8-03(b)(8) to require compliance with proposed
Rule 13-02.
3. Offerings Pursuant to Regulation A
In connection with offerings made pursuant to Regulation A, Forms
1-A and 1-K direct a Regulation A Issuer to comply with Rule 3-16 for
the same periods as the Regulation A Issuer's financial statements and
specifies the applicable audit requirements. Accordingly, we propose to
replace the existing requirement in the forms that Regulation A Issuers
comply with Rule 3-16 with a requirement to provide the disclosures
specified in proposed Rule 13-02 and specify the location of the
disclosures, similar to the proposed note to Rule 13-02(a) but
consistent with the requirements of Regulation A.\222\ Additionally,
consistent with the discussion above about requiring registrants to
comply with proposed Rule 13-02 in filings made on Form 10-Q, a
requirement to comply with proposed Rule 13-02 would be added to Form
1-SA.
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\222\ If a Regulation A Issuer elects to provide the proposed
disclosures in its audited financial statements, such disclosures
would be required to be audited.
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VI. General Request for Comment
We request and encourage any interested person to submit comments
on any aspect of the proposal, other matters that might have an impact
on the amendments and any suggestions for additional changes. Comments
are of greatest assistance to our rulemaking initiative if accompanied
by supporting data and analysis, particularly quantitative information
as to the costs and benefits, and by alternatives to the proposals
where appropriate. Where alternatives to the proposals are suggested,
please include information as to the costs and benefits of those
alternatives.
VII. Economic Analysis
A. Introduction
As discussed above, we are proposing amendments to the financial
disclosure requirements in Rules 3-10 and 3-16 of Regulation S-X to
improve those requirements for both investors and registrants. These
proposed amendments may result in simplified disclosures that highlight
information that is material to investment decisions. They may also
serve to reduce existing regulatory burdens that otherwise inhibit
registrants from engaging in registered debt offerings that are backed
by guarantees or collateral and may unnecessarily restrict the set of
investment opportunities available to some investors. The discussion
below addresses the potential economic effects of the proposed
amendments, including the likely benefits and costs, as well as the
likely effects on efficiency, competition, and capital formation,
measured against a baseline that includes both current regulatory
requirements and current market practices. We also discuss the
potential economic effects of certain alternatives
[[Page 49659]]
to the proposed amendments. Throughout this analysis, we draw on
academic studies and incorporate public comments, where appropriate.
We are mindful of the costs and benefits of our rules. Section 2(b)
of the Securities Act, Section 3(f) of the Exchange Act, Section 2(c)
of the Investment Company Act, and Section 202(c) of the Investment
Advisers Act require us, when engaging in rulemaking that requires us
to consider or determine whether an action is necessary or appropriate
in (or, with respect to the Investment Company Act, consistent with)
the public interest, to consider, in addition to the protection of
investors, whether the action will promote efficiency, competition, and
capital formation.\223\ Additionally, Exchange Act Section 23(a)(2)
requires us, when adopting rules under the Exchange Act, to consider,
among other things, the impact that any new rule would have on
competition and not to adopt any rule that would impose a burden on
competition that is not necessary or appropriate in furtherance of the
Exchange Act.\224\
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\223\ 15 U.S.C. 77b(b), 78c(f), 80a-2(c), and 80b-2(c).
\224\ 15 U.S.C. 78w(a)(2).
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B. Baseline and Affected Parties
The existing regulatory requirements of Rules 3-10 and 3-16 under
Regulation S-X have been described above \225\ and have prompted
registrants to adopt disclosure practices and business practices
specifically designed to comply with or avoid these requirements. We
analyze the economic effects of the proposed amendments by assessing
their impact on affected parties as compared to the current state of
the disclosure regime, including both existing disclosure requirements
and available exemptions, where applicable. The parties that are likely
to be affected by the proposed amendments include issuers and
guarantors of guaranteed debt securities, issuers of debt securities
collateralized by securities of issuers' affiliate(s), and investors in
each of these types of securities.\226\
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\225\ See Section II for Rule 3-10 and Section IV for Rule 3-16.
\226\ While the proposed amendments would apply to registered
investment companies, and could thereby affect registered investment
advisers, based on staff experience, we believe registered
investment companies are unlikely to engage in the activities
addressed by the proposed amendments. Accordingly, we also we
believe the proposed amendments are unlikely to affect registered
investment advisers.
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1. Market Participants
The first main group of market participants affected by the
proposed amendments consists of issuers and guarantors of guaranteed
debt securities and issuers of debt securities collateralized by
securities of the issuer's affiliates. These issuers would be affected
because the disclosure called for by the proposed amendments would
differ from the content and format of financial information currently
required to be presented in registered debt offerings and in certain
ongoing reporting. The proposed amendments may also alter the capital
raising decisions of potential issuers.
The second group of market participants affected by the proposed
amendments consists of investors in these securities. These investors
can be divided into three main categories: (1) QIBs; \227\ (2)
institutional investors (other than QIBs); and (3) non-institutional
(retail) investors. In addition to the change in content and location
of the disclosed information presented to them, which is discussed
below in Section VII.C.1.b, the impact on these investors would also
depend on whether there is a change in the number of registered debt
offerings by new issuers, issuers that previously offered debt
securities under Rule 144A, or both, as a result of the proposed
amendments. Currently, there are four approaches that issuers often use
when issuing guaranteed or collateralized debt securities. First,
issuers may offer registered guaranteed and/or collateralized debt
securities and provide the required disclosures under existing Rules 3-
10 and 3-16. Second, issuers may opt to privately offer the debt
securities with guarantees or pledges of affiliate securities as
collateral under Rule 144A with registration rights. This may allow
issuers to access the capital markets more quickly than if they had to
comply with existing requirements at initial issuance. Issuers do,
however, have to provide the disclosures required by existing Rules 3-
10 and 3-16 when the privately issued notes are exchanged for
registered notes. Third, issuers may opt to privately offer securities
under Rule 144A without registration rights. Under this approach,
issuers do not have to provide disclosures required by existing Rules
3-10 and 3-16, but issuers and investors are not afforded the benefits
of registration. Fourth, issuers may structure a registered offering to
not include guarantees or pledges of affiliated securities as
collateral. Here, while issuers would not have to provide disclosures
required by existing Rules 3-10 and 3-16, they may incur a higher cost
of capital than if they had structured their debt agreements with these
credit enhancements.
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\227\ 17 CFR 230.144A(a)(1).
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Only QIBs can participate in Rule 144A offerings; retail and
institutional investors are unable to participate in such offerings.
Furthermore, collateralized debt offerings are often structured to
avoid or limit Rule 3-16 disclosures by reducing the amount of
collateral investors might receive in the event of default, resulting
in reduced collateral packages. Overall, investors may experience both
a change in the number of investment opportunities available, as well
as a change in the information presented to them in registered
offerings.
2. Market Conditions
To provide context for debt securities offerings likely to be
impacted by this proposal, Table 1 provides estimates of the number and
dollar amount of all registered debt offerings and Rule 144A debt
offerings per year since 2013.\228\ The dollar volume of registered
debt and Rule 144A offerings appears to have increased in recent years,
which may be a result of improving macroeconomic conditions and a low
interest rate environment.\229\
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\228\ These estimates are based on staff analysis of data from
the Mergent database. Data specific to offerings of guaranteed
securities and offerings of securities collateralized by the
securities of an issuer's affiliate(s) is unavailable. We begin our
sample in the post-financial crisis timeframe in order to exclude
capital raising concerns, liquidity shocks, and other constraints
that are exogenous to our baseline analysis.
For perspective, the amount of funding obtained through the
registered debt market on an annual basis is much larger than that
obtained through the registered equity market. See Access to Capital
and Market Liquidity Report.
\229\ See id.
[[Page 49660]]
Table 1--Registered Debt and Rule 144A Debt Offerings From 2013-2017
----------------------------------------------------------------------------------------------------------------
Registered debt Rule 144A
---------------------------------------------------------------
Year Number of
offerings $ Amount Number of $ Amount
\230\ (bil) offerings (bil)
----------------------------------------------------------------------------------------------------------------
2013............................................ 1,509 1,052 969 512
2014............................................ 1,597 1,113 920 530
2015............................................ 1,560 1,206 808 575
2016............................................ 1,639 1,329 785 526
2017............................................ 1,853 1,298 995 657
----------------------------------------------------------------------------------------------------------------
Source: DERA staff analysis.
Studies looking at registered debt offerings and debt offerings
made under Rule 144A find that the two offerings have distinct
characteristics. Issuers offering debt securities under Rule 144A have,
on average, lower credit quality and higher information asymmetry than
registered debt offerings,\231\ conditions that may increase the
likelihood that investors require guarantees and collateral relative to
investment grade issuers who may not need such credit enhancements.
This is consistent with studies that have found the cost of capital
associated with debt offerings made under Rule 144A to be higher than
the cost of capital in registered debt offerings.\232\ According to
these studies, there are two main benefits of Rule 144A offerings: (1)
The speed of issuance, given the absence of a registration requirement;
and (2) relative high liquidity, given the possibility to exchange the
securities for registered securities.\233\
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\230\ Number of offerings does not include registered exchanges
of debt securities previously issued privately with registration
rights.
\231\ See, e.g., Matteo P. Arena, The Corporate Choice Between
Public Debt, Bank Loans, Traditional Private Debt Placements, and
144A Debt Issues, 36 Rev. of Quantitative Fin. & Acct. 391 (2011).
\232\ See George W. Fenn, Speed of Issuance and the Adequacy of
Disclosure in the 144A High-Yield Debt Market, 56 J. of Fin. Econ.
383 (2000); Miles Livingston & Lei Zhou, The Impact of Rule 144A
Debt Offerings Upon Bond Yields and Underwriter Fees, 31 Fin. Mgmt.
5 (2002); Susan Chaplinsky & Latha Ramchand, The Impact of SEC Rule
144A on Corporate Debt Issuance by International Firms, 77 J. of
Bus. 1073 (2004); Usha R. Mittoo & Zhou Zhang, The Evolving World of
Rule 144A Market: A Cross-Country Analysis (2010) (unpublished
working paper) (University of Manitoba, Winnipeg MD). The studies of
Fenn (2000) and Chaplinsky and Ramchand (2004) find the yield
premium decreased over time, whereas the study of Livingston and
Zhou (2002) and unpublished working paper of Mittoo and Zhang (2011)
do not observe that trend. Mittoo and Zhang (2011), however, find
that the yield premium increased after the Sarbanes-Oxley Act was
enacted.
\233\ See, e.g., Fenn, note 232 above.
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As discussed above,\234\ Rule 3-10 requires that every issuer of a
registered security that is guaranteed and every guarantor of a
registered security file the financial statements required for a
registrant by Regulation S-X, except under certain circumstances when
Alternative Disclosures are permitted. There are two forms of
Alternative Disclosures prescribed by the rule: (1) Consolidating
Information; and (2) a brief narrative. Consolidating Information is
the most common type of alternative disclosure under Rule 3-10. Table 2
presents data on the number of unique registrants and filings that
included Consolidating Information under Rule 3-10 for the period 2013-
2017; \235\ the data is consistent with estimates provided by one
commenter.\236\
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\234\ See Section II.A, ``Background.''
\235\ To identify these disclosures, we searched all Forms 10-K,
10-Q, 20-F, 40-F, S-1, S-4, and F-4 and their amendments using XBRL
tags most commonly associated with Consolidating Information. The
amounts in the table represent the number of annual, quarterly, and
periodic filings including amendments that are unique for the
covered period in each calendar year from 2013-2017.
\236\ See letter from EY. The commenter identified 494
registrants that provided Consolidating Information by searching for
keywords on Form 10-K filings only. If we limit our search to Form
10-K filings in 2013, we reach a similar number, which we believe
provides validity to our methodology.
Table 2--Estimated Number of Unique Registrants and Filings Including Consolidating Information Under Rule 3-10
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of Number of
Year unique total 10-K 10-Q 20-F 40-F S-1 S-4 F-4
registrants filings
--------------------------------------------------------------------------------------------------------------------------------------------------------
2013............................... 533 1,834 431 1,339 12 0 15 34 3
2014............................... 530 1,861 461 1,360 10 0 9 21 0
2015............................... 500 1,750 437 1,288 9 0 5 11 0
2016............................... 469 1,641 417 1,199 8 0 1 16 0
2017............................... 403 1,430 369 1,043 5 1 1 11 0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: DERA staff analysis of Edgar Filings.
The second and less common form of Alternative Disclosures under
existing Rule 3-10 is a brief narrative. While we believe the number of
filings including the brief narrative form of Alternative Disclosure is
smaller than the number of filings using Consolidating
Information,\237\ we are unable to determine that number due to
methodological and data extraction challenges.\238\
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\237\ As described in Section II.F, ``Exceptions,'' the brief
narrative form of Alternative Disclosures is available for three
situations. One of these situations is when a parent company uses a
finance subsidiary to issue securities that the parent company
guarantees, which in our experience is limited and generally for
convenience purposes. As several commenters noted, the other
situations permitting the brief narrative form of Alternative
Disclosures require additional restrictive conditions to be met,
which greatly limit the circumstances in which they can be used.
See, e.g., letters from ABA-Committees, AB-NYC, CAQ, DT, EY, FedEx,
KPMG, and PwC. Based on our experience, we believe there are fewer
instances of the brief narrative form of Alternative Disclosures
than Consolidating Information.
\238\ These narrative disclosures are typically no more than a
paragraph in length and vary in content based on the three scenarios
under which the brief narrative can be provided. We conducted text
searches of EDGAR filings in an attempt to accurately identify
issuers providing narrative disclosure under Rule 3-10. However,
given the variation in phrasing in these paragraphs, the search did
not produce meaningful results.
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[[Page 49661]]
As discussed above,\239\ under existing Rule 3-16, a registrant is
required to provide Rule 3-16 Financial Statements for each affiliate
whose securities, which are pledged as collateral, constitute a
substantial portion of the collateral for any class of securities
registered or being registered. Table 3 presents data on the number of
filings and unique registrants that included Rule 3-16 Financial
Statements since 2013. The number of registrants remained steady over
this period. Due to the manual process by which we attained these
estimates, there are likely more registrants providing Rule 3-16
Financial Statements than are reflected here.\240\ However, based on
the comments we received, we do not expect the number to be
significantly larger.\241\
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\239\ See Section IV, ``Rule 3-16 of Regulation S-X.''
\240\ There are no XBRL tags specific to Rule 3-16. To identify
these disclosures, we searched all Forms 10-K, 10-Q, 20-F, 40-F, S-
1, S-3, S-4, S-11, F-1, F-3, F-4, 10, 1-A, 1-K, and 1-SA and their
amendments using a text search on the word combination ``Rule 3-
16.'' We applied different text search combinations and found that
using ``Rule 3-16'' offered the most accurate search results. Even
so, we received hundreds of false hit returns. These were mainly
registrants mentioning ``Rule 3-16'' as part of a description of
collateral release provisions. That is, if Rule 3-16 were triggered,
the debt agreement would release the collateral that triggered Rule
3-16. This is consistent with one commenter who noted that issuers
use such release provisions to avoid compliance with Rule 3-16. See
letter from PwC. We manually sifted through these false returns to
identify the positive results listed in Table 3.
\241\ One commenter noted that Rule 3-16 application is rarely
seen in practice, see letter from BDO, while another commenter noted
that many deals are intentionally structured to avoid Rule 3-16 by
using Rule 144A and not providing registration rights. See letter
from Covenant.
Table 3--Estimated Number of Unique Registrants and Filings Including Rule 3-16 Financial Statements
----------------------------------------------------------------------------------------------------------------
Number of
Year unique Number of 10-K 20-F
registrants total filings
----------------------------------------------------------------------------------------------------------------
2013............................................ 7 7 6 1
2014............................................ 7 7 6 1
2015............................................ 7 7 6 1
2016............................................ 7 7 6 1
2017............................................ 7 7 6 1
----------------------------------------------------------------------------------------------------------------
Source: DERA staff analysis of EDGAR filings.
Request for Comment
105. Are there reliable sources of information or robust means of
estimating the proportion of Rule 144A offerings that do not include
registration rights versus those that do include registration rights?
If so, please describe these sources and methods.
106. What is the current level of participation of non-QIB and
retail investors in registered offerings of corporate debt? Are there
reliable sources of information or robust means of estimating the
proportion of registered versus unregistered debt offerings held by
different investor types such as QIBs and non-QIBs? If so, please
describe these sources and methods.
107. How do investors and other market participants currently use
the information required to be disclosed by Rules 3-10 and 3-16? Are
these disclosures generally consumed directly by investors? Is
information derived from these disclosures made available to investors
by financial analysts or other third party service providers?
C. Anticipated Economic Effects
In this section we discuss the anticipated economic benefits and
costs of the proposed amendments to Rules 3-10 and 3-16.
1. Proposed Amendments to Rule 3-10 and Partial Relocation to Rule 13-
01
We received a number of comments indicating that the existing
requirements often lead registered debt agreements to be structured in
such a way as to avoid compliance with Rule 3-10,\242\ thereby
depriving certain investors of the opportunity to invest in guaranteed
securities. Similarly, others noted that issuers who have not
previously issued guaranteed debt securities often are deterred by the
associated compliance costs and prefer instead to issue securities
privately through Rule 144A.\243\ In light of these comments, we expect
the proposed amendments to benefit issuers and investors. For example,
as a result of the overall reduced burdens associated with the proposed
amendments, investors may benefit from access to more registered
offerings that are structured to include guarantees and, accordingly,
the additional protections that come with Section 11 liability for
disclosures made in those offerings. Also, an increase in the overall
use of guarantees could reduce structural subordination issues that
arise. Typically, all of a parent company's subsidiaries support the
parent company's debt-paying ability. However, in the event of default,
the holders of debt without the benefit of guarantees are comparatively
disadvantaged. In the event of default, a holder of a guaranteed debt
security issued by a parent company can make claims for payment
directly against the issuer and its subsidiary guarantors. The assets
of non-guarantor subsidiaries typically would be accessible by the
debtholder only indirectly through a bankruptcy proceeding. In such a
proceeding, absent a guarantee, the claims of the debtholder would be
structurally subordinate to the claims of other creditors, including
trade creditors of the non-guarantor subsidiaries. The less burdensome
disclosures under the proposed amendments may lead to greater use of
guarantees to address these structural subordination issues, which
could result in more efficient risk sharing within corporate groups and
potentially a lower cost of capital for registrants.
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\242\ See, e.g., letters from CAQ and KPMG.
\243\ See, e.g., letter from Cahill.
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Furthermore, the less burdensome disclosures may lead issuers to
register the initial offerings of guaranteed securities rather than
opting to issue them under Rule 144A with registration rights. Issuers
may be able to comply with the proposed rule and access the capital
markets more quickly than under the existing Rule 3-10 requirements.
These issuers would not incur costs associated with exchanging the
privately issued debt securities for registered guaranteed debt
securities.
a. Eligibility Conditions To Omit Financial Statements of Subsidiary
Issuer or Guarantor
As detailed in Section III.C.1.b, ``Consolidated Subsidiary,'' we
propose to replace one of the conditions that must be met to be
eligible to omit the separate financial statements of a subsidiary
issuer or guarantor--that the
[[Page 49662]]
subsidiary issuer or guarantor be 100% owned by the parent company--
with a condition that the subsidiary issuer or guarantor be
consolidated in the parent company's consolidated financial statements.
This proposed change would permit the parent company to omit the
separate financial statements of a consolidated subsidiary issuer or
guarantor even if third parties hold non-controlling ownership
interests in that subsidiary issuer or guarantor. However, the proposed
rule would require, to the extent material, a description of any
factors that may affect payments to holders of the guaranteed security,
such as the rights of a non-controlling interest holder.
In addition to the proposed change from 100% owned to
consolidation, we are proposing changes to simplify the Rule's
eligibility conditions. Namely, as discussed in Section III.C.1.d,
``Eligible Issuer and Guarantor Structures Condition,'' the proposed
amendments would replace the five specific issuer and guarantor
structures currently eligible under the existing rule with a broader
two-category framework. Under these changes, separate financial
statements of consolidated subsidiary guarantors may be omitted for
each issuer and guarantor structure that is eligible. Additionally,
unlike the existing rule, the nature of the subsidiary guarantees,
including whether the guarantee is full and unconditional or joint and
several, would no longer impact the eligibility to omit separate
subsidiary financial statements and instead would only impact the
extent of disclosure in the Proposed Alternative Disclosures.
Overall, these proposed amendments would permit a broader scope of
issuers and guarantors to be eligible to provide the Proposed
Alternative Disclosures in lieu of separate financial statements of
each subsidiary issuer and guarantor than under existing Rule 3-10.
This, in turn, would reduce the compliance costs associated with
preparation of disclosures for these registered debt offerings and
ongoing periodic reporting.\244\ To the extent there are more issuers
and guarantors that are eligible to provide the less burdensome
Proposed Alternative Disclosures in lieu of separate financial
statements of each subsidiary issuer and guarantor under proposed Rule
3-10, these entities may be more likely to register their debt
offerings, either at the outset or through an exempt offering with
registration rights. As a result, some issuers may realize a lower cost
of capital. Such an outcome would be consistent with previous studies
that have found the cost of capital associated with registered debt
offerings to be lower than that of private offerings made under Rule
144A,\245\ although other issuer characteristics indicative of
creditworthiness would remain relevant with respect to the cost of
capital, regardless of offering method. Additionally, subsidiary
issuers and guarantors that are currently required to file separate
financial statements because they do not meet existing Rule 3-10's
eligibility criteria would have reduced compliance costs to the extent
they meet the revised eligibility criteria under proposed Rule 3-10 and
the Proposed Alternative Disclosures are provided in lieu of their
separate financial statements.
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\244\ Commenters highlighted the significant time and cost
associated with preparing the Alternative Disclosures. See, e.g.,
letters from Cahill, FedEx, and Noble-UK. Noble-UK estimated that
compliance with Rule 3-10 requires the equivalent of approximately
two full time employees across its organization. FedEx estimated
that compliance requires approximately 280 hours per year. Based on
this commenter's estimate of compliance hours, estimated compliance
costs under the existing rule amount to $97,000 per year (calculated
as 280 hours x Compliance Attorney at $348 per hour = $97,440 per
year). The per hour figure for a Compliance Attorney is taken from
SIFMA's 2013 Management & Professional Earnings in the Securities
Industry, modified by Commission staff to account for an 1800-hour
work-year and multiplied by 5.35 to account for bonuses, firm size,
employee benefits and overhead and adjusted for inflation. See Sec.
Indus. and Fin. Mkts. Ass'n (SIFMA), Management & Professional
Earnings in the Securities Industry (2013), https://www.sifma.org/resources/research/management-and-professional-earnings-in-the-securities-industry-2013. For purposes of the Paperwork Reduction
Act of 1995 (``PRA''), 44 U.S.C. 3501 et seq., we estimate that the
proposed amendments to Rule 3-10 would result in an overall
reduction of 30 burden hours for each form affected by the proposed
amendments. See Section VIII.B.1, ``Rule 3-10,'' below.
\245\ See discussion and references within Section VII.B.2,
``Market Conditions.''
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Certain investors could also benefit from the proposed amendments
to the eligibility conditions. If issuers opt to register debt
offerings, rather than structure them as private offerings using Rule
144A, then new investors--namely, non-QIB institutional investors and
retail investors who cannot participate in Rule 144A offerings--would
be eligible to participate in the offerings. To the extent that the
proposed amendments to the eligibility conditions encourage additional
registered debt offerings, more investment opportunities would be made
available, and a resulting increase in market participation would
improve the overall competitiveness and efficiency of the capital
markets. Furthermore, these debt offerings would benefit investors by
extending to them the protections associated with registration.
We expect little, if any, adverse effect on issuers and guarantors
of guaranteed debt securities from these proposed amendments. We also
believe the adverse effects on investors, if any, are likely to be
limited. Under the existing rule, investors receive separate financial
statements of subsidiary issuers and guarantors if these entities are
not 100% owned by the parent company. If these subsidiaries are
consolidated in the parent company's financial statements and all other
conditions of proposed Rule 3-10 are met, investors may no longer
receive the separate financial statements of these subsidiary issuers
and guarantors. In such cases, although investors would not receive the
detailed information about each such subsidiary issuer or guarantor
included in the separate financial statements, a parent company would
be required to provide, to the extent material, financial and non-
financial information for consolidated subsidiary issuers and
guarantors with non-controlling interests, as well as a description of
any factors associated with non-controlling interest holders that may
affect payments to holders of the guaranteed security. Where all
eligibility conditions of the proposed rule are met, we believe the
Proposed Alternative Disclosures would provide the information
investors need to make informed investment decisions with respect to a
guaranteed security.
Several commenters supported modifying the 100% owned condition in
the existing rule for reasons consistent with the analysis above.\246\
One commenter recommended we eliminate this condition and instead
require separate disclosure of subsidiaries providing lesser
guarantees,\247\ whereas another commenter stated that the existing
requirement should remain unchanged.\248\
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\246\ See, e.g., letters from ABA-Committees, AB-NYC, Chamber,
EY, SIFMA, and PwC.
\247\ See letter from SIFMA.
\248\ See letter from CalPERS.
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b. Disclosure Requirements
As detailed in Section III.C.2, ``Disclosure Requirements,'' one of
the conditions in the existing rule for omitting separate financial
statements of a subsidiary issuer or guarantor is providing the
Alternative Disclosures in the footnotes to the parent company's
consolidated financial statements. The proposed rule would retain the
requirement to provide the Alternative Disclosures, but with
modifications. We address below the proposed amendments related to the
Alternative
[[Page 49663]]
Disclosures (the Proposed Alternative Disclosures).
i. Financial and Non-Financial Disclosures
As described in Section III.C.2.a, ``Financial Disclosures,'' we
propose to simplify the financial disclosures required by current Rule
3-10 by replacing Consolidating Information with a requirement to
provide Summarized Financial Information. The level of detail currently
required in Consolidating Information often contributes to multiple
pages of detail in the parent company's financial statements. The
proposed Summarized Financial Information would focus on the
information that is most likely to be material to an investment
decision. If additional line items, beyond what is required in the
Summarized Financial Information are material, they would be required
to be disclosed.
The proposed amendments should simplify the disclosures and reduce
the cost of compliance and could engender further benefits. For
example, academic literature finds that simplified financial statements
are associated with more efficient price discovery,\249\ and that
investors underreact more to firms with less readable financial
disclosures.\250\ More generally, we believe the proposed amendments
would provide investors with streamlined and easier to understand
financial information that we believe is material to an investment
decision. Thus, to the extent that the proposed amendments have their
intended effect, reducing complexity while maintaining the material
completeness of financial disclosures, we anticipate that the financial
disclosures that result from the proposed amendments would improve
price discovery, enhance the allocative efficiency of markets, and
facilitate capital formation.
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\249\ See Brian P. Miller, The Effects of Reporting Complexity
on Small and Large Investor Trading, 85 Acct. Rev. 2107 (2010).
\250\ See Haifeng You & Xiao-jun Zhang, Financial Reporting
Complexity and Investor Underreaction to 10-K Information, 14 Rev.
of Acct. Stud. 559 (2009); Alastair Lawrence, Individual Investors
and Financial Disclosure, 56 J. of Acct. & Econ. 130 (2013).
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We are also proposing that a parent company be permitted to provide
financial disclosures about the Obligor Group on a combined basis
rather than on a disaggregated basis. Additionally, if non-financial
disclosure provided in response to proposed Rule 13-01 were applicable
to one or more, but not all, guarantors, such as where a subsidiary's
guarantee is limited to a particular dollar amount, separate disclosure
of Summarized Financial Information for one or more issuers and
guarantors would be required, to the extent material.
To the extent that investors are indifferent about whether payment
under the guaranteed security comes from the issuer or one or more
guarantors in the same consolidated group, or both, the disclosure
resulting from the proposed amendments would not adversely impact
investment decisions and could offer investors more readable,
streamlined financial information. To the extent that increased
readability without loss of material information would facilitate
investor evaluation of whether the entities in the Obligor Group have
the ability to make payments as required under the guaranteed security,
the proposed amendments would promote the efficiency of security prices
and investor portfolios. Consistent with potential benefits from these
changes, a growing body of academic literature finds that financial
statement readability affects the information environment and that more
readable statements are associated with lower cost of debt capital and
reduced bond rating agency disagreement.\251\
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\251\ See Samuel B. Bonsall & Brian P. Miller, The Impact of
Narrative Disclosure Readability on Bond Ratings and the Cost of
Debt, 22 Rev. of Acct. Stud. 608 (2017).
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The proposed rule also requires that Summarized Financial
Information be provided only for the most recently completed fiscal
year and year-to-date interim period, if applicable, included in the
parent company's consolidated financial statements, rather than for the
additional periods specified under existing Rules 3-01 and 3-02 of
Regulation S-X. This is intended to preserve information that is
material to an investment decision while reducing compliance costs for
registrants. This proposed change is consistent with commenter views.
The commenters that discussed the number of annual periods for
disclosure recommended limiting disclosure to the current year, citing
challenges recasting prior period information for circumstances such as
legal entity mergers and discontinued operations. Others cited
significant costs to issuers from requiring additional periods.\252\
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\252\ See, e.g., letters form BDO, Headwaters, Medtronic, and
PwC. Headwaters noted that Alternative Disclosure composed
approximately 15% of the entire financial disclosure in its most
recent Form 10-K and approximately 28% of the entire financial
disclosure in its most recent Form 10-Q. Medtronic indicated that it
has one staff person on its external reporting team that spends over
80% of his or her time preparing Rule 3-10 related information in
support of quarterly filings.
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In addition, we are proposing to require non-financial disclosures
to supplement the proposed financial disclosures with additional
information that may be material to an investment decision. This would
include material information about how payments to holders of
guaranteed securities may be affected by such things as the issuer and
guarantor structure, the terms and conditions of the guarantees, the
impact of non-controlling ownership interests, or other factors
specific to the offering. These proposed amendments should enhance the
information provided to investors about the investment without imposing
significant burdens on registrants. Overall, this should lead to
greater transparency and reduce information asymmetries between issuers
and investors.
Despite being unable to estimate the number of filings that provide
brief narrative disclosures under the existing Alternative Disclosure,
we do not expect parent companies to incur significant costs to provide
the Proposed Alternative Disclosures. For example, where Alternative
Disclosures under the current rule would constitute only a brief
narrative, we generally believe separate financial disclosures about
the issuers and guarantors of the guaranteed securities likely would
not be material and therefore could be omitted under the proposed
amendments. Finally, as with any change to reporting format and
presentation of information, the recommended proposals may lead
companies and investors to incur costs to adjust to the new
disclosures. As further discussed below, we do not expect such costs to
be substantial.
ii. When Disclosure Is Required
As explained in Section III.C.2.c, ``When Disclosure is Required,''
we propose eliminating the numerical thresholds of existing Rule 3-10
that are used to determine the form and content of disclosure. Instead,
all proposed disclosures would be required unless such information
would not be material to holders of the guaranteed security. While
numerical thresholds may be easier to apply than a materiality standard
that requires judgment, this change would allow for a more principles-
based disclosure approach that is more tailored to the specific
circumstances and the needs of investors.\253\ Allowing the parent
[[Page 49664]]
company to omit immaterial information would lower the costs of
disclosure relative to existing requirements and may help focus
investor attention on decision-relevant information. However, this
change could also increase the risk that a parent company would omit,
potentially inadvertently, value-relevant information. In such
instances, investors may make suboptimal investment decisions. Omitting
material information, however, would subject issuers and guarantors to
increased litigation risk, providing incentive for issuers to make
careful determinations on the form and content of disclosures.
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\253\ A number of academic studies have explored the use of
bright-line thresholds and ``when material'' disclosure standards.
The majority of these papers highlight a preference for principles-
based ``when material'' standard. See generally, e.g., Eugene A.
Imhoff Jr. & Jacob K. Thomas, Economic Consequences of Accounting
Standards: The Lease Disclosure Rule Change, 10 J. of Acct. & Econ.
277 (1988) (providing evidence that management modifies existing
lease agreements to avoid crossing bright-line threshold for lease
capitalization).
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In certain settings, there is academic evidence that allowing
issuers to make principles-based disclosure decisions using a
materiality criterion is consistent with investor preferences.\254\
However, there is also evidence of investor benefits from rules-based
reporting standards.\255\ While the proposed amendments could result in
reduced comparability across registrants and transactions, using a
principles-based standard could benefit investors by allowing
registrants to tailor their disclosure to provide material information
to them. The proposed amendment also accords with a number of
commenters who indicated that existing thresholds are overly
restrictive.\256\
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\254\ See Usha Rodrigues & Mike Stegemoller, An Inconsistency in
SEC Disclosure Requirements? The Case of the ``Insignificant''
Private Target, 13 J. of Corp. Fin. 251 (2007) (providing evidence,
in the context of mergers and acquisitions, that bright-line
thresholds can deviate from investor preferences).
\255\ See Mark W. Nelson, Behavioral Evidence on the Effects of
Principles- and Rules-Based Standards, 17 Acct. Horizons 91 (2003);
see also Katherine Schipper, Principles-Based Accounting Standards,
17 Acct. Horizons 61 (2003). These studies note potential advantages
of rules-based accounting standards, including: Increased
comparability among firms, increased verifiability for auditors, and
reduced litigation for firms.
\256\ See letters from ABA-Committees, AB-NYC, CAQ, DT, EY,
FedEx, KPMG, and PwC.
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iii. Location of Proposed Alternative Disclosures and Audit Requirement
The proposed amendments would allow the parent company the choice
of whether to provide the Proposed Alternative Disclosures in the
financial statement footnotes or elsewhere in the registration
statement covering the offer and sale of the guaranteed debt and any
related prospectus, as well as annual and quarterly Exchange Act
periodic reports required to be filed during the fiscal year in which
the first bona fide sale of the subject securities is completed. If the
parent company were to provide the Proposed Alternative Disclosures in
its financial statements in its registration statement and in certain
Exchange Act periodic reports required to be filed during fiscal year
in which the first bona fide sale of the subject securities is
completed, consistent with the existing rule, the disclosures would be
subject to annual audit, interim review, and internal control over
financial reporting requirements. Investors may perceive this choice of
placement to mean the disclosures are more reliable than if they were
not in the financial statements at the time of registration.
In contrast, if the parent company were to provide the Proposed
Alternative Disclosures outside its financial statements in its
registration statement and in certain Exchange Act periodic reports
required to be filed during the fiscal year in which the first bona
fide sale of the subject securities is completed, lower compliance
costs would likely result with respect to these filings. While we
generally would expect lower compliance costs, disclosures outside the
financial statements may result in certain costs to parent companies,
such as legal costs or due diligence activities (e.g., comfort
letters). Additionally, this proposed optionality may reduce the
potential for delay in offerings that exists under the current rule due
to the need to prepare audited Alternative Disclosures. Parent
companies using this proposed option to provide the disclosures outside
the consolidated financial statements may be able to register
guaranteed debt offerings and go to market more quickly than under the
existing rule. This may allow parent companies to more promptly access
favorable market conditions. Although these disclosures are
supplemental in nature, investors may nevertheless be adversely
impacted as these disclosures would not immediately benefit from the
enhanced accuracy and reliability associated with information that is
included in the financial statements at registration. To the extent
that investors prefer these initial disclosures to be included in the
parent company's financial statements, their willingness to invest may
be influenced or they may discount the information provided in the
unaudited portion of the disclosure, potentially reducing the amount of
information incorporated into security prices and increasing the
issuer's cost of capital.\257\
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\257\ One commenter noted that supplemental information
typically included in offering memoranda for Rule 144A debt
offerings, including revenues, operating income, assets and
liabilities of the non-guarantor group, is provided on an unaudited
basis. See letter from ABA-Committees. If QIBs currently do not
require such supplemental disclosures to be audited in 144A debt
offerings, the costs outlined above would not be expected to apply
to this group of investors.
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Additionally, the amount of information that investors receive in
the registration statement and in certain Exchange Act periodic reports
required to be filed during the fiscal year in which the first bona
fide sale of the subject securities is completed could be affected by
the choice of placement. The safe harbor for forward-looking
information under PSLRA is not available for disclosures provided in
the financial statements. A parent company providing the Proposed
Alternative Disclosures outside its financial statements may be more
likely to voluntarily supplement those required disclosures with
forward-looking information, as compared to a parent company that
provides the Proposed Alternative Disclosures in its financial
statements. Such supplemental forward-looking information, if provided,
could benefit investors. The relocation of disclosures may also affect
the prominence of the disclosures. Some academic research provides
indirect evidence that users may treat information differently
depending on the location of the disclosure.\258\
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\258\ For instance, research shows a weaker relation between
equity prices and disclosed items in the notes to the financial
statements versus recognized items on the face of the financial
statements. See, e.g., Maximilian A. M[uuml]ller, Edward J. Riedl &
Thorsten Sellhorn, Recognition versus Disclosure of Fair Values, 90
Acct. Rev. 2411 (2015) (showing a lower association between equity
prices and disclosed investment property fair values relative to
recognized investment property fair values and finding that reduced
information processing costs and higher readability mitigates the
discount applied to disclosed fair values); Hassan Espahbodi et al.,
Stock Price Reaction and Value Relevance of Recognition versus
Disclosure: The Case of Stock-Based Compensation, 33 J. of Acct. &
Econ. 343 (2002) (examining the equity price reaction to the
announcements related to accounting for stock-based compensation to
assess the value relevance of recognition (on the face of the
financial statements) versus disclosure (in the notes to the
financial statements) and concluding that recognition and disclosure
are not substitutes).
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If a parent company provides the Proposed Alternative Disclosures
in its financial statements, consistent with the existing rule, such
disclosures would be subject to XBRL requirements. Because the machine-
readable nature of XBRL disclosures facilitates aggregation,
comparison, and large-scale analysis of reported information through
automated means, investors stand to benefit from enhanced analysis
capabilities, particularly in the comparison of disclosures across
issuers and time periods. The parent company may incur
[[Page 49665]]
additional costs to comply with these tagging requirements. In
contrast, Proposed Alternative Disclosures provided outside the
financial statements would not be subject to XBRL tagging requirements.
Investors would not benefit from the enhanced analysis capabilities and
the parent company would not incur the related costs to comply with the
tagging requirements. In general, we believe the incremental cost of
tagging the Proposed Alternative Disclosures in XBRL, and hence the
incremental cost savings of not having to tag the proposed Alternative
Disclosures likely would be relatively low, as issuers already would
have software or processes in place for tagging financial statement
information.
Finally, while a parent company is afforded a choice of where to
locate disclosures in its registration statement and in certain
Exchange Act periodic reports required to be filed during fiscal year
in which the first bona fide sale of the subject securities is
completed, beginning with its annual report filed on Form 10-K or Form
20-F for the fiscal year during which the first bona fide sale of the
subject securities is completed, the parent company would be required
to locate the disclosures within the footnotes to its consolidated
financial statements, which are subject to applicable annual audit,
interim review, and internal control over financial reporting. Because
this requirement would be consistent with existing location
requirements, we do not anticipate economic effects from this
requirement as compared to the current state except, as discussed above
that there may be decreases in costs attributable to the more
simplified and streamlined proposed disclosures.
iv. Recently Acquired Subsidiary Issuers and Guarantors
We are proposing to delete the requirement to provide pre-
acquisition audited financial statements of a recently acquired
subsidiary issuer or guarantors. The existing requirement for pre-
acquisition financial statements of recently-acquired subsidiary
issuers or guarantors calls for far greater detail than what is
required for any other subsidiary issuer and guarantor.\259\ As
discussed in Section III.C.2.e, ``Recently-Acquired Subsidiary Issuers
and Guarantors,'' we believe Rule 3-05 of Regulation S-X, which
requires audited pre-acquisition financial statements of an acquired
business to be provided if the acquired subsidiary exceeds specified
thresholds of significance, provides sufficient information in this
context such that the pre-acquisition financial statements of recently-
acquired subsidiary issuers and guarantors required by existing Rule 3-
10(g) are unnecessary.
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\259\ Some commenters also noted the inconsistency in that
information required for recently acquired subsidiary issuers and
guarantors is more detailed than information required for other
subsidiary issuers and guarantors. See, e.g., letters from DT and
PwC.
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In addition, the trigger for pre-acquisition financial statements
of a recently-acquired subsidiary issuer or guarantor under existing
Rule 3-10(g) is based on the significance of the acquired subsidiary
compared to the size of the offering. This may lead issuers to provide
audited financial statements of a recently-acquired subsidiary that is
small relative to its consolidated parent company. The proposed changes
would address these circumstances.
We believe the proposed amendment would reduce the compliance
burden for preparers without reducing material information for
investors, since material information about recently acquired
subsidiaries would be required by Rule 3-05 of Regulation S-X and
proposed Rule 13-01(a)(5). Furthermore, to the extent that investors
find the information provided under the existing requirement redundant,
as it overlaps with Rule 3-05 of Regulation S-X, eliminating the
existing requirement would streamline disclosures. Academic research
suggests that individuals invest more in firms with more concise
financial disclosures.\260\ Thus, to the extent that the proposed
amendments alleviate duplication and do not affect the completeness of
financial disclosures, the resulting disclosures could result in
improved price discovery, enhance the allocative efficiency of the
market, and facilitate capital formation.
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\260\ See Lawrence, note 250 above.
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v. Continuous Reporting Obligation
As discussed in Section III.C.2.f, ``Continuous Reporting
Obligation,'' we are proposing that a parent company be permitted to
cease providing the Proposed Alternative Disclosures in its ongoing
reporting if the corresponding subsidiary issuer's or guarantor's
reporting obligation under Section 13 and/or Section 15(d) of the
Exchange Act with respect to the guaranteed securities is terminated or
suspended. This amendment would reduce compliance costs without loss of
material information for investors. To the extent that the existing
requirements impose unnecessary burdens by requiring a parent company
to continue providing the Alternative Disclosures beyond when the
subsidiary would have to report with respect to the guaranteed
securities,\261\ or otherwise deter issuers and guarantors from
engaging in public debt offerings to avoid such reporting
obligations,\262\ this amendment would remove such inefficiencies.
Commenters generally supported the proposed amendment, noting
inconsistencies between the existing requirement and other reporting
rules,\263\ and suggesting that it likely deters registration of debt
offerings.\264\
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\261\ See letters from DT and Simpson.
\262\ See letter from Simpson.
\263\ See letters from ABA-Committees, DT, EY, PwC, SIFMA, and
Simpson.
\264\ See letters from DT and Simpson.
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2. Proposed Amendments to Rule 3-16 and Relocation to Rule 13-02
As discussed in detail in Section V.B, ``Overview of the Proposed
Changes,'' although affiliates whose securities are pledged as
collateral are not registrants with respect to the collateralized
security, Rule 3-16, when triggered, requires financial statements as
if such affiliates were registrants. We are proposing to replace the
existing requirement to provide separate financial statements for each
affiliate whose securities are pledged as collateral with financial and
non-financial disclosures about the affiliate(s) and the collateral
arrangement, where material, as a supplement to the consolidated
financial statements of the registrant that issues the collateralized
security.
Debt agreements are often structured to avoid the requirements of
Rule 3-16 by either structuring the debt agreement to release any
pledge of affiliate securities as collateral if and when such pledge
triggers the requirements under Rule 3-16, or by not including pledges
of affiliate securities as collateral altogether.\265\ In such
circumstances, investors may demand a higher interest rate from issuers
to compensate for the absence of collateral, potentially increasing the
cost of capital to issuers. The proposed amendments would reduce the
burden of having to provide separate financial statements of affiliates
under the existing rule and provide issuers with the flexibility to
structure their debt agreements with pledges of affiliate securities.
If, as a result of the proposed amendments, debt agreements are no
longer structured to avoid Rule 3-16 requirements, investors would
obtain the benefit of both the collateral and the related disclosures,
all of which would be subject to Section 11 liability. This flexibility
may also permit issuers
[[Page 49666]]
to attract investors that prefer to invest in obligations where
collateral is fully available and not subject to the release mechanisms
designed to avoid Rule 3-16 requirements. By appealing to a broader
range of investors and providing more attractive collateral
arrangements, registrants may be able to obtain a lower cost of
capital.
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\265\ See letters from ABA-Committees, Cahill, Chamber,
Covenant, Davis, DT, and EY.
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As discussed above for the Proposed Amendments to Rule 3-10,
Proposed Rule 13-02 would provide flexibility to place the proposed
disclosures within the notes to the financial statements or in
specified prominent locations outside the financial statements in
registration statements covering the offer and sale of the
collateralized debt securities and any related prospectus, as well as
annual and quarterly Exchange Act periodic reports required to be filed
during the fiscal year in which the first bona fide sale of the subject
securities is completed. For registrants that include the proposed
disclosures in their financial statements, such information would be
subject to applicable annual audit, interim review, and internal
control over financial reporting requirements. Investors may perceive
this choice of placement as making the disclosure more reliable than if
it were placed outside of the financial statements. To the extent that
investors prefer these disclosures to be located in the registrant's
financial statements, this choice may influence their willingness to
invest. Registrants could attempt to influence such willingness by
including the proposed disclosures in their financial statements. Also
consistent with the proposed amendments to Rule 3-10, the registrant
would, however, be required to provide the proposed disclosures in a
footnote to its consolidated financial statements in its annual and
quarterly reports beginning with its annual report filed for the fiscal
year during which the first bona fide sale of the subject securities is
completed. This requirement would be consistent with existing location
requirements, and we do not anticipate economic effects as compared to
the current state.
Finally, as with any change to reporting format and presentation of
information, the proposed amendments may lead companies and investors
to incur costs to adjust to the new disclosures, as further discussed
below.
a. Financial Disclosures
i. Level of Detail
As discussed in Section V.C.1, ``Level of Detail,'' affiliates
whose securities are pledged as collateral are almost always
consolidated subsidiaries of the registrant,\266\ and their financial
information is thus already reflected in the registrant's consolidated
financial statements. We propose to require Summarized Financial
Information for each such affiliate and disclosure of additional
financial information if material to holders of the collateralized
security. For registrants, this would reduce compliance costs by
reducing the amount of information needed to be prepared and
disclosed.\267\ For investors, we do not anticipate significant costs
since material information would still be required to be provided. The
simplified disclosures would highlight material information needed to
make informed investment decisions and therefore would enable investors
to process information more efficiently and make more informed
investment decisions.
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\266\ In the rare circumstances where the affiliate is not a
consolidated subsidiary of the registrant, proposed Rule 13-02(a)(5)
would require the registrant to provide any other quantitative or
qualitative information that would be material to making an
investment decision with respect to the collateralized security. In
this regard, separate financial statements of the unconsolidated
affiliate may be necessary if material to an investment decision.
See additional discussion in Section V.C.1, ``Level of Detail.''
\267\ For purposes of the PRA, we estimate that the proposed
amendments to Rule 3-16 would result in an overall reduction of 30
burden hours for each form (other than Form 10-Q) affected by the
proposed amendments. See Section VIII.B.2, ``Rule 3-16,'' below.
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ii. Presentation on a Combined Basis
We are proposing to permit a registrant to provide the Summarized
Financial Information of consolidated affiliates that are pledged as
collateral on a combined rather than individual basis. Additional
disclosure specific to an affiliate would be required, if material. As
with the effects of the proposed amendments to Rule 3-10 discussed
above, we believe the simplified disclosures in the proposed amendments
to Rule 3-16 would both lower compliance costs for issuers and provide
investors with more streamlined and concise disclosures that would
promote more efficient decision-making by investors. We do not
anticipate significant costs to investors since material information
would still be required to be provided.
iii. Periods to Present
The proposed amendments would require the disclosure of Summarized
Financial Information for the most recently ended fiscal year and year-
to-date interim period included in the registrant's consolidated
financial statements. Rule 3-16 financial statements are not currently
required in quarterly reports, and as such, registrants would incur
costs to provide this additional interim disclosure.\268\ We believe
the proposed amendments would benefit investors by providing them with
the most recent information to ensure informed investment decisions.
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\268\ For purposes of the PRA, we estimate that the proposed
amendments to Rule 3-16 would result in an increase of 70 burden
hours per Form 10-Q filing. See Section VIII.B.2, ``Rule 3-16,''
below.
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b. Non-Financial Disclosures
We are proposing to require non-financial information about
affiliates whose securities are pledged as collateral and the
collateral arrangements, to the extent material. While we did not
receive comments on non-financial disclosures, we do not believe this
proposed amendment would impose undue costs for issuers, as the
majority of the information required to be disclosed under the proposed
amendments should be readily available or attainable.\269\ We believe
investors would benefit because the proposed amendment would supplement
the financial disclosures with additional, material information,
thereby rendering the combined financial and non-financial disclosures
more informative for investment decisions.
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\269\ The content of the proposed non-financial disclosures
consists of basic information about the collateral arrangement and
the entities involved. We do not expect such information, which is
generally available from debt agreements, would impose a significant
burden on a registrant to prepare.
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c. When Disclosure Is Required
Rather than utilizing existing numerical thresholds, disclosure of
the proposed financial and non-financial disclosures would be required
if material to holders of the collateralized security. To the extent
the numerical thresholds under the existing rule result in disclosure
of unnecessary or immaterial information, investors may benefit from
reduced search costs and the facilitation of more efficient information
processing.\270\ Further, we believe that, compared to existing rule
requirements, the proposed amendments to Rule 3-16 would reduce
compliance costs for issuers and increase the likelihood of
registration.
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\270\ See David Hirschleifer & Siew Hong Teoh, Limited
Attention, Information Disclosure, and Financial Reporting, 36 J. of
Acct. and Econ. 337 (2003) (developing a theoretical model where
investors have limited attention and processing power). The authors
show that with partially attentive investors, means of presenting
information may have an impact on stock price reactions,
misvaluation, long-run abnormal returns, and corporate decisions.
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[[Page 49667]]
D. Anticipated Effects on Efficiency, Competition, and Capital
Formation
Several commenters noted that the need to comply with existing
disclosure requirements often makes issuers structure registered
offerings to avoid triggering Rules 3-10 or 3-16, or avoid registration
altogether.\271\ As discussed above, and as a general matter, we
believe the proposed amendments would improve the content, format, and
focus of required registrant disclosures. This should both reduce the
compliance cost for issuers and allow more efficient decision-making by
investors. This may be true particularly to the extent that the
proposed amendments result in more efficient and effective
dissemination of material information to investors and increase the
efficiency of investor processing and usage of this information.
Further, the proposed rule amendments may affect issuers' registration
choices. This, in turn, could broaden the investment opportunities
available for different types of investors and may allow for more
efficient matching of investors with assets that meet their investment
objectives and preferences. Retail investors could additionally be
indirectly affected through their investments managed by institutional
investors, who would have greater access to a broader range of
investment opportunities in the registered debt market. To the extent
that the proposed amendments ease registration burdens for issuers,
there could be an increase in the number of registered offerings. If
such issuers would not have otherwise issued debt securities under Rule
144A, this would result in an increase in capital formation. If such
issuers would have otherwise issued debt under Rule 144A, it is
possible that a switch to a registered offering would lower the
issuers' cost of capital while also providing investors with the
enhanced protections afforded by registered offerings.
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\271\ See, e.g., letters from BDO, Cahill, Covenant, and PwC.
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Finally, rather than be 100% owned by the parent company, the
proposed amendments allow for the subsidiary issuer or guarantor to be
consolidated in the parent company's consolidated financial statements
as one of the conditions that must be met in order to be eligible to
omit separate subsidiary issuer and guarantor financial statements. To
the extent that the proposed amendments expand the scope of subsidiary
issuers and guarantors that meet Rule 3-10 eligibility requirements,
the proposed amendments may promote greater competition among issuers
and guarantors of guaranteed debt securities. This may enable more
registrants, especially those on the margins, to compete on better
terms. However, we do not anticipate the overall impact on competition
to be substantial.
E. Consideration of Reasonable Alternatives
We discuss below potential alternatives to the proposed amendments
to existing Rules 3-10 and 3-16.
1. Alternative to Proposed Amendments to Existing Rule 3-10
An alternative to the proposed amendments to Rule 3-10 would be to
permit the Proposed Alternative Disclosures be provided if the
subsidiary issuers and/or guarantors were ``wholly owned'' by the
parent company, as defined in Rule 1-02(aa) of Regulation S-X.\272\
Using ``wholly owned'' as the parent company ownership threshold,
rather than the existing 100% ownership requirement, would likely
permit more subsidiary issuers and guarantors to use the Alternative
Disclosures as compared to the existing rule, but would be less
flexible than the proposed amendments, as detailed above. As a result,
we believe the proposed amendments would better serve to enhance
efficiency, competition, and capital formation.
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\272\ Rule 1-02(aa) of Regulation S-X (''The term wholly owned
subsidiary means a subsidiary substantially all of whose outstanding
voting shares are owned by its parent and/or the parent's other
wholly owned subsidiaries.'' (Emphasis in original.)).
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2. Alternatives Common to Proposed Amendments to Existing Rule 3-10 and
Existing Rule 3-16
One alternative to each set of proposed amendments would be to
require that the Proposed Alternative Disclosures, or the disclosures
specified in proposed Rule 13-02, as applicable, be located in the
audited annual and unaudited interim financial statement footnotes of
the parent company, or registrant, as applicable, in all filings. Under
this alternative, the parent company or registrant would not have a
choice of whether to locate the proposed disclosures outside its
consolidated financial statements in registration statements covering
the offer and sale of the guaranteed or collateralized debt securities
and any related prospectus, or in annual and quarterly Exchange Act
periodic reports required to be filed during the fiscal year in which
the first bona fide sale of the subject securities is completed. On the
one hand, this could increase investor confidence in the disclosed
information and provide the benefits of XBRL tagging. On the other
hand, the cost to a parent company or registrant associated with
preparing registration statements and certain periodic reports would be
higher with this alternative than if the disclosures were provided
outside of the financial statements. Furthermore, the flexibility of
going to market more quickly would not be available under this
alternative. This could limit the incentives to pursue registered
offerings compared to the proposed amendments, and those registrants
that do pursue registered offerings may be less likely to issue
guarantees, or pledge affiliate securities as collateral, given the
additional cost associated with including the proposed disclosures in
the financial statements. Additionally, a parent company or registrant
may be less likely to voluntarily supplement the disclosures with
forward-looking information because the safe harbor for forward-looking
information under PSLRA is not available for disclosures provided in
the financial statements. As discussed above,\273\ guarantees and
pledges of affiliate securities as collateral serve, in part, to reduce
investor risk of structural subordination. Overall, we believe the
benefits to investors of enhanced access to registered offerings with
guarantees and pledges of affiliate securities as collateral, together
with the benefits of reduced compliance burdens for issuers, justify
forgoing the benefits of requiring these disclosures to be located in
the financial statements of the parent company, or registrant, as
applicable, included in registration statements covering the offer and
sale of the guaranteed or collateralized debt securities and any
related prospectus, as well as annual and quarterly Exchange Act
periodic reports required to be filed during the fiscal year in which
the first bona fide sale of the subject securities is completed.
However, we solicit comment on this point and the potential benefits
and concerns for registrants and investors of requiring the proposed
disclosures to be located in the notes to the financial statements in
all filings.
---------------------------------------------------------------------------
\273\ See Section VII.C.1, ``Proposed Amendments to Rule 3-10
and Partial Relocation to Rule 13-01.''
---------------------------------------------------------------------------
A second related alternative to each set of the proposed rules
would be to allow the parent company or registrant to provide the
Proposed Alternative Disclosures, or the disclosures specified in
proposed Rule 13-02, as applicable, outside the financial statement
footnotes in all filings. On the one hand, if the
[[Page 49668]]
parent company or registrant opts to disclose the information outside
the financial statements, the cost to a parent company or registrant
associated with preparing the information would be lower with this
alternative than if the disclosures were provided in the financial
statements. This could incentivize the pursuit of registered offerings
with guarantees or collateral, given the flexibility and associated
reduced costs. While we generally would expect lower compliance costs,
disclosures outside the financial statements may result in certain
costs to parent companies and registrants, such as legal costs or due
diligence activities (e.g., comfort letters). Additionally, a parent
company or registrant may be more likely to voluntarily supplement the
disclosures with forward-looking information because the safe harbor
for forward-looking information under PSLRA is not available for
disclosures provided in the financial statements. On the other hand,
allowing the parent company or registrant the flexibility of disclosing
outside the financial statements may reduce investor confidence in the
disclosed information, as this information would not be subject to
annual audit, interim review, and internal control over financial
reporting requirements. As a result, this alternative could reduce
investor confidence in the disclosed information and may affect their
willingness to invest.
While we acknowledge that providing additional flexibility to the
parent company or registrant in the location of the disclosures would
likely further reduce the compliance burdens associated with registered
offerings with guarantees or collateral, investors may demand a higher
expected return if they perceive reduced reliability of the Proposed
Alternative Disclosure. The potential for higher borrowing costs may
encourage issuers to voluntarily include the Proposed Alternative
Disclosures or proposed disclosures, as applicable, in the financial
statements of the parent company, or registrant, as applicable. We
solicit comment on this point and the potential benefits and concerns
for registrants and investors of providing flexibility to locate the
Proposed Alternative Disclosures outside the financial statements in
all filings.
Finally, a third alternative relevant to each set of proposed
amendments would be to require Summarized Financial Information to be
provided for the same periods as the parent company or registrant, as
applicable, instead of the most recent annual and interim period as
proposed. While this alternative would increase the amount of
information available to investors, the additional information may not
be material in making informed investment decisions. As discussed
above,\274\ prior studies have suggested that simpler disclosures may
benefit investors by reducing search costs and facilitating more
efficient information processing. Moreover, including additional
historical periods would result in higher costs to registrants when
preparing registration information and ongoing reporting. We do not
believe the potential benefit to investors of this additional
historical information justifies the potential cost to the registrants.
---------------------------------------------------------------------------
\274\ See note 249 and accompanying text.
---------------------------------------------------------------------------
F. Request for Comment
We request comment on all aspects of our economic analysis,
including the potential costs and benefits of the proposed amendments
and alternatives thereto, and whether the rules, if adopted, would
promote efficiency, competition, and capital formation or have an
impact on investor protection. Commenters are requested to provide
empirical data, estimation methodologies, and other factual support for
their views, in particular, on costs and benefits estimates.
VIII. Paperwork Reduction Act
A. Background
Certain provisions of our rules and forms that would be affected by
the proposed amendments contain ``collection of information''
requirements within the meaning of the PRA.\275\ The Commission is
submitting the proposal to the Office of Management and Budget
(``OMB'') for review in accordance with the PRA.\276\ The hours and
costs associated with preparing and filing the forms and reports
constitute reporting and cost burdens imposed by each collection of
information. An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information requirement unless
it displays a currently valid OMB control number. Compliance with the
information collections is mandatory. Responses to the information
collections are not kept confidential and there is no mandatory
retention period for the information disclosed. The titles for the
affected collections of information are: \277\
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\275\ See note 244 above.
\276\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
\277\ As noted above, while the proposed amendments would apply
to registered investment companies, and could thereby affect
registered investment advisers, based on staff experience, we
believe registered investment companies are unlikely to engage in
the activities addressed by the proposed amendments. Accordingly, we
are not revising the burden estimates for the forms and reports
filed by these types of entities.
---------------------------------------------------------------------------
``Regulation S-K'' (OMB Control No. 3235-0071); \278\
---------------------------------------------------------------------------
\278\ The paperwork burdens for Regulation S-K and Regulation S-
X are imposed through the forms that are subject to the requirements
in these regulations and are reflected in the analysis of those
forms. To avoid a PRA inventory reflecting duplicative burdens, and
for administrative convenience, we estimate that the proposed
amendments would not impose an incremental burden for these
regulations.
---------------------------------------------------------------------------
``Regulation S-X'' (OMB Control No. 3235-0009);
``Form S-1'' \279\ (OMB Control No. 3235-0065);
---------------------------------------------------------------------------
\279\ 17 CFR 239.11.
---------------------------------------------------------------------------
``Form S-3'' \280\ (OMB Control No. 3235-0073); \281\
---------------------------------------------------------------------------
\280\ 17 CFR 239.13.
\281\ The paperwork burdens for Form S-3 and Form F-3 are
imposed through the forms from which they incorporate by reference
and are reflected in the analysis of those forms. To avoid a PRA
inventory reflecting duplicative burdens and for administrative
convenience, we assign a one-hour burden to each of these forms.
---------------------------------------------------------------------------
``Form S-4'' \282\ (OMB Control No. 3235-0324);
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\282\ 17 CFR 239.25.
---------------------------------------------------------------------------
``Form S-11'' \283\ (OBM Control No. 3235-0067);
---------------------------------------------------------------------------
\283\ 17 CFR 239.18.
---------------------------------------------------------------------------
``Form F-1'' (OMB Control No. 3235-0258);
``Form F-3'' (OMB Control No. 3235-0256);
``Form F-4'' \284\ (OMB Control No. 3235-0325);
---------------------------------------------------------------------------
\284\ 17 CFR 239.34.
---------------------------------------------------------------------------
``Form 10'' \285\ (OMB Control No. 3235-0064);
---------------------------------------------------------------------------
\285\ 17 CFR 249.210.
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``Form 20-F'' (OMB Control No. 3235-0288);
``Form 40-F'' \286\ (OMB Control No. 3235-0381);
---------------------------------------------------------------------------
\286\ 17 CFR 249.240f.
---------------------------------------------------------------------------
``Form 10-K'' \287\ (OMB Control No. 3235-0063);
---------------------------------------------------------------------------
\287\ 17 CFR 249.310.
---------------------------------------------------------------------------
``Form 8-K'' \288\ (OMB Control No. 3235-0060); \289\
---------------------------------------------------------------------------
\288\ 17 CFR 249.308.
\289\ The paperwork burdens for Form 8-K is imposed through the
forms from which they incorporate by reference and are reflected in
the analysis of those forms. To avoid a PRA inventory reflecting
duplicative burdens and for administrative convenience, we estimate
that the proposed amendments would not impose an incremental burden
for this form.
---------------------------------------------------------------------------
``Regulation 14A'' \290\ and ``Schedule 14A'' \291\ (OMB
Control No. 3235-0059); \292\
---------------------------------------------------------------------------
\290\ 17 CFR 240.14a-1 through 240.14a-104.
\291\ 17 CFR 240.14a-101.
\292\ As described below, our estimates for Form 10-K take into
account the burden that would be incurred by including the proposed
disclosure in the annual report directly or incorporating by
reference from a proxy or information statement. To avoid a PRA
inventory reflecting duplicative burdens, we estimate that the
proposed disclosure would not impose an incremental burden for proxy
statements on Schedule 14A.
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[[Page 49669]]
``Regulation 14C'' \293\ and ``Schedule 14C'' \294\ (OMB
Control No. 3235-0057); \295\
---------------------------------------------------------------------------
\293\ 17 CFR 240.14c-1 through 240. 14c-7.
\294\ 17 CFR 240.14c-101.
\295\ As described below, our estimates for Form 10-K take into
account the burden that would be incurred by including the proposed
disclosure in the annual report directly or incorporating by
reference from a proxy or information statement. To avoid a PRA
inventory reflecting duplicative burdens, we estimate that the
proposed disclosure would not impose an incremental burden for
information statements on 14C.
---------------------------------------------------------------------------
``Form 10-Q'' (OMB Control No. 3235-0070);
``Form SF-1'' \296\ (OMB Control No. 3235-0707);
---------------------------------------------------------------------------
\296\ 17 CFR 239.44.
---------------------------------------------------------------------------
``Form SF-3'' \297\ (OMB Control No. 3235-0690);
---------------------------------------------------------------------------
\297\ 17 CFR 239.45.
---------------------------------------------------------------------------
``Form 1-A'' \298\ (OMB Control No. 3235-0286);
---------------------------------------------------------------------------
\298\ 17 CFR 239.90.
---------------------------------------------------------------------------
``Form 1-K'' \299\ (OMB Control No. 3235-0720); and
---------------------------------------------------------------------------
\299\ 17 CFR 239.91.
---------------------------------------------------------------------------
``Form 1-SA'' \300\ (OMB Control No. 3235-0721).
---------------------------------------------------------------------------
\300\ 17 CFR 239.92.
---------------------------------------------------------------------------
The regulations, schedules, and forms listed above were adopted
under the Securities Act and/or the Exchange Act. These regulations,
schedules, and forms set forth the disclosure requirements for
registration statements, periodic and current reports, distribution
reports, and proxy and information statements filed by registrants to
help investors make informed investment and voting decisions.
We are proposing amendments to the disclosure requirements in Rules
3-10 and 3-16 of Regulation S-X to better align those requirements with
the needs of investors and to simplify and streamline the disclosure
obligations of registrants. We are proposing to amend both rules and
relocate part of Rule 3-10 and all of Rule 3-16 to proposed Rules 13-01
and 13-02, respectively. We also are proposing to make conforming
amendments to Items 504, 1100, 1112, 1114, and 1115 of Regulation S-K;
Forms F-1, F-3, 1-A, 1-K, and 1-SA under the Securities Act; and Rule
12h-5 and Form 20-F under the Exchange Act. These amendments are
intended to provide investors with the information that is important
given the specific facts and circumstances, make the disclosures easier
to understand, and reduce the costs and burdens to registrants.
B. Summary of the Proposed Amendments Impact on Collection of
Information
In this section, we summarize the proposed amendments and their
general impact on the paperwork burdens associated with the forms
listed above. In the subsequent section below, we provide the revised
burden estimates of each affected form.
1. Rule 3-10
The proposed amendments to Rule 3-10 would replace the
Consolidating Information required by existing Rule 3-10 with
Summarized Financial Information of the Obligor Group. Several
commenters noted that preparing and providing Consolidated Information
is particularly challenging, complex, and costly.\301\ Among other
things, the Proposed Alternative Disclosures would permit a parent
company to: (1) Exclude the financial information of non-obligated
entities; (2) reduce the number of periods to be presented; and (3)
provide the information of each issuer and guarantor on a combined,
rather than disaggregated, basis. These changes would reduce a parent
company's paperwork burden by permitting the parent company to exclude
information unnecessary to an investment decision as compared to the
existing rule. In certain circumstances, the paperwork burden could be
reduced even further because registrants would not be required to
recast prior period information, which commenters noted can be
particularly challenging.\302\
---------------------------------------------------------------------------
\301\ See, e.g., letters from ABA-Committees, Anuradha, BDO,
Cahill, CAQ, DT, EY, FedEx, GM, Grant, Headwaters, KPMG, Medtronic,
and Noble-UK.
\302\ See, e.g., letters from Medtronic and PwC.
---------------------------------------------------------------------------
Existing Rule 3-10 requires the Alternative Disclosures to be
included in the notes to the parent company's consolidated financial
statements, thereby requiring the Alternative Disclosures to be audited
for the same periods. The proposed amendments would revise this
requirement so that parent companies may provide the Proposed
Alternative Disclosures outside their financial statement footnotes in
a registration statement covering the offer and sale of the subject
securities and any related prospectus, and in Exchange Act annual and
quarterly reports required to be filed during the fiscal year in which
the first bona fide sale of the subject securities is completed, but
require the Proposed Alternative Disclosures to be included in the
footnotes to the parent company's consolidated financial statements for
annual and quarterly reports beginning with the annual report for the
fiscal year during which the first bona fide sale of the subject
securities is completed. This amendment could reduce the burdens
associated with preparing the Proposed Alternative Disclosures because
the information would not need to be immediately audited or tagged.
However, this amendment could result in certain legal and due diligence
costs (e.g., comfort letters).
Whether a parent company would elect to provide the Proposed
Alternative Disclosures outside its financial statement footnotes
likely would depend on the company's specific facts and circumstances
and, as discussed above,\303\ we believe there could be reasons for
companies to elect either option. In addition, any reduction in
paperwork burden associated with such an election would be incremental,
as the parent company would still incur expenses to prepare audited
financial information. Given these considerations, and to avoid
overestimating the overall paperwork burden reduction associated with
the proposed amendments, we are not estimating a specific burden
reduction for this aspect of the proposed amendments. However, we
solicit comment on whether it would be appropriate to do so, and, if
so, how we might estimate such a reduction.
---------------------------------------------------------------------------
\303\ See Sections III.C.2.d, ``Location of Proposed Alternative
Disclosures and Audit Requirement,'' and VII.C.1.b.iii, ``Location
of Proposed Alternative Disclosures and Audit Requirement.''
---------------------------------------------------------------------------
The existing rule also requires a parent company to provide the
Alternative Disclosures as a condition to omitting the separate
financial statements of a subsidiary issuer or guarantor. In most
cases, the Alternative Disclosures consist of Consolidating
Information, but the Alternative Disclosures may consist of a brief
narrative if certain numerical thresholds are met. The proposed
amendments would eliminate these separate categories of Alternative
Disclosures. Instead, the proposed amendments would require a parent
company to provide all financial and non-financial disclosures
specified in proposed Rule 13-01 to the extent they are material to a
holder of the guaranteed security. The proposed amendments would also
require disclosure of any additional information that would be material
to a holder of the guaranteed security.
While the proposed amendments would eliminate some disclosure that
may be required by the existing rule, they would also require other
disclosure that may not be required by the existing rule. For example,
if a numerical
[[Page 49670]]
threshold is met under the existing rule, disclosure is required even
if that disclosure is immaterial to an investment decision. The
proposed amendments would not require that disclosure if it was not
material, which would reduce the parent company's paperwork burden.
Conversely, if a numerical threshold is not met under the existing
rule, disclosure is not required unless that information is necessary
to make the disclosure provided not misleading.\304\ The proposed
amendments would require that disclosure in all cases, to the extent
material, which could increase the parent company's paperwork burden.
---------------------------------------------------------------------------
\304\ See 17 CFR 230.408(a), 240.12b-20.
---------------------------------------------------------------------------
We have estimated the number of filings that include Consolidating
Information under Rule 3-10, but we are unable to identify accurately
the issuers providing narrative disclosures under Rule 3-10 because the
language of those disclosures varies based on facts and
circumstances.\305\ However, we do not believe that the proposed
amendments would affect the paperwork burden for filings that include
the narrative disclosures under existing Rule 3-10 because registrants
that provide these narrative disclosures would be permitted to provide
similar information under the proposed amendments.
---------------------------------------------------------------------------
\305\ See Section VII.B.2, ``Baseline and Affected Parties--
Market Conditions.''
---------------------------------------------------------------------------
Further, under the proposed amendments, parent companies would no
longer be required to provide the pre-acquisition financial statements
of recently-acquired subsidiary issuers and guarantors, as is currently
required by existing Rule 3-10(g). Disclosure may be required under the
proposed rule, however, if it is material to an investment decision in
the guaranteed security. This aspect of the proposed amendments would
decrease the overall paperwork burden of the affected forms. This
reduction would be mitigated somewhat, however, because parent
companies would still be required to provide information about any
recently-acquired subsidiaries when it is material.
Finally, we are proposing amendments to require specific non-
financial disclosures, where material, about the issuers and
guarantors, the terms and conditions of the guarantees, and how the
issuer and guarantor structure and other factors may affect payments to
holders of the guaranteed securities. These disclosures would enhance
the information provided about subsidiary issuers and guarantors and
would be more comprehensive than the similar disclosures a parent
company must provide under existing Rule 3-10. These additional
disclosures, therefore, could incrementally increase a parent company's
existing paperwork burden.
Considering the various impacts to the existing collection of
information requirements outlined above, we estimate that the proposed
amendments to Rule 3-10 would reduce the overall paperwork burden for
registrants. Moreover, some aspects of the proposed amendments could
reduce the paperwork burden significantly. For example, Consolidating
Information, which includes multiple columns and typically occupies
several pages of a parent company's filing, would be replaced with the
Proposed Alternative Disclosures, which we expect in most cases would
consist of one or two pages of disclosure in a parent company's filing.
Overall, therefore, we estimate that the proposed amendments would
reduce the paperwork burden for registrants by approximately 30 hours
for each filing that includes the Proposed Alternative Disclosures in
lieu of the existing Alternative Disclosures.
Although the proposed amendments would reduce the paperwork burden
for any particular filing on an affected form that includes the
existing Alternative Disclosures, not all filings on the affected forms
include these disclosures because they are provided only in certain
instances.\306\ Therefore, to estimate the overall paperwork burden
reduction from the proposed amendments, we estimated the number of
filings that include the Alternative Disclosures. To do so, we used a
number of methods that varied based on the affected form.
---------------------------------------------------------------------------
\306\ We were not able to determine the number of filings that
included the Alternative Disclosures with certainty because
registrants are not required to state explicitly that the
disclosures they are providing are meant to satisfy the requirements
of Rule 3-10.
---------------------------------------------------------------------------
As an initial step, we examined the XBRL tags most commonly
associated with Consolidating Information. Not all filings include XBRL
tags, so we estimated the number of all the affected forms that
included XBRL tags and extrapolated the number of affected forms based
on the percentage of filings that include XBRL tags. For example, in
Section VII.B.2, ``Market Conditions,'' using XBRL tags, we estimated
that registrants filed 1,223 Form 10-Ks with the Alternative
Disclosures in the last three calendar years from 2015 to 2017, which
averages approximately 407.67 filings per year. However, over those
three years, only approximately 86 percent of Forms 10-K included XBRL
tags. For PRA purposes, therefore, we divided 407.67 by 0.86 to
estimate that 474 filings per year included Alternative Disclosures
over the last three years.
We were able to use this extrapolation method for Forms 10-K, 10-Q,
S-1, 20-F, and 40-F, because the percentage of filings made on those
forms that included XBRL tags was sufficient to make the extrapolation
meaningful. The table below sets forth our estimates of the number of
filings on these forms that included the Alternative Disclosures based
on the XBRL tagging extrapolation method.
Table 4--Calculation of the Number of Filings on Affected Forms With the Alternative Disclosures Based on XBRL Tagging Extrapolation
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of
responses over Annual average Percentage of Annual average of Estimated
three-year period of responses responses tagged responses average annual
using XBRL data using XBRL data using XBRL responses
(A) (B) (C) (D) = (B) / (C) (E)
--------------------------------------------------------------------------------------------------------------------------------------------------------
10-K..................................................... 1,223 407.67 .86 474.03 474
10-Q..................................................... 3,530 1,176.67 .94 1,251.77 1,252
S-1...................................................... 7 2.33 .24 9.71 10
20-F..................................................... 17 5.67 .41 12.82 14
40-F..................................................... 1 .33 .16 8.31 8
--------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 49671]]
We also searched Forms S-4, S-11, 10, F-1, F-4, SF-1, SF-3, 1-A, 1-
K, and 1-SA using XBRL tags most commonly associated with Consolidating
Information. However, this extrapolation method did not provide
meaningful results because registrants rarely include XBRL tags for
these affected forms. For example, only one percent of Form S-4 filings
include XBRL tags.\307\ Therefore, to provide a more meaningful
estimate of the number of these forms that include the Alternative
Disclosures, we conducted separate database searches for filings of
those forms over the last three calendar years using search terms
similar to those used by a commenter.\308\
---------------------------------------------------------------------------
\307\ Similarly, only six percent of Form S-11, three percent of
Form F-1, and three percent of Form 10 filings include XBRL tags.
\308\ See letter from EY.
---------------------------------------------------------------------------
Based on these searches, we estimate that, over the last three
calendar years from 2015 to 2017, there were on average 300 filings on
Form S-4, 15 filings on Form S-11, 20 filings on Form 10, 15 filings on
Form F-1, and 20 filings on Form F-4 that included the Alternative
Disclosures. We were unable to find any filings on the remaining
affected forms that included the Alternative Disclosures. Therefore, we
estimate that no filings on those forms included the Alternative
Disclosures. The table below sets forth our estimates of the number of
filings on these forms that included the Alternative Disclosures based
on the other database searches.
Table 5--Calculation of the Number of Filings on Affected Forms With the Alternative Disclosures Based on
Database Searches
----------------------------------------------------------------------------------------------------------------
Number of
responses over Annual average of Estimated
three-year period responses using average annual
using database database searches responses
searches
(A) (B) = (A) / 3 (C)
----------------------------------------------------------------------------------------------------------------
S-4.................................................... 300 100 100
S-11................................................... 15 5 5
10..................................................... 20 6.67 7
F-1.................................................... 15 5 5
F-4.................................................... 20 6.67 7
1-A.................................................... 0 0 0
1-K.................................................... 0 0 0
1-SA................................................... 0 0 0
SF-1................................................... 0 0 0
SF-3................................................... 0 0 0
----------------------------------------------------------------------------------------------------------------
Although the proposed amendments to Rule 3-10 would reduce the
paperwork burden for each individual affected form, the proposed
amendments could cause the number of affected forms filed to change
over a period of time. One commenter \309\ stated that the high
compliance costs associated with preparing the Rule 3-10 financial
information leads many companies to issue debt securities privately.
Again, we believe that the proposed amendments would encourage
potential issuers to conduct registered debt offerings or private
offerings with registration rights. Therefore, we believe that the
number of registration statements and periodic reports filed on
affected forms that include the Proposed Alternative Disclosures would
increase.
---------------------------------------------------------------------------
\309\ Letter from Cahill.
---------------------------------------------------------------------------
For example, we believe the number of issuers and guarantors
eligible to provide the Proposed Alternative Disclosures would increase
in lieu of providing separate financial statements of each subsidiary
issuer and guarantor because the proposed amendments would replace the
100%-owned condition with one requiring that the subsidiary issuer/
guarantor be a consolidated subsidiary of the parent company pursuant
to the relevant accounting standards it already uses and eliminate the
requirement that guarantees of subsidiary guarantors be full and
unconditional. If some of those eligible issuers and guarantors conduct
registered debt offerings or private offerings with registration rights
instead of conducting offerings privately and without registration
rights, the number of registration statements and associated periodic
reports filed on affected forms would necessarily increase when
measured over a period of time.
Conversely, other aspects of the proposed amendments would lead to
a decrease in the number of periodic reports filed on affected forms
when measured over time. For example, under existing Rule 3-10, if a
parent company conducts a registered debt offering or private offering
with registration rights and the subsidiary issuer or guarantor is not
100%-owned, but is instead consolidated into the parent company's
financial statements, or if the subsidiary guarantor's guarantee is not
full and unconditional, the subsidiary must file its own periodic
reports. The subsidiary is required to file a registration statement
for the transaction, which is usually combined with its parent's
registration statement, so the number of registration statements filed
with the Proposed Alternative Disclosures would not decrease as a
result of this aspect of the proposed amendments. However, under the
proposed amendments, if that parent company provides the Proposed
Alternative Disclosures, and meets the other conditions of proposed
Rule 3-10, its subsidiaries would be exempt from periodic reporting
under Rule 12h-5. Therefore, fewer periodic reports on affected forms
would be filed, which would decrease those forms' paperwork burden when
measured over a period of time.
As another example, existing Rule 3-10 requires a parent company to
include the Alternative Disclosures of its subsidiary issuers and
guarantors in its periodic reports for so long as the guaranteed
securities are outstanding. The proposed amendments would permit the
parent company to cease providing the Proposed Alternative Disclosures
in its periodic reports if the corresponding Section 15(d) obligations
of its subsidiary issuers and guarantors are suspended. Therefore, we
expect that parent companies would provide
[[Page 49672]]
the Proposed Alternative Disclosures in fewer filings, which would
reduce the paperwork burden for periodic reports on affected forms when
measured over a period of time.
Overall, we believe that the decrease in the number of periodic
reports filed on affected forms due to the change in ongoing reporting
requirements would be largely mitigated, and perhaps offset, by the
number of periodic reports that would increase due to the filing of new
registration statements. Consequently, to avoid overestimating the
paperwork reduction associated with the proposed amendments, we are not
adjusting our existing estimate for the number of periodic reports
filed on affected forms. However, we solicit comment on whether and, if
so, how we should make an adjustment to this estimate in light of the
proposed amendments.
Although we believe the number of periodic reports filed on
affected forms would remain steady, we estimate that the number of
registration statements that include the Proposed Alternative
Disclosures, as opposed to those that presently include the existing
Alternative Disclosures, would increase. As discussed in Section
VII.B.2, ``Market Conditions,'' we note that issuers have conducted
approximately half as many Rule 144A debt offerings as registered debt
offerings. We do not believe that all the issuers that conducted Rule
144A would conduct registered debt offerings as a result of the
proposed amendments, but we estimate that there would be a 33 percent
increase in registration statements filed based on the proposed
amendments. Therefore, we estimate that there would be an additional
three filings on Form S-1,\310\ 33 filings on Form S-4,\311\ two
filings on Form S-11,\312\ two filings on Form 10,\313\ two filings on
Form F-1,\314\ and two filings on Form F-4 per year.\315\ Further, we
estimated above that 14 filings on Form 20-F included the existing
Alternative Disclosures. We estimate that half of those filings were
registration statements. Therefore, we estimate there would be an
additional two registration statements filed on Form 20-F per
year.\316\
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\310\ Ten current filings on Form S-1 x 0.33 = 3.3 filings,
which rounds to 3 filings.
\311\ One hundred current filings on Form S-4 x 0.33 = 33
filings.
\312\ Five current filings on Form S-11 x 0.33 = 1.65 filings,
which rounds to two filings.
\313\ Seven current filings on Form 10 x 0.33 = 2.31 filings,
which rounds to two filings.
\314\ Five current filings on Form F-1 x 0.33 = 1.65 filings,
which rounds to two filings.
\315\ Seven current filings on Form F-4 x 0.33 = 2.31 filings,
which rounds to two filings.
\316\ Seven current fillings on Form 20-F x .033 = 2.31 filings,
which rounds to two filings.
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Finally, to determine the paperwork burden for an issuer to file a
registration statement with the Proposed Alternative Disclosures, we
first estimated the number of burden hours required for an issuer to
provide the existing Alternative Disclosures. A number of commenters
provided examples of the burdens required to prepare and process the
existing Alternative Disclosures,\317\ but only one commenter
quantified the number of hours.\318\ This commenter indicated that it
required 280 hours per year to prepare and review its Alternative
Disclosures.\319\ We note that this commenter is relatively large and
not necessarily representative of the size of all reporting companies.
Therefore, for PRA purposes, we estimate that the existing Alternative
Disclosures require an average of 100 burden hours to prepare and
process. However, we solicit comment on the number of burden hours
required to prepare the Alternative Disclosures. If the Proposed
Alternative Disclosures would reduce an issuer's burden by 30 hours, as
compared to the issuer providing the existing Alternative Disclosures,
we estimate that the Proposed Alternative Disclosures would require 70
hours to prepare and process.
---------------------------------------------------------------------------
\317\ See, e.g., letters from EY, FedEx, Medtronic, and Noble-
UK.
\318\ Letter from FedEx.
\319\ Id. The commenter noted that it would require 280 hours to
prepare and review its Consolidating Information. As discussed
above, the existing Alternative Disclosures may include either
Consolidating Information or brief narrative disclosure, and we do
not believe that the proposed amendments would affect the paperwork
burden for filings that include the narrative disclosure under
existing Rule 3-10 because registrants that provide these narrative
disclosures would be permitted to provide similar information under
the proposed amendments.
---------------------------------------------------------------------------
2. Rule 3-16
Existing Rule 3-16 requires separate Rule 3-16 Financial Statements
for each affiliate whose securities constitute a ``substantial
portion'' of the collateral for any class of registered securities as
if the affiliate were a separate registrant. The proposed amendments
related to Rule 3-16 would replace this requirement with a requirement
for a registrant to provide Summarized Financial Information of those
affiliates on a combined basis, pursuant to proposed Rule 13-02, if the
affiliates are consolidated subsidiaries of the registrant. If
additional line items of financial information are material to an
investment decision, the registrant would be required to disclose that
information as well. In addition, the proposed amendments would
require, to the extent material, certain non-financial disclosures
about the securities pledged as collateral, each affiliate whose
securities are pledged, the terms and conditions of the collateral
arrangement, and whether a trading market exists for the pledged
securities.
We believe that these amendments would reduce the paperwork burden
for the affected forms because Summarized Financial Information is less
detailed than separate financial statements and, therefore, is less
costly and burdensome to prepare. Further, we believe the registrant's
ability to present Summarized Financial Information on a combined basis
with its consolidated affiliates would reduce the registrant's
paperwork burden because the registrant would not be required to
prepare and disclose each of its affiliates' financial statements
separately. However, because proposed Rule 13-02 requires certain
financial information that may not otherwise be required in the
Summarized Financial Information and additional non-financial
disclosures, when material, the expected paperwork burden reduction may
be somewhat mitigated.
Existing Rule 3-16 requires the Rule 3-16 Financial Statements of
an affiliate to be audited for the periods required by Rules 3-01 and
3-02 of Regulation S-X. Similar to the proposed amendments to Rule 3-
10, the proposed amendments related to Rule 3-16 would permit a
registrant to provide the disclosures in proposed Rule 13-02 outside
its financial statements in a registration statement covering the offer
and sale of the subject securities and any related prospectus, and in
Exchange Act annual and quarterly reports required to be filed during
the fiscal year in which the first sale of the subject securities is
completed, but require the proposed disclosures to be included in the
footnotes to the registrant's consolidated financial statements for
annual and quarterly reports beginning with the annual report for the
fiscal year during which the first bona fide sale of the subject
securities is completed. Therefore, if provided outside the
registrant's financial statements, the proposed Rule 13-02 disclosures
would not be audited or tagged, which could reduce the burdens
associated with preparing this information. Whether a registrant would
elect to provide the disclosures outside its financial statement
footnotes likely would depend on the company's specific facts and
circumstances and, as discussed
[[Page 49673]]
above,\320\ we believe there could be reasons for companies to elect
either option. In addition, any reduction in paperwork burden
associated with such an election would be incremental, as the
registrant would still incur expenses to prepare audited financial
information. Given these considerations, and to avoid overestimating
the overall paperwork burden reduction associated with the proposed
amendments, we are not estimating a specific additional burden
reduction for this aspect of the proposed amendments. However, we
solicit comment on whether it would be appropriate to do so and, if so,
how we might estimate such a reduction.
---------------------------------------------------------------------------
\320\ Sections V.B., ``Overview of the Proposed Changes,'' and
VII.C.2 ``Proposed Amendments to Rule 3-16 and Relocation to Rule
13-02.''
---------------------------------------------------------------------------
The proposed amendments would require registrants to provide
Summarized Financial Information of affiliates as of, and for, the most
recently-ended fiscal year and interim period included in their
consolidated financial statements. Under existing Rule 3-16, financial
statements of affiliates are required for the periods specified in
Rules 3-01 and 3-02 of Regulation S-X. This aspect of the proposed
amendments, therefore, would reduce the paperwork burden for
registrants by reducing the number of periods required to be presented.
Overall, we estimate that the proposed amendments related to Rule
3-16 would reduce the current paperwork burden by approximately 30
hours for each affected form except for quarterly reports on Form 10-Q.
Existing Rule 3-16 requires registrants to include interim period Rule
3-16 Financial Statements when the financial statements are presented
in registration statements, but it does not require Rule 3-16 Financial
Statements in quarterly reports on Form 10-Q. The proposed amendments
related to Rule 3-16 would require financial information in quarterly
reports on Form 10-Q, which would increase registrants' paperwork
burden for that form. We estimate that the proposed amendments related
to Rule 3-16 would increase the current paperwork burden by
approximately 70 hours \321\ for each affected quarterly report on Form
10-Q.
---------------------------------------------------------------------------
\321\ This figure corresponds to the 70 burden hours we estimate
will be required to prepare and process the proposed Rule 13-02
information in connection with the filing of a registration
statement. See discussion below.
---------------------------------------------------------------------------
As with the proposed amendments to Rule 3-10, although the proposed
amendments related to Rule 3-16 would reduce the paperwork burden for
each individual affected form, except for Form 10-Q, the proposed
amendments could cause the number of affected forms filed over a period
of time to change. A number of commenters stated that, due to the costs
and burdens associated with preparing the information, collateralized
debt offerings are often unregistered or structured to avoid or limit
Rule 3-16 disclosures.\322\ We believe that the proposed amendments
would encourage potential issuers to conduct additional registered
collateralized debt offerings because the costs of complying with
proposed Rule 13-02 could be less than the costs required to comply
with existing Rule 3-16. As the number of these registered offerings
increases, the number of affected forms filed would also increase over
a period of time.
---------------------------------------------------------------------------
\322\ See, e.g., letters from ABA-Committees, Cahill, Chamber,
Covenant, Davis Polk, DT, KPMG, EY, and PwC.
---------------------------------------------------------------------------
As discussed in Section VII.B.2, ``Market Conditions,'' over the
last three calendar years from 2015 to 2017, approximately seven
filings per year have included Rule 3-16 Financial Statements, with six
of those filings on Form 10-K and one on Form 20-F. However, a number
of filings on affected forms include references to Rule 3-16 even
though they do not include Rule 3-16 Financial Statements.\323\ As
commenters indicated, indenture agreements frequently include
provisions that release collateral requirements if their inclusion
would trigger Rule 3-16 Financial Statements.\324\
---------------------------------------------------------------------------
\323\ We estimate that, over the last three calendar years,
approximately 21 filings on Form 10-K included Rule 3-16 Financial
Statements and an additional 15 filings on that form referenced Rule
3-16 but did not include Rule 3-16 Financial Statements. Also, three
filings on Form 20-F included Rule 3-16 Financial Statements and no
other filings on that form referenced Form 3-16. Further, 25 filings
on Form 10-Q, 11 filings on Form S-1, 35 filings on Form S-4, one
filing on Form S-11, one filing on Form 10, and one filing on Form
1-A referred to Rule 3-16 but did not include Rule 3-16 Financial
Statements. No filings on the other affected forms referenced the
rule.
\324\ See, e.g., letters from Davis, KPMG, and PwC.
---------------------------------------------------------------------------
We do not believe that all the filings on affected forms that
reference Rule 3-16 but do not include Rule 3-16 Financial Statements
would include the proposed Rule 13-02 information, but we believe many
would include this information. For PRA purposes, we estimate that the
proposed amendments would result in approximately 33 percent of the
registration statements that reference Rule 3-16 but do not include
Rule 3-16 Financial Statements providing the proposed Rule 13-02
information. As such, we estimate that approximately ten additional
registration statements would include the proposed Rule 13-02
information, with four of those filings on Form S-4 \325\ and one each
on Forms S-1,\326\ S-11, 10, 1-A, F-1, and F-4.\327\
---------------------------------------------------------------------------
\325\ We estimated this figure by multiplying the average number
of filings per year from the last three calendar years on Form S-4
that referenced Rule 3-16 but did not include the Rule 3-16
Financial Statements (12 filings) by 0.33. The average annual number
of filings on Form S-4 that referenced Rule 3-16 but did not include
the Rule 3-16 Financial Statements is 11.67, which rounds to 12.
\326\ We estimated this figure by multiplying the average number
of filings per year from the last three calendar years on Form S-1
that referenced Rule 3-16 but did not include the Rule 3-16
Financial Statements (four filings) by 0.33. The average annual
number of filings on Form S-1 that referenced Rule 3-16 but did not
include the Rule 3-16 Financial Statements is 1.33, which rounds to
one.
\327\ Over the last three calendar years, one filing on Form S-
11, one filing on Form 10, and one filing on Form 1-A referred to
Rule 3-16 but did not include Rule 3-16 Financial Statements.
Therefore, we estimate that one additional filing on each of these
forms would include the proposed Rule 13-02 information. Also,
although there were no filings on Forms F-1 and F-4 that referenced
Rule 3-16 in the last three calendar years, one filing on Form F-1
and two filings on Form F-4 referenced Rule 3-16 in calendar years
2013 and 2014, so we estimated that one additional filing on each of
these forms would include the proposed Rule 13-02 information.
---------------------------------------------------------------------------
Further, we do not believe that all registrants that file
additional registration statements with the proposed Rule 13-02
information would be new registrants, so we do not believe there would
be an additional ten filings on Form 10-K. We estimate that 33 percent
of the registrants that file additional registration statements with
the proposed Rule 13-02 information would be new registrants, so an
additional three filings on Form 10-K would include the proposed Rule
13-02 information.\328\ Also, we estimate that two additional filings
on Form 20-F, one registration statement and one annual report, would
include the proposed Rule 13-02 information.
---------------------------------------------------------------------------
\328\ Thirty-three percent of ten is 3.33, which rounds to
three.
---------------------------------------------------------------------------
Estimating the number of additional filings on Form 10-Q requires a
separate determination because the proposed amendments would require
that proposed Rule 13-02 information be included in quarterly reports
on Form 10-Q. Rule 3-16 Financial Statements are not required in
quarterly reports on Form 10-Q under existing Rule 3-16. To estimate
the number of additional filings on Form 10-Q that would include the
proposed Rule 13-02 information, we look to the estimated number of
filings on Form 10-K. For every Form 10-K, a registrant would be
required to file three quarterly reports on Form 10-Q. Assuming that
six filings on Form 10-K would be made each year with the proposed Rule
13-02
[[Page 49674]]
information,\329\ we estimate that 18 quarterly reports on Form 10-Q
per year would be filed with the proposed Rule 13-02 information.
---------------------------------------------------------------------------
\329\ This figure was determined by adding the two current
filings on Form 10-K that include Rule 3-16 Financial Statements
with the estimated four additional filings on Form 10-K that would
include proposed Rule 13-02 information.
---------------------------------------------------------------------------
Finally, to determine the paperwork burden for a registrant to file
a registration statement with the proposed Rule 13-02 information, we
estimated the number of burden hours required for an issuer to provide
the existing Rule 3-16 Financial Statements. Unlike for Rule 3-10, no
commenter provided an estimate for the cost of Rule 3-16 Financial
Statements. For PRA purposes, we estimate that the Rule 3-16 Financial
Statements require an average of 100 burden hours, which is the same
estimate we use for the hours required to prepare and process the
Alternative Disclosures under existing Rule 3-10. However, we solicit
comment on the number of burden hours required to prepare the Rule 3-16
Financial Statements. If proposed Rule 13-02 would reduce a
registrant's burden by 30 hours, as compared to the registrant
providing the existing Rule 3-16 Financial Statements, we estimate that
the proposed Rule 13-02 information would require 70 hours to prepare
and process.
C. Burden and Cost Estimates for the Proposed Amendments
Below we estimate the aggregate change in paperwork burden as a
result of the proposed amendments, both in terms of the change to
existing responses as well as the effect of additional responses. These
estimates represent the average burden for all registrants, both large
and small. In deriving our estimates, we recognize that the burdens
will likely vary among individual registrants based on a number of
factors, including the nature of their business. The burden estimates
were calculated by multiplying the estimated number of responses by the
estimated average amount of time it would take a registrant to prepare
and review disclosure required under the proposed amendments. The
portion of the burden carried by outside professionals is reflected as
a cost, while the portion of the burden carried by the registrant
internally is reflected in hours.
For purposes of the PRA, we estimate that 75% of the burden of
preparation of Forms 10-K, 10-Q, 1-A, and 1-K is carried by the
registrant internally and that 25% of the burden of preparation is
carried by outside professionals retained by the company at an average
cost of $400 per hour.\330\ Additionally, we estimate that 25% of the
burden of preparation for Forms 10, S-1, S-3, S-4, S-11, SF-3, F-1, F-
3, F-4, 20-F, and 40-F and is carried by the registrant internally and
that 75% of the burden of preparation is carried by outside
professionals retained by the company at an average cost of $400 per
hour. Finally, we estimate that 85% of the burden of preparation of
Form 1-SA is carried by the registrant internally and that 15% of the
burden of preparation is carried by outside professionals retained by
the company at an average cost of $400 per hour.
---------------------------------------------------------------------------
\330\ We recognize that the costs of retaining outside
professionals may vary depending on the nature of the professional
services, but for purposes of this PRA analysis, we estimate that
such costs would be an average of $400 per hour. This estimate is
based on consultations with several registrants, law firms and other
persons who regularly assist registrants in preparing and filing
reports with the Commission.
---------------------------------------------------------------------------
The tables below illustrate the change to the total annual
compliance burden of affected forms, in hours and in costs, as a result
of the proposed amendments.
Table 6--Calculations of Change in Burden Estimates of Current Responses Due to Proposed Amendments to Rule 3-10
--------------------------------------------------------------------------------------------------------------------------------------------------------
Change in Change in
Number of Burden hour Change in Change in professional professional
current change per burden hours company hours hours for costs for
affected current for current for current current current
responses affected affected affected affected affected
response responses responses responses responses
(A) (B) (C) = (A) x (B) (D) = (C) x (E) = (C) x (F) = (E) x
0.75, 0.25, or 0.25, 0.75, or $400
0.85 0.15
--------------------------------------------------------------------------------------------------------------------------------------------------------
10-K................................................ 474 (30) (14,220) (10,665) (3,555) ($1,422,000)
10-Q................................................ 1,252 (30) (37,560) (28,170) (9,390) (3,756,000)
S-1................................................. 10 (30) (300) (75) (225) (90,000)
20-F................................................ 14 (30) (420) (105) (315) (126,000)
40-F................................................ 8 (30) (240) (60) (180) (72,000)
S-4................................................. 100 (30) (3,000) (750) (2,250) (900,000)
S-11................................................ 5 (30) (150) (37.5) (112.5) (45,000)
10.................................................. 7 (30) (210) (52.5) (157.5) (63,000)
F-1................................................. 5 (30) (150) (37.5) (112.5) (45,000)
F-4................................................. 7 (30) (210) (52.5) (157.5) (63,000)
1-A................................................. 0 .............. ............... ............... ............... ...............
1-K................................................. 0 .............. ............... ............... ............... ...............
1-SA................................................ 0 .............. ............... ............... ............... ...............
SF-1................................................ 0 .............. ............... ............... ............... ...............
SF-3................................................ 0 .............. ............... ............... ............... ...............
--------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 49675]]
Table 7--Calculations of Change in Burden Estimates of Additional Responses Due to Proposed Amendments to Rule 3-10
--------------------------------------------------------------------------------------------------------------------------------------------------------
Change in Change in
Number of Burden hour Change in Change in professional professional
additional change per burden hours company hours hours for costs for
affected additional for additional for additional additional additional
responses affected affected affected affected affected
response responses responses responses responses
(A) (B) (C) = (A) x (B) (D) = (C) x (E) = (C) x (F) = (E) x
0.75, 0.25, or 0.25, 0.75, or $400
0.85 0.15
--------------------------------------------------------------------------------------------------------------------------------------------------------
10-K................................................ 0 .............. ............... ............... ............... ...............
10-Q................................................ 0 .............. ............... ............... ............... ...............
S-1................................................. 3 70 210 52.5 157.5 $63,000
20-F................................................ 2 70 140 35 105 42,000
40-F................................................ 0 .............. ............... ............... ............... ...............
S-4................................................. 33 70 2,310 577.5 1,732.5 693,000
S-11................................................ 2 70 140 35 105 42,000
10.................................................. 2 70 140 35 105 42,000
F-1................................................. 2 70 140 35 105 42,000
F-4................................................. 2 70 140 35 105 42,000
1-A................................................. 0 .............. ............... ............... ............... ...............
1-K................................................. 0 .............. ............... ............... ............... ...............
1-SA................................................ 0 .............. ............... ............... ............... ...............
SF-1................................................ 0 .............. ............... ............... ............... ...............
SF-3................................................ 0 .............. ............... ............... ............... ...............
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table 8--Calculations of Change in Burden Estimates of Current Responses Due to Proposed Amendments to Rule 3-16
--------------------------------------------------------------------------------------------------------------------------------------------------------
Change in Change in
Number of Burden hour Change in Change in professional professional
current change per burden hours company hours hours for costs for
affected current for current for current current current
responses affected affected affected affected affected
response responses responses responses responses
(A) (B) (C) = (A) x (B) (D) = (C) x (E) = (C) x (F) = (E) x
0.75, 0.25, or 0.25, 0.75, or $400
0.85 0.15
--------------------------------------------------------------------------------------------------------------------------------------------------------
10-K................................................ 7 (30) (210) (157.5) (52.5) ($21,000)
10-Q................................................ 0 .............. ............... ............... ............... ...............
S-1................................................. 0 .............. ............... ............... ............... ...............
20-F................................................ 1 (30) (30) (7.5) (22.5) (9,000)
40-F................................................ 0 .............. ............... ............... ............... ...............
S-4................................................. 0 .............. ............... ............... ............... ...............
S-11................................................ 0 .............. ............... ............... ............... ...............
10.................................................. 0 .............. ............... ............... ............... ...............
F-1................................................. 0 .............. ............... ............... ............... ...............
F-4................................................. 0 .............. ............... ............... ............... ...............
1-A................................................. 0 .............. ............... ............... ............... ...............
1-K................................................. 0 .............. ............... ............... ............... ...............
1-SA................................................ 0 .............. ............... ............... ............... ...............
SF-1................................................ 0 .............. ............... ............... ............... ...............
SF-3................................................ 0 .............. ............... ............... ............... ...............
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table 9--Calculations of Change in Burden Estimates of Additional Responses Due to Proposed Amendments to Rule 3-16
--------------------------------------------------------------------------------------------------------------------------------------------------------
Change in Change in
Number of Burden hour Change in Change in professional professional
additional change per burden hours company hours hours for costs for
affected additional for additional for additional additional additional
responses affected affected affected affected affected
response responses responses responses responses
(A) (B) (C) = (A) x (B) (D) = (C) x (E) = (C) x (F) = (E) x
0.75, 0.25, or 0.25, 0.75, or $400
0.85 0.15
--------------------------------------------------------------------------------------------------------------------------------------------------------
10-K................................................ 3 70 210 157.5 52.5 $21,000
10-Q................................................ 18 70 1,260 945 315 126,000
[[Page 49676]]
S-1................................................. 1 70 70 17.5 52.5 21,000
20-F................................................ 2 70 140 35 105 42,000
40-F................................................ 0 .............. ............... ............... ............... ...............
S-4................................................. 4 70 280 70 210 84,000
S-11................................................ 1 70 70 17.5 52.5 21,000
10.................................................. 1 70 70 17.5 52.5 21,000
F-1................................................. 1 70 70 17.5 52.5 21,000
F-4................................................. 1 70 70 17.5 52.5 21,000
1-A................................................. 1 70 70 52.5 17.5 7,000
1-K................................................. 0 .............. ............... ............... ............... ...............
1-SA................................................ 0 .............. ............... ............... ............... ...............
SF-1................................................ 0 .............. ............... ............... ............... ...............
SF-3................................................ 0 .............. ............... ............... ............... ...............
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table 10--Calculations for Incremental Paperwork Burden Under the Proposed Amendments to Rules 3-10 and 3-16
[Current Responses + Additional Responses]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Change in Change in
Change in Change in Change in Change in professional professional Change in Change in
Number of Number of burden hours burden hours company hours company hours hours for hours for professional professional
total affected total affected for total for total for total for total total total costs for costs for
responses responses affected affected affected affected affected affected total total
under under responses responses responses responses responses responses affected affected
Proposed Rule Proposed Rule under under under under under under responses responses
3-10 3-16 Proposed Rule Proposed Rule Proposed Rule Proposed Rule Proposed Rule Proposed Rule under Rule 3- under Rule 3-
3-10 3-16 3-10 3-16 3-10 3-16 10 16
(A) \331\ (B) \332\ (C) \333\ (D) \334\ (E) \335\ (F) \336\ (G) \337\ (H) \338\ (I) \339\ (J) \340\
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
10-K............................ 474 10 (14,220) 0 (10,665) 0 (3,555) 0 ($1,422,000) $0
10-Q............................ 1,252 18 (37,560) 1,260 (28,170) 945 (9,390) 315 (3,756,000) 126,000
S-1............................. 13 1 (90) 70 (22.5) 17.5 (67.5) 52.5 (27,000) 21,000
20-F............................ 16 3 (280) 110 (70) 27.5 (210) 82.5 (84,000) 33,000
40-F............................ 8 0 (240) .............. (60) .............. (180) .............. (72,000) ..............
S-4............................. 133 4 (690) 280 (172.5) 70 (517.5) 210 (207,000) 84,000
S-11............................ 7 1 (10) 70 (2.5) 17.5 (7.5) 52.5 (3,000) 21,000
10.............................. 9 1 (70) 70 (17.5) 17.5 (52.5) 52.5 (21,000) 21,000
F-1............................. 7 1 (10) 70 (2.5) 17.5 (7.5) 52.5 (3,000) 21,000
F-4............................. 9 1 (70) 70 (17.5) 17.5 (52.5) 52.5 (21,000) 21,000
1-A............................. 0 1 .............. 70 .............. 52.5 .............. 17.5 .............. 7,000
1-K............................. 0 0 .............. .............. .............. .............. .............. .............. .............. ..............
1-SA............................ 0 0 .............. .............. .............. .............. .............. .............. .............. ..............
SF-1............................ 0 0 .............. .............. .............. .............. .............. .............. .............. ..............
SF-3............................ 0 0 .............. .............. .............. .............. .............. .............. .............. ..............
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------
\331\ Table 6, Column (A) + Table 7, Column (A).
\332\ Table 8, Column (A) + Table 9, Column (A).
\333\ Table 6, Column (C) + Table 6, Column (C).
\334\ Table 8, Column (C) + Table 9, Column (C).
\335\ Table 6, Column (D) + Table 7, Column (D).
\336\ Table 8, Column (D) + Table 9, Column (D).
\337\ Table 6, Column (E) + Table 7, Column (E).
\338\ Table 8, Column (E) + Table 9, Column (E).
\339\ Table 6, Column (F) + Table 7, Column (F).
\340\ Table 8, Column (F) + Table 9, Column (F).
Table 11--Incremental Paperwork Burden Under the Proposed Amendments to Rules 3-10 and 3-16
----------------------------------------------------------------------------------------------------------------
Change in
Number of burden hours Change in Change in Change in
affected of affected company hours professional professional
responses response hours costs
(A) \341\ (B) \342\ (C) \343\ (D) \344\ (E) \345\
----------------------------------------------------------------------------------------------------------------
10-K............................ 484 (14,220) (10,665) (3,555) ($1,422,000)
10-Q............................ 1,270 (36,300) (27,225) (9,075) (3,630,000)
S-1............................. 14 (20) (5) (15) (6,000)
20-F............................ 19 (170) (42.5) (127.5) (51,000)
40-F............................ 8 (240) (60) (180) (72,000)
[[Page 49677]]
S-4............................. 137 (410) (102.5) (307.5) (123,000)
S-11............................ 8 60 15 45 18,000
10.............................. 10 0 0 0 0
F-1............................. 8 60 15 45 18,000
F-4............................. 10 0 0 0 0
1-A............................. 1 70 52.5 17.5 7,000
1-K............................. 0 .............. .............. .............. ..............
1-SA............................ 0 .............. .............. .............. ..............
SF-1............................ 0 .............. .............. .............. ..............
SF-3............................ 0 .............. .............. .............. ..............
----------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------
\341\ Table 10, Columns (A) + (B).
\342\ Table 10, Columns (C) + (D).
\343\ Table 10, Columns (E) + (F).
\344\ Table 10, Columns (G) + (H).
\345\ Table 10, Columns (I) + (J).
Table 12--Requested Paperwork Burden Under the Proposed Amendments to Rules 3-10 and 3-16 \346\
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Current burden Program change Requested change in burden
---------------------------------------------------------------------------------------------------------------------------------------------------
Number of Change in
Current annual Current burden Current cost affected Change in professional Annual Burden hours Cost burden
responses hours burden responses company hours costs responses
(A) (B) (C) (D) \347\ (E) \348\ (F) \349\ (G) = (A) + (H) = (B) + (I) = (C) + (F)
(D) (E)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
10-K........................................ 8,137 14,596,183 $1,950,114,190 484 (10,665) ($1,422,000) 8,621 14,585,518 $1,948,692,190
10-Q........................................ 22,907 3,271,578 436,240,908 1,270 (27,225) (3,630,000) 24,117 3,244,353 432,610,908
S-1......................................... 901 151,143 181,371,300 14 (5) (6,000) 915 151,138 181,365,300
20-F........................................ 725 480,226 576,270,600 19 (42.5) (51,000) 744 480,184 576,219,600
40-F........................................ 160 17,197 20,636,800 8 (60) (72,000) 168 17,137 20,564,800
S-4......................................... 551 565,282 678,338,304 137 (102.5) (123,000) 688 565,180 678,215,304
S-11........................................ 64 12,529 15,034,368 8 15 18,000 72 12,544 15,052,368
10.......................................... 216 11,783 14,140,051 10 0 0 226 11,783 14,140,051
F-1......................................... 63 26,980 32,375,700 8 15 18,000 71 26,995 32,393,700
F-4......................................... 39 14,245 17,093,700 10 0 0 49 14,245 17,093,700
1-A......................................... 250 140,813 18,775,200 1 52.5 7,000 251 140,866 18,782,200
1-K......................................... 188 84,600 11,280,000 0 .............. ............... 188 84,600 11,280,000
1-SA........................................ 188 29,952 2,113,872 0 .............. ............... 188 29,952 2,113,872
SF-1........................................ 6 2,076 2,491,200 0 .............. ............... 6 2,076 2,491,200
SF-3........................................ 71 24,548 29,457,900 0 .............. ............... 71 24,548 29,457,900
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
D. Request for Comment
---------------------------------------------------------------------------
\346\ The figures in Table 12, Columns (G), (H), and (I) have
been rounded to the nearest whole number.
\347\ From Table 11, Column (A).
\348\ From Table 11, Column (C).
\349\ From Table 11, Column (F).
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Pursuant to 44 U.S.C. 3506(c)(2)(B), we request comment in order
to:
Evaluate whether the proposed collections of information
are necessary for the proper performance of the functions of the
Commission, including whether the information will have practical
utility;
Evaluate the accuracy of our assumptions and estimates of
the burden of the proposed collection of information;
Determine whether there are ways to enhance the quality,
utility, and clarity of the information to be collected;
Evaluate whether there are ways to minimize the burden of
the collection of information on those who respond, including through
the use of automated collection techniques or other forms of
information technology; and
Evaluate whether the proposed amendments would have any
effects on any other collection of information not previously
identified in this section.
Any member of the public may direct to us any comments concerning
the accuracy of these burden estimates and any suggestions for reducing
these burdens. Persons submitting comments on the collection of
information requirements should direct their comments to the Office of
Management and Budget, Attention: Desk Officer for the U.S. Securities
and Exchange Commission, Office of Information and Regulatory Affairs,
Washington, DC 20503, and send a copy to, Brent J. Fields, Secretary,
U.S. Securities and Exchange Commission, 100 F Street NE, Washington,
DC 20549, with reference to File No. S7-19-18. Requests for materials
submitted to OMB by the Commission with regard to the collection of
information requirements should be in writing, refer to File No. S7-19-
18 and be submitted to the U.S. Securities and Exchange Commission,
Office of FOIA Services, 100 F Street NE, Washington, DC 20549. OMB is
required to make a decision concerning the collection of information
requirements between 30 and 60 days after publication of the proposed
amendments. Consequently, a comment to OMB is best assured of having
its full effect if the OMB receives it within 30 days of publication.
IX. Small Business Regulatory Enforcement Fairness Act
For purposes of the Small Business Regulatory Enforcement Fairness
Act of
[[Page 49678]]
1996 (``SBREFA''),\350\ we solicit data to determine whether the
proposed amendments constitute a ``major'' rule. Under SBREFA, a rule
is considered ``major'' where, if adopted, it results or is likely to
result in:
---------------------------------------------------------------------------
\350\ Public Law 104-121, tit. II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------
An annual effect on the economy of $100 million or more
(either in the form of an increase or a decrease);
A major increase in costs or prices for consumers or
individual industries; or
Significant adverse effects on competition, investment, or
innovation.
Commenters should provide comment and empirical data on (a) the
potential annual effect on the U.S. economy; (b) any increase in costs
or prices for consumers or individual industries; and (c) any potential
effect on competition, investment, or innovation.
X. Initial Regulatory Flexibility Act Analysis
This Initial Regulatory Flexibility Act Analysis has been prepared
in accordance with the Regulatory Flexibility Act.\351\ It relates to
the proposed amendments to the financial disclosure requirements in
Rules 3-10 and 3-16 of Regulation S-X to improve those requirements for
both investors and registrants.
---------------------------------------------------------------------------
\351\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------
A. Reasons for, and Objectives of, the Proposing Action
The purpose of the proposed amendments to Rules 3-10 and 3-16 is to
better align those requirements with the needs of investors and to
simplify and streamline the disclosure obligations of registrants. The
proposed changes would include amending both rules and relocating part
of Rule 3-10 and all of Rule 3-16 to proposed Rules 13-01 and 13-02 in
Regulation S-X, respectively. These changes are intended to provide
investors with the information that is important given the specific
facts and circumstances, make the disclosures easier to understand, and
reduce the costs and burdens to registrants. The reasons for, and
objectives of, the proposed amendments are discussed in more detail in
Sections I through III above.
B. Legal Basis
We are proposing the rule and form amendments contained in this
release under the authority set forth in Sections 3, 6, 7, 8, 9, 10,
19(a), and 28 of the Securities Act of 1933, as amended and Sections
3(b), 12, 13, 15(d), 23(a), and 36 of the Securities Exchange Act of
1934, as amended.
C. Small Entities Subject to the Proposed Rules
The proposed changes would affect some registrants that are small
entities. The Regulatory Flexibility Act defines ``small entity'' to
mean ``small business,'' ``small organization,'' or ``small
governmental jurisdiction.'' \352\ For purposes of the Regulatory
Flexibility Act, under our rules, an issuer, other than an investment
company or an investment adviser, is a ``small business'' or ``small
organization'' if it had total assets of $5 million or less on the last
day of its most recent fiscal year and is engaged or proposing to
engage in an offering of securities that does not exceed $5
million.\353\ We estimate that there are 1,196 issuers that file with
the Commission, other than investment companies and investment
advisers, that may be considered small entities and are potentially
subject to the proposed amendments.\354\
---------------------------------------------------------------------------
\352\ 5 U.S.C. 601(6).
\353\ See 17 CFR 230.157 under the Securities Act and 17 CFR
240.0-10(a) under the Exchange Act.
\354\ This estimate is based on staff analysis of XBRL data
submitted by filers, other than co-registrants, with EDGAR filings
of Forms 10-K, 20-F, and 40-F and amendments filed during the
calendar year 2017 and a staff analysis of Forms 1-A and 1-K filed
during the calendar year 2017.
---------------------------------------------------------------------------
D. Reporting, Recordkeeping, and Other Compliance Requirements
As noted above, the purpose of the proposed amendments to Rules 3-
10 and 3-16 is to better align those requirements with the needs of
investors and to simplify and streamline the disclosure obligations of
registrants. Proposed Rule 3-10 would continue to permit the omission
of separate financial statements of subsidiary issuers and guarantors
when certain conditions are met and the parent company provides the
Proposed Alternative Disclosures. While the conditions that must be met
to omit separate subsidiary issuer or guarantor financial statements
would continue to be located in proposed Rule 3-10, the disclosure
requirements would be relocated to proposed Rule 13-01. The proposed
amendments would:
Replace the condition that a subsidiary issuer or
guarantor be 100% owned by the parent company with a condition that it
be consolidated in the parent company's consolidated financial
statements;
replace Consolidating Information with Summarized
Financial Information of the Obligor Group, which may be presented on a
combined basis, and reduce the number of periods presented;
expand the qualitative disclosures about the guarantees
and the issuers and guarantors;
eliminate quantitative thresholds for disclosure and
require disclosure of additional information that would be material to
a holder of the guaranteed security;
permit the Proposed Alternative Disclosures to be provided
outside the footnotes to the parent company's audited annual and
unaudited interim consolidated financial statements in a registration
statement covering the offer and sale of the subject securities and any
related prospectus, and in certain Exchange Act reports filed shortly
thereafter;
require that the Proposed Alternative Disclosures be
included in the footnotes to the parent company's consolidated
financial statements for annual and quarterly reports beginning with
the annual report for the fiscal year during which the first bona fide
sale of the subject securities is completed;
eliminate the requirement to provide pre-acquisition
financial statements of recently-acquired subsidiary issuers and
guarantors; and
require the Proposed Alternative Disclosures for as long
as the issuers and guarantors have an Exchange Act reporting obligation
with respect to the guaranteed securities rather than for so long as
the guaranteed securities are outstanding.
The proposed amendments to Rule 3-10 would simplify and streamline
the rule structure in several ways. Most significantly, under proposed
Rules 3-10(a) and 3-10(a)(1) there would be only a single set of
eligibility criteria that would apply to all issuer and guarantor
structures instead of having separate sets of criteria contained in
each of the five exceptions in existing Rules 3-10(b) through (f).
Similarly, the requirements for the Proposed Alternative Disclosures
would be included in a single location within proposed Rule 13-01,
rather than spread among the multiple paragraphs of existing Rule 3-10.
Proposed Rule 3-16 would replace the rule's existing requirement to
provide separate financial statements for each affiliate whose
securities are pledged as collateral with financial and non-financial
disclosures about the affiliate(s) and the collateral arrangement as a
supplement to the consolidated financial statements of the registrant
that issues the collateralized security. Similar to the proposed
disclosures for issuers and guarantors of guaranteed securities under
Rule 3-10, the disclosure requirements in Rule 3-16 would be amended
and relocated to proposed Rule 13-02.
[[Page 49679]]
Additionally, instead of requiring disclosure only when the pledged
securities meet or exceed a numerical threshold relative to the
securities registered or being registered under the existing rule's
``substantial portion'' test, the proposed amendments would require
disclosure to the extent material to a holder of the collateralized
security. Further, the proposed amendments would require disclosure of
any additional information about the collateral arrangement and each
affiliate whose security is pledged as collateral that would be
material to a holder of the collateralized securities. We believe these
proposed disclosures would enable an investor to evaluate the potential
outcomes in the event of foreclosure, would reduce costs and burdens on
registrants, and may facilitate the use of debt structures that include
pledges of affiliate securities, resulting in improved collateral
packages being available to investors.
Many of the proposed changes would simplify and streamline existing
disclosure requirements in ways that are expected to reduce compliance
burdens for all registrants, including small entities. Some of the
proposed changes would incrementally increase compliance costs for
registrants, although we do not expect these additional costs to be
significant. In addition, compliance with the proposed amendments would
require the use of professional skills, including accounting and legal
skills. The proposed amendments are discussed in detail in Sections II
and III above. We discuss the economic impact including the estimated
costs and burdens, of the proposed amendments to all registrants,
including small entities, in Sections VII and VIII above.
E. Duplicative, Overlapping, or Conflicting Federal Rules
We believe that the proposed amendments would not duplicate,
overlap, or conflict with other federal rules.
F. Significant Alternatives
The Regulatory Flexibility Act directs us to consider alternatives
that would accomplish our stated objectives, while minimizing any
significant adverse impact on small entities. In connection with the
proposed amendments, we considered the following alternatives:
Establishing different compliance or reporting
requirements that take into account the resources available to small
entities;
Clarifying, consolidating, or simplifying compliance and
reporting requirements under the rules for small entities;
Using performance rather than design standards; and
Exempting small entities from all or part of the
requirements.
We believe the proposed amendments would simplify and streamline
disclosure requirements in ways that are expected to reduce compliance
burdens for all registrants, including small entities. We do not
believe that the proposed amendments would impose any significant new
compliance obligations. Accordingly, we do not believe it is necessary
to exempt small entities from all or part of the proposed amendments.
We note in this regard that the Commission's existing disclosure
requirements provide for scaled disclosure requirements and other
accommodations for small entities, and the proposed amendments would
not alter these existing accommodations. We are, however, soliciting
comment on whether the amendments should permit additional or different
flexibility for SRCs and other types of issuers to locate the Proposed
Alternative Disclosures outside the financial statements in light of
the burdens associated with annual audit, interim review, and internal
control over financial reporting requirements.
Finally, with respect to using performance rather than design
standards, the proposed amendments generally contain elements similar
to performance standards, which we believe is appropriate because it
would allow registrants to omit financial information that is not
necessary for an investment decision based on facts and circumstances
applicable to that registrant and offering. For example, under the
proposed amendments, the Summarized Financial Information of the
Obligor Group that generally would be required could be omitted if it
is not materially different from corresponding amounts in the parent
company's consolidated financial statements. This and other performance
standards included in the proposed amendments would reduce compliance
burdens for all registrants, including small entities.
Request for Comment
We encourage the submission of comments with respect to any aspect
of this Initial Regulatory Flexibility Analysis. In particular, we
request comments regarding:
How the proposed rule and form amendments can achieve
their objective while lowering the burden on small entities;
the number of small entity companies that may be affected
by the proposed rule and form amendments;
the existence or nature of the potential effects of the
proposed amendments on small entity companies discussed in the
analysis; and
how to quantify the effects of the proposed amendments.
Commenters are asked to describe the nature of any effect and
provide empirical data supporting the extent of that effect. Comments
will be considered in the preparation of the Final Regulatory
Flexibility Analysis, if the proposed rules are adopted, and will be
placed in the same public file as comments on the proposed rules
themselves.
XI. Statutory Authority
The amendments contained in this release are being proposed under
the authority set forth in Sections 3, 6, 7, 8, 10, 19(a), and 28 of
the Securities Act, as amended, and Sections 3(b), 12, 13, 15(d),
23(a), and 36 of the Exchange Act.
List of Subjects in 17 CFR Parts 210, 229, 239, 240 and 249
Reporting and recordkeeping requirements, Securities.
Text of Proposed Rule and Form Amendments
For the reasons set out in the preamble, the Commission is
proposing to amend title 17, chapter II of the Code of Federal
Regulations as follows:
PART 210--FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL
STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF
1934, INVESTMENT COMPANY ACT OF 1940, INVESTMENT ADVISERS ACT OF
1940, AND ENERGY POLICY AND CONSERVATION ACT OF 1975
0
1. The authority citation for part 210 continues to reads as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3,
77aa(25), 77aa(26), 77nn(25), 77nn(26), 78c, 78j-1, 78l, 78m, 78n,
78o(d), 78q, 78u-5, 78w, 78ll, 78mm, 80a-8, 80a-20, 80a-29, 80a-30,
80a-31, 80a-37(a), 80b-3, 80b-11, 7202 and 7262, and sec. 102(c),
Pub. L. 112-106, 126 Stat. 310 (2012), unless otherwise noted.
0
2. Revise Sec. 210.3-10 to read as follows:
Sec. 210.3-10 Financial statements of guarantors and issuers of
guaranteed securities registered or being registered.
(a) If an issuer or guarantor of a guaranteed security that is
registered or being registered is required to file financial statements
required by Regulation S-X with respect to the
[[Page 49680]]
guarantee or guaranteed security, such financial statements may be
omitted if the issuer or guarantor is a consolidated subsidiary of the
parent company, the parent company's consolidated financial statements
have been filed, and the conditions in paragraphs (a)(1) and (2) of
this section have been met:
(1) The guaranteed security is debt or debt-like; and
(i) The parent company issues the security or co-issues the
security, jointly and severally, with one or more of its consolidated
subsidiaries; or
(ii) A consolidated subsidiary issues the security or co-issues the
security with one or more other consolidated subsidiaries of the parent
company, and the security is guaranteed fully and unconditionally by
the parent company.
(2) The parent company provides the disclosures specified in Sec.
210.13-01.
(b) For the purposes of this section and Sec. 210.13-01:
(1) The ``parent company'' is the entity that:
(i) Is an issuer or guarantor of the guaranteed security;
(ii) Is, or as a result of the subject Securities Act registration
statement will be, an Exchange Act reporting company; and
(iii) Consolidates each subsidiary issuer and/or subsidiary
guarantor of the guaranteed security in its consolidated financial
statements.
(2) A security is ``debt or debt-like'' if it has the following
characteristics:
(i) The issuer has a contractual obligation to pay a fixed sum at a
fixed time; and
(ii) Where the obligation to make such payments is cumulative, a
set amount of interest must be paid.
Note 1 to paragraph (b)(2). Neither the form of the security nor
its title will determine whether a security is debt or debt like.
Instead, the substance of the obligation created by the security
will be determinative.
Note 2 to paragraph (b)(2). The phrase ``set amount of
interest'' is not intended to mean ``fixed amount of interest.''
Floating and adjustable rate securities, as well as indexed
securities, may meet the criteria specified in paragraph (b)(2)(ii)
of this section as long as the payment obligation is set in the debt
instrument and can be determined from objective indices or other
factors that are outside the discretion of the obligor.
(3) A guarantee is ``full and unconditional,'' if, when an issuer
of a guaranteed security has failed to make a scheduled payment, the
guarantor is obligated to make the scheduled payment immediately and,
if it does not, any holder of the guaranteed security may immediately
bring suit directly against the guarantor for payment of all amounts
due and payable.
Sec. 210.3-16 [Removed and Reserved]
0
3. Remove and reserve Sec. 210.3-16.
0
4. Amend Sec. 210.8-01 by revising Note 3 and Note 4 to read as
follows:
Sec. 210.8-01 Preliminary Notes to Article 8.
* * * * *
Note 3 to Sec. 210.8. The requirements of Sec. 210.3-10 are
applicable to financial statements for a subsidiary of a smaller
reporting company that issues securities guaranteed by the smaller
reporting company or guarantees securities issued by the smaller
reporting company. Disclosures about guarantors and issuers of
guaranteed securities registered or being registered must be
presented as required by Sec. 210.13-01.
Note 4 to Sec. 210.8. Disclosures about a smaller reporting
company's affiliates whose securities collateralize any class of
securities registered or being registered and the related collateral
arrangement must be presented as required by Sec. 210.13-02.
* * * * *
0
5. Amend Sec. 210.8-03 by adding paragraphs (b)(7) and (8) to read as
follows:
Sec. 210.8-03 Interim financial statements.
* * * * *
(b) * * *
(7) Financial statements of and disclosures about guarantors and
issuers of guaranteed securities. The requirements of Sec. 210.3-10
are applicable to financial statements for a subsidiary of a smaller
reporting company that issues securities guaranteed by the smaller
reporting company or guarantees securities issued by the smaller
reporting company. Disclosures about guarantors and issuers of
guaranteed securities registered or being registered must be presented
as required by Sec. 210.13-01.
(8) Disclosures about affiliates whose securities collateralize an
issuance. Disclosures about a smaller reporting company's affiliates
whose securities collateralize any class of securities registered or
being registered and the related collateral arrangement must be
presented as required by Sec. 210.13-02.
* * * * *
0
6. Amend Sec. 210.10-01 by adding paragraphs (b)(9) and (10) to read
as follows:
Sec. 210.10-01 Interim financial statements.
* * * * *
(b) * * *
(9) The requirements of Sec. 210.3-10 are applicable to financial
statements for a subsidiary of the registrant that issues securities
guaranteed by the registrant or guarantees securities issued by the
registrant. Disclosures about guarantors and issuers of guaranteed
securities registered or being registered must be presented as required
by Sec. 210.13-01.
(10) Disclosures about a registrant's affiliates whose securities
collateralize any class of securities registered or being registered
and the related collateral arrangement must be presented as required by
Sec. 210.13-02.
* * * * *
0
7. Add an undesignated center heading and Sec. Sec. 210.13-01 and
210.13-02 to read as follows:
Financial and Non-Financial Disclosures for Certain Securities
Registered or Being Registered
Sec. 210.13-01 Guarantors and issuers of guaranteed securities
registered or being registered.
(a) For each class of guaranteed security registered or being
registered for which the registrant is the parent company (as that term
is defined in Sec. 210.3-10(b)(1)), provide the following disclosures
to the extent material to holders of the guaranteed security:
(1) Identification of the issuers and guarantors of the guaranteed
security;
(2) A description of the terms and conditions of the guarantees,
and how payments to holders of the guaranteed security may be affected
by the composition of and relationships among the issuers, guarantors,
and subsidiaries of the parent company that are not issuers or
guarantors of the guaranteed security;
(3) A description of other factors that may affect payments to
holders of the guaranteed security, such as contractual or statutory
restrictions on dividends, guarantee enforceability, or the rights of a
noncontrolling interest holder;
(4) Summarized financial information as specified in Sec. 210.1-
02(bb)(1) of each issuer and guarantor of the guaranteed security. The
summarized financial information of each such issuer and guarantor
consolidated in the parent company's consolidated financial statements
may be presented on a combined basis with the summarized financial
information of the parent company. Intercompany transactions between
issuers and guarantors whose summarized financial information is
presented on a combined basis shall be eliminated. If the information
provided in response to the requirements of this section is applicable
to one or more, but not all, issuers and/or guarantors, separately
disclose the summarized financial information applicable to those
issuers and/or guarantors. The financial information of subsidiaries
that are not issuers or guarantors shall not be combined with that of
issuers and guarantors. The method selected to
[[Page 49681]]
present investments in subsidiaries that are not issuers or guarantors
shall be disclosed and used for all such subsidiaries for all of the
classes of guaranteed securities for which disclosure is required by
this section, and shall be reasonable in the circumstances. Disclose
this summarized financial information as of and for the most recently
ended fiscal year and interim period included in the parent company's
consolidated financial statements. If the disclosure required by this
paragraph (a)(4) is omitted because it is not material to holders of
the guaranteed security, disclose a statement to that effect and the
reasons therefore; and
(5) Any other quantitative or qualitative information that would be
material to making an investment decision with respect to the
guaranteed security.
Note 1 to paragraph (a). The parent company may elect to provide
the disclosures required by this section in a footnote to its
consolidated financial statements or alternatively, in management's
discussion and analysis of financial condition and results of
operations described in Sec. 229.303 (Item 303 of Regulation S-K)
of this chapter in its registration statement covering the offer and
sale of the subject securities and any related prospectus, and in
Exchange Act reports on the forms described in Sec. Sec. 249.310
(Form 10-K), 249.220f (Form 20-F), and 249.308a (Form 10-Q) of this
chapter required to be filed during the fiscal year in which the
first bona fide sale of the subject securities is completed. If not
otherwise included in the consolidated financial statements or in
management's discussion and analysis of financial condition and
results of operations, the parent company must include the
disclosures in its prospectus immediately following ``Risk
Factors,'' if any, or otherwise, immediately following pricing
information described in Sec. 229.503(c) (Item 503(c) of Regulation
S-K) of this chapter. However, the parent company must provide the
disclosures in a footnote to its consolidated financial statements
in its annual and quarterly reports beginning with its annual report
filed on the forms described in Sec. Sec. 249.310 (Form 10-K) and
249.220f (Form 20-F) of this chapter for the fiscal year during
which the first bona fide sale of the subject securities is
completed.
(b) [Reserved]
Sec. 210.13-02 Affiliates whose securities collateralize securities
registered or being registered.
(a) For each class of security registered or being registered that
is collateralized by a security of the registrant's affiliate or
affiliates, provide the following disclosures to the extent material to
holders of the collateralized security:
(1) A description of the security pledged as collateral and each
affiliate whose security is pledged as collateral;
(2) A description of the terms and conditions of the collateral
arrangement, including the events or circumstances that would require
delivery of the collateral;
(3) A description of the trading market for the affiliate's
security pledged as collateral or a statement that there is no market;
(4) Summarized financial information as specified in Sec. 210.1-
02(bb)(1) of each affiliate whose securities are pledged as collateral.
The summarized financial information of each such affiliate
consolidated in the registrant's financial statements may be presented
on a combined basis. Intercompany transactions between affiliates whose
summarized financial information is presented on a combined basis shall
be eliminated. If the information provided in response to the
requirements of this section is applicable to one or more, but not all,
affiliates, separately disclose the summarized financial information
applicable to those affiliates. Disclose this summarized financial
information as of and for the most recently ended fiscal year and
interim period included in the registrant's consolidated financial
statements. If the disclosure required by this paragraph (a)(4) is
omitted because it is not material to holders of the collateralized
security, disclose a statement to that effect and the reasons
therefore; and
(5) Any other quantitative or qualitative information that would be
material to making an investment decision with respect to the
collateralized security.
Note 1 to paragraph (a). The registrant may elect to provide
the disclosures required by this section in a footnote to its
consolidated financial statements or alternatively, in management's
discussion and analysis of financial condition and results of
operations described in Sec. 229.303 (Item 303 of Regulation S-K)
of this chapter in its registration statement covering the offer and
sale of the subject securities and any related prospectus, and in
Exchange Act reports on the forms described in Sec. Sec. 249.310
(Form 10-K), 249.220f (Form 20-F), and 249.308a (Form 10-Q) of this
chapter required to be filed during the fiscal year in which the
first bona fide sale of the subject securities is completed. If not
otherwise included in the consolidated financial statements or in
management's discussion and analysis of financial condition and
results of operations, the registrant must include the disclosures
in its prospectus immediately following ``Risk Factors,'' if any, or
otherwise, immediately following pricing information described in
Sec. 229.503(c) (Item 503(c) of Regulation S-K) of this chapter.
However, the registrant must provide the disclosures in a footnote
to its consolidated financial statements in its annual and quarterly
reports beginning with its annual report filed on the forms
described in Sec. Sec. 249.310 (Form 10-K) and 249.220f (Form 20-F)
of this chapter for the fiscal year during which the first bona fide
sale of the subject securities is completed.
(b) [Reserved]
PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND
CONSERVATION ACT OF 1975--REGULATION S-K
0
8. The authority citation for part 229 reads as follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2,
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj,
77nnn, 77sss, 78c, 78i, 78j, 78j-3, 78l, 78m, 78n, 78n-1, 78o, 78u-
5, 78w, 78ll, 78 mm, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-
31(c), 80a-37, 80a-38(a), 80a-39, 80b-11 and 7201 et seq.; 18 U.S.C.
1350; sec. 953(b), Pub. L. 111-203, 124 Stat. 1904 (2010); and sec.
102(c), Pub. L. 112-106, 126 Stat. 310 (2012).
0
9. Amend Sec. 229.504 by revising Instruction 6 to read as follows:
Sec. 229.504 (Item 504) Use of proceeds.
* * * * *
6. Where the registrant indicates that the proceeds may, or will,
be used to finance acquisitions of other businesses, the identity of
such businesses, if known, or, if not known, the nature of the
businesses to be sought, the status of any negotiations with respect to
the acquisition, and a brief description of such business shall be
included. Where, however, pro forma financial statements reflecting
such acquisition are not required by Sec. Sec. 210.1-01 through
210.13-02 (Regulation S-X) of this chapter, including Sec. 210.8-05
(Rule 8-05 of Regulation S-X) of this chapter for smaller reporting
companies, to be included in the registration statement, the possible
terms of any transaction, the identification of the parties thereto or
the nature of the business sought need not be disclosed, to the extent
that the registrant reasonably determines that public disclosure of
such information would jeopardize the acquisition. Where Sec. Sec.
210.1-01 through 210.13-02 (Regulation S-X) of this chapter, including
Sec. 210.8-04 (Rule 8-04 of Regulation S-X) of this chapter for
smaller reporting companies, as applicable, would require financial
statements of the business to be acquired to be included, the
description of the business to be acquired shall be more detailed.
* * * * *
[[Page 49682]]
0
10. Amend Sec. 229.1100 by revising paragraphs (c)(2)(ii)(C), (D), and
(F) to read as follows:
Sec. 229.1100 (Item 1100) General.
* * * * *
(c) * * *
(2) * * *
(ii) * * *
(C) If the third party does not meet the conditions of paragraph
(c)(2)(ii)(A) or (B) of this section and the pool assets relating to
the third party are fully and unconditionally guaranteed by a direct or
indirect parent of the third party, General Instruction I.C.3 of the
form described in Sec. 239.13 (Form S-3) of this chapter or General
Instruction I.A.5(iii) of the form described in Sec. 239.33 (Form F-3)
of this chapter is met with respect to the pool assets relating to such
third party and the disclosures specified in Sec. 210.13-01 (Rule 13-
01 of Regulation S-X) of this chapter have been provided in the reports
to be referenced. Financial statements of the third party may be
omitted if the requirements of Sec. 210.3-10 (Rule 3-10 of Regulation
S-X) of this chapter are satisfied.
(D) If the pool assets relating to the third party are guaranteed
by a wholly owned subsidiary of the third party and the subsidiary does
not meet the conditions of paragraph (c)(2)(ii)(A) or (B) of this
section, the criteria in either paragraph (c)(2)(ii)(A) or (B) of this
section are met with respect to the third party and the disclosures
specified in Rule 13-01 of Regulation S-X have been provided in the
reports to be referenced. Financial statements of the subsidiary
guarantor may be omitted if the requirements of Rule 3-10 of Regulation
S-X are satisfied.
* * * * *
(F) The third party is a U.S. government-sponsored enterprise, has
outstanding securities held by non-affiliates with an aggregate market
value of $75 million or more, and makes information publicly available
on an annual and quarterly basis, including audited financial
statements prepared in accordance with generally accepted accounting
principles covering the same periods that would be required for audited
financial statements under Sec. Sec. 210.1-01 through 210.13-02
(Regulation S-X) of this chapter and non-financial information
consistent with that required by Sec. Sec. 229.10 through 229.1208
(Regulation S-K).
* * * * *
0
11. Amend Sec. 229.1112 by revising paragraph (b)(2) to read as
follows:
Sec. 229.1112 (Item 1112) Significant obligors of pool assets.
* * * * *
(b) * * *
(2) If pool assets relating to a significant obligor represent 20%
or more of the asset pool, provide financial statements meeting the
requirements of Sec. Sec. 210.1-01 through 210.13-02 (Regulation S-X)
of this chapter, except Sec. Sec. 210.3-05 (Rule 3-05) and 210.11-01
through 210.11-03 (Article 11 of Regulation S-X) of this chapter, of
the significant obligor. Financial statements of such obligor and its
subsidiaries consolidated (as required by Sec. 240.14a-3(b) of this
chapter) shall be filed under this item.
* * * * *
0
12. Amend Sec. 229.1114 by revising paragraph (b)(2)(ii) to read as
follows:
Sec. 229.1114 (Item 1114) Credit enhancement and other support,
except for certain derivatives instruments.
* * * * *
(b) * * *
(2) * * *
(ii) If any entity or group of affiliated entities providing
enhancement or other support described in paragraph (a) of this section
is liable or contingently liable to provide payments representing 20%
or more of the cash flow supporting any offered class of the asset-
backed securities, provide financial statements meeting the
requirements of Sec. Sec. 210.1-01 through 210.13-02 (Regulation S-X)
of this chapter, except Sec. Sec. 210.3-05 (Rule 3-05) and 210.11-01
through 210.11-03 (Article 11 of Regulation S-X) of this chapter, of
such entity or group of affiliated entities. Financial statements of
such enhancement provider and its subsidiaries consolidated (as
required by Sec. 240.14a-3(b) of this chapter) shall be filed under
this item.
* * * * *
0
13. Amend Sec. 229.1115 by revising paragraph (b)(2) to read as
follows:
Sec. 229.1115 (Item 1115) Certain derivatives instruments.
* * * * *
(b) * * *
(2) If the aggregate significance percentage related to any entity
or group of affiliated entities providing derivative instruments
contemplated by this section is 20% or more, provide financial
statements meeting the requirements of Sec. Sec. 210.1-01 through
210.13-02 (Regulation S-X) of this chapter, except Sec. Sec. 210.3-05
(Rule 3-05) and 210.11-01 through 210.11-03 (Article 11 of Regulation
S-X) of this chapter, of such entity or group of affiliated entities.
Financial statements of such entity and its subsidiaries consolidated
(as required by Sec. 240.14a-3(b) of this chapter) shall be filed
under this item.
* * * * *
PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
0
14. The authority citation for part 239 is revised to read as follows:
Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-
3, 77sss, 78c, 78l, 78m, 78n, 78o(d), 78o-7, 78u-5, 78w(a), 78ll,
78mm, 80a-2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-13, 80a-24, 80a-26,
80a-29, 80a-30, and 80a-37; and sec. 107, Pub. L. 112-106, 126 Stat.
312, unless otherwise noted.
0
15. Amend Sec. 239.31 by revising paragraph (b) to read as follows:
Sec. 239.31 Form F-1, registration statement under the Securities Act
of 1933 for securities of certain foreign private issuers.
* * * * *
(b) If a registrant is a majority-owned subsidiary, which does not
itself meet the conditions of these eligibility requirements, it shall
nevertheless be deemed to have met such conditions if its parent meets
the conditions and if the parent fully guarantees the securities being
registered as to principal and interest. In such an instance the
parent-guarantor is the issuer of a separate security consisting of the
guarantee which must be concurrently registered but may be registered
on the same registration statement as are the guaranteed securities.
Both the parent-guarantor and the subsidiary shall each disclose the
information required by this Form as if each were the only registrant
except that if the subsidiary will not be eligible to file annual
reports on the form described in Sec. 249.229f (Form 20-F) of this
chapter after the effective date of the registration statement, then it
shall disclose the information specified in the form described in Sec.
239.11 (Form S-1) of this chapter. The requirements of Sec. 210.3-10
(Rule 3-10 of Regulation S-X) of this chapter are applicable to
financial statements for a subsidiary of a parent company that issues
securities guaranteed by the parent company.
0
16. Amend Form F-1 (referenced in Sec. 239.31) by revising Instruction
I.B under ``General Instructions'' to read as follows:
Note: The text of Form F-1 does not, and this amendment will
not, appear in the Code of Federal Regulations.
[[Page 49683]]
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM F-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
* * * * *
GENERAL INSTRUCTIONS
I. Eligibility Requirements for Use of Form F-1
* * * * *
B. If a registrant is a majority-owned subsidiary, which does not
itself meet the conditions of these eligibility requirements, it shall
nevertheless be deemed to have met such conditions if its parent meets
the conditions and if the parent fully guarantees the securities being
registered as to principal and interest. Note: In such an instance the
parent-guarantor is the issuer of a separate security consisting of the
guarantee which must be concurrently registered but may be registered
on the same registration statement as are the guaranteed securities.
Both the parent-guarantor and the subsidiary shall each disclose the
information required by this Form as if each were the only registrant
except that if the subsidiary will not be eligible to file annual
reports on Form 20-F after the effective date of the registration
statement, then it shall disclose the information specified in Forms S-
1 (Sec. 239.11 of this chapter). The requirements of Rule 3-10 of
Regulation S-X (Sec. 210.3-10 of this chapter) are applicable to
financial statements for a subsidiary of a parent company that issues
securities guaranteed by the parent company.
* * * * *
0
17. Amend Sec. 239.33 by revising Note to paragraph (a)(5) to read as
follows:
Sec. 239.33 Form F-3, for registration under the Securities Act of
1933 of securities of certain foreign private issuers offered pursuant
to certain types of transactions.
* * * * *
Note to paragraph (a)(5). In the situations described in
paragraphs (a)(5)(iii), (iv), and (v) of this section, the parent or
majority-owned subsidiary guarantor is the issuer of a separate
security consisting of the guarantee, which must be concurrently
registered, but may be registered on the same registration statement
as are the guaranteed non-convertible securities. Both the parent
and majority-owned subsidiary shall each disclose the information
required by this Form as if each were the only registrant except
that if the majority-owned subsidiary will not be eligible to file
annual reports on the forms described in Sec. 249.220f (Form 20-F)
or Sec. 249.240f (Form 40-F) of this chapter after the effective
date of the registration statement, then it shall disclose the
information specified in the form described in Sec. 239.13 (Form S-
3) of this chapter. The requirements of Sec. 210.3-10 (Rule 3-10 of
Regulation S-X) of this chapter are applicable to financial
statements of a subsidiary of a parent company that issues
securities guaranteed by the parent company or guarantees securities
issued by the parent company.
* * * * *
0
18. Amend Form F-3 (referenced in Sec. 239.33) by revising the note to
Instruction I.A.5 under ``General Instructions'' to read as follows:
Note: The text of Form F-3 does not, and this amendment will
not, appear in the Code of Federal Regulations.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM F-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
* * * * *
GENERAL INSTRUCTIONS
* * * * *
I. Eligibility Requirements for Use of Form F-3
* * * * *
A. Registration Requirements
* * * * *
5. Majority-owned Subsidiaries. If a registrant is a majority-owned
subsidiary, security offerings may be registered on this Form if:
* * * * *
Note: In the situation described in paragraphs I.A.5(iii),
I.A.5(iv), and I.A.5(v) above, the parent or majority-owned
subsidiary guarantor is the issuer of a separate security consisting
of the guarantee, which must be concurrently registered, but may be
registered on the same registration statement as are the guaranteed
non-convertible securities. Both the parent or majority-owned
subsidiary shall each disclose the information required by this Form
as if each were the only registrant except that if the majority-
owned subsidiary will not be eligible to file annual reports on Form
20-F or Form 40-F after the effective date of the registration
statement, then it shall disclose the information specified in Form
S-3. The requirements of Rule 3-10 of Regulation S-X are applicable
to financial statements for a subsidiary of a parent company that
issues securities guaranteed by the parent company or guarantees
securities issued by the parent company.
* * * * *
0
19. Amend Form 1-A (referenced in Sec. 239.90) by revising paragraph
(b)(7) of Part F/S to read as follows:
Note: The text of Form 1-A does not, and this amendment will
not, appear in the Code of Federal Regulations.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 1-A
REGULATION A OFFERING STATEMENT UNDER THE SECURITIES ACT OF 1933
* * * * *
Part F/S
* * * * *
(b) Financial Statements for Tier 1 Offerings
* * * * *
(7) Financial Statements of and Disclosures About Other Entities.
The circumstances described below may require you to file financial
statements of, or provide disclosures about, other entities in the
offering statement. The financial statements of other entities must be
presented for the same periods as if the other entity was the issuer as
described above in paragraphs (b)(3) and (b)(4) unless a shorter period
is specified by the rules below. The financial statements of other
entities shall follow the same audit requirement as paragraph (b)(2) of
this Part F/S:
(i) Financial Statements of and Disclosures About Guarantors and
Issuers of Guaranteed Securities. The requirements of Rule 3-10 of
Regulation S-X are applicable to financial statements of a subsidiary
that issues securities guaranteed by the ``parent company,'' as that
term is defined in Rule 3-10 of Regulation S-X, or guarantees
securities issued by the parent company. However, the reference in Rule
3-10(a) of Regulation S-X to ``an issuer or guarantor of a guaranteed
security that is registered or being registered is required to file
financial statements required by Regulation S-X with respect to the
guarantee or guaranteed security'' instead refers to ``an issuer or
guarantor of a guaranteed security that is qualified or being qualified
pursuant to Regulation A is required to file financial statements
required by Part F/S of Form 1-A with respect to the guarantee or
guaranteed security.'' The parent company must also provide the
disclosures required by Rule 13-01 of Regulation S-X. The parent
company may elect to provide these disclosures in a footnote to its
consolidated financial statements or alternatively, in management's
discussion and analysis of financial condition and results of
operations described in Item 9 of Form 1-A in its
[[Page 49684]]
offering statement on Form 1-A filed in connection with the offer and
sale of the subject securities.
(ii) Disclosures About Affiliates Whose Securities Collateralize an
Issuance. Disclosures about an issuer's affiliates whose securities
collateralize any class of securities being offered must be provided as
required by Rule 13-02 of Regulation S-X. The issuer may elect to
provide these disclosures in a footnote to its consolidated financial
statements or alternatively, in management's discussion and analysis of
financial condition and results of operations described in Item 9 of
Form 1-A in its offering statement on Form 1-A filed in connection with
the offer and sale of the subject securities.
* * * * *
0
20. Amend Form 1-K (referenced in Sec. 239.91) by revising paragraph
Item 7(g) of Part II to read as follows:
Note: The text of Form 1-K does not, and this amendment will
not, appear in the Code of Federal Regulations.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 1-K
* * * * *
PART II
* * * * *
Item 7. Financial Statements
* * * * *
(g) Financial Statements of and Disclosures About Other Entities.
The circumstances described below may require you to file financial
statements of, or provide disclosures about, other entities. The
financial statements of other entities must be presented for the same
periods as the issuer's financial statements described above in
paragraphs (d) and (e) unless a shorter period is specified by the
rules below.
(1) Financial Statements of and Disclosures About Guarantors and
Issuers of Guaranteed Securities. The requirements of Rule 3-10 of
Regulation S-X are applicable to financial statements of a subsidiary
that issues securities guaranteed by the ``parent company,'' as that
term is defined in Rule 3-10 of Regulation S-X, or guarantees
securities issued by the parent company. However, the reference in Rule
3-10(a) of Regulation S-X to ``an issuer or guarantor of a guaranteed
security that is registered or being registered is required to file
financial statements required by Regulation S-X with respect to the
guarantee or guaranteed security'' instead refers to ``an issuer or
guarantor of a guaranteed security that is qualified or being qualified
pursuant to Regulation A is required to file financial statements
required by Item 7 of Part II of Form 1-K with respect to the guarantee
or guaranteed security.'' The parent company must also provide the
disclosures required by Rule 13-01 of Regulation S-X. The parent
company may elect to provide these disclosures in a footnote to its
consolidated financial statements or alternatively, in management's
discussion and analysis of financial condition and results of
operations described in Item 9 of Form 1-A in reports on Form 1-K and
Form 1-SA required to be filed during the fiscal year in which the
first bona fide sale of the subject securities is completed. However,
the parent company must provide the disclosures in a footnote to its
consolidated financial statements in its annual and semiannual reports
beginning with its annual report filed on Form 1-K for the fiscal year
during which the first bona fide sale of the subject securities is
completed.
(2) Disclosures About Affiliates Whose Securities Collateralize an
Issuance. Disclosures about an issuer's affiliates whose securities
collateralize any class of securities being offered must be provided as
required by Rule 13-02 of Regulation S-X. The issuer may elect to
provide these disclosures in a footnote to its consolidated financial
statements or alternatively, in management's discussion and analysis of
financial condition and results of operations described in Item 9 of
Form 1-A in reports on Form 1-K and Form 1-SA required to be filed
during the fiscal year in which the first bona fide sale of the subject
securities is completed. However, the issuer must provide the
disclosures in a footnote to its consolidated financial statements in
its annual and semiannual reports beginning with its annual report
filed on Form 1-K for the fiscal year during which the first bona fide
sale of the subject securities is completed.
* * * * *
0
21. Amend Form 1-SA (referenced in Sec. 239.92) by revising Item 3(e)
to read as follows:
Note: The text of Form 1-SA does not, and this amendment will
not, appear in the Code of Federal Regulations.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 1-SA
* * * * *
INFORMATION TO BE INCLUDED IN REPORT
* * * * *
Item 3. Financial Statements
* * * * *
(e) Financial Statements of and Disclosures About Other Entities.
The circumstances described below may require you to file financial
statements of, or provide disclosures about, other entities. These
financial statements and disclosures may be unaudited.
(1) Financial Statements of and Disclosures About Guarantors and
Issuers of Guaranteed Securities. The requirements of Rule 3-10 of
Regulation S-X are applicable to financial statements of a subsidiary
that issues securities guaranteed by the ``parent company,'' as that
term is defined in Rule 3-10 of Regulation S-X, or guarantees
securities issued by the parent company. However, the reference in Rule
3-10(a) of Regulation S-X to ``an issuer or guarantor of a guaranteed
security that is registered or being registered is required to file
financial statements required by Regulation S-X with respect to the
guarantee or guaranteed security'' instead refers to ``an issuer or
guarantor of a guaranteed security that is qualified or being qualified
pursuant to Regulation A is required to file financial statements
required by Item 3 of Form 1-SA with respect to the guarantee or
guaranteed security.'' The parent company must also provide the
disclosures required by Rule 13-01 of Regulation S-X. The parent
company may elect to provide these disclosures in a footnote to its
consolidated financial statements or alternatively, in management's
discussion and analysis of financial condition and results of
operations described in Item 9 of Form 1-A in reports on Form 1-K and
Form 1-SA required to be filed during the fiscal year in which the
first bona fide sale of the subject securities is completed. However,
the parent company must provide the disclosures in a footnote to its
consolidated financial statements in its annual and semiannual reports
beginning with its annual report filed on Form 1-K for the fiscal year
during which the first bona fide sale of the subject securities is
completed.
(2) Disclosures About Affiliates Whose Securities Collateralize an
Issuance. Disclosures about an issuer's affiliates whose securities
collateralize any class of securities being offered must be provided as
required by Rule 13-02 of Regulation S-X. The issuer may elect to
provide these disclosures in a footnote to its consolidated
[[Page 49685]]
financial statements or alternatively, in management's discussion and
analysis of financial condition and results of operations described in
Item 9 of Form 1-A in reports on Form 1-K and Form 1-SA required to be
filed during the fiscal year in which the first bona fide sale of the
subject securities is completed. However, the issuer must provide the
disclosures in a footnote to its consolidated financial statements in
its annual and semiannual reports beginning with its annual report
filed on Form 1-K for the fiscal year during which the first bona fide
sale of the subject securities is completed.
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
0
22. The authority citation for part 240 continues to read in part as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4,
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20,
80a-3, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et seq.; and 8302;
7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; and Pub.
L. 111-203, 939A, 124 Stat. 1887 (2010); and secs. 503 and 602, Pub.
L. 112-106, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
0
23. Revise Sec. 240.12h-5 to read as follows:
Sec. 240.12h-5 Exemption for subsidiary issuers of guaranteed
securities and subsidiary guarantors.
Any issuer of a guaranteed security, or guarantor of a security,
that is permitted to omit financial statements by Sec. 210.3-10 (Rule
3-10 of Regulation S-X) of this chapter is exempt from the requirements
of 15 U.S.C. 78m(a) (Section 13(a) of the Act) or 78o(d) (Section 15(d)
of the Act).
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
0
24. The authority citation for part 249 continues to read in part as
follows:
Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C.
5461 et seq.; 18 U.S.C. 1350; Sec. 953(b), Pub. L. 111-203, 124
Stat. 1904; Sec. 102(a)(3), Pub. L. 112-106, 126 Stat. 309 (2012);
Sec. 107, Pub. L. 112-106, 126 Stat. 313 (2012), and Sec. 72001,
Pub. L. 114-94, 129 Stat. 1312 (2015), unless otherwise noted.
* * * * *
0
25. Amend Form 20-F (referenced in Sec. 249.220f) by revising
Instruction 1 to Item 8 to read as follows:
Note: The text of Form 20-F does not, and this amendment will
not, appear in the Code of Federal Regulations.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 20-F
* * * * *
Instructions to Item 8:
1. This item refers to the company, but note that under Rules 3-05,
3-09, 3-10, 3-14, 13-01, and 13-02 of Regulation S-X, you also may have
to provide financial statements or financial information for entities
other than the issuer. In some cases, you may have to provide financial
statements for a predecessor. See the definition of ``predecessor'' in
Exchange Act Rule 12b-2 and Securities Act Rule 405.
* * * * *
By the Commission.
Dated: July 24, 2018.
Brent J. Fields,
Secretary.
Note: The following appendix will not appear in the Code of
Federal Regulations.
Appendix
Financial Disclosures About Guarantors and Issuers of Guaranteed
Securities and Affiliates Whose Securities Collateralize a Registrant's
Securities
For ease of reference, set forth below is a table summarizing
the main features of existing Rule 3-10 and Rule 3-16 and the
proposed rules. This is only a summary of certain requirements
contained in the Commission's rules and regulations, as well as a
summary of certain proposed rules; it is not a substitute for the
rules and regulations or for the proposed rules. Registrants should
refer to the existing rules and to the proposed rule text for the
full requirements and the description of those requirements in the
release. The changes we are proposing include amending both rules
and relocating part of Rule 3-10 and all of Rule 3-16 to proposed
Rules 13-01 and 13-02, respectively.
------------------------------------------------------------------------
Summary of existing Rule Summary of
3-10 proposed rules
------------------------------------------------------------------------
Financial Statement Rule 3-10(a) states that Each issuer of
Requirement & Omission of every issuer of a a registered
Subsidiary Issuer and registered security that security that
Guarantor Financial is guaranteed and every is guaranteed
Statements. guarantor of a and each
registered security must guarantor of a
file the financial registered
statements required for security must
a registrant by file the
Regulation S-X. financial
Rules 3-10(b)-(f) set statements
forth five exceptions to required for a
this general rule, which registrant by
permit the omission of Regulation S-
separate financial X; however,
statements of subsidiary proposed Rule
issuers and guarantors 3-10(a) would
when certain conditions no longer
are met, including that contain this
the parent company express
provides the Alternative statement.
Disclosures. Proposed Rule 3-
10(a) would
continue to
permit the
omission of
separate
financial
statements of
subsidiary
issuers and
guarantors
when certain
conditions are
met, including
that the
parent company
provides the
Proposed
Alternative
Disclosures.
Rule Structure & Eligible Rules 3-10(b) through (f) The proposed
Issuer and Guarantor set forth the five rules would
Structures. exceptions. Each replace the
exception specifies the exceptions in
eligible structures to existing Rule
which it applies, and 3-10(b)
the conditions that must through (f).
be met. In each case, Proposed Rule
the parent company must 3-10(a) would
provide the Alternative permit the
Disclosures. separate
Eligible issuer and financial
guarantor structures: statements of
A finance a subsidiary
subsidiary issues issuer or
securities that its guarantor to
parent company be omitted if
guarantees (Rule 3- the
10(b)); eligibility
an operating conditions in
subsidiary issues proposed Rules
securities that its 3-10(a) and 3-
parent company 10(a)(1) are
guarantees (Rule 3- met and the
10(c)); Proposed
a subsidiary Alternative
issues securities that Disclosures
its parent company and specified in
one or more other proposed Rule
subsidiaries of its 13-01 are
parent company guarantee provided in
(Rule 3-10(d)); the filing, as
a parent company required by
issues securities that proposed Rule
one of its subsidiaries 3-10(a)(2).
guarantees (Rule 3- Proposed Rule
10(e)); or 3-10(a)(1)
a parent company sets forth the
issues securities that eligible
more than one of its structures.
subsidiaries guarantees Eligible issuer
(Rule 3-10(f)). and guarantor
structures:
The
parent company
issues the
security or co-
issues the
security,
jointly and
severally,
with one or
more of its
consolidated
subsidiaries
(Proposed Rule
3-10(a)(1)(i))
; or
a
consolidated
subsidiary
issues the
security, or
co-issues it
with one or
more other
consolidated
subsidiaries
of the parent
company, and
the security
is guaranteed
fully and
unconditionall
y by the
parent company
(Proposed Rule
3-10(a)(1)(ii)
).
The role of
subsidiary
guarantors
would not be
specified in
the proposed
categories of
structures;
however, the
proposed rules
are intended
to cover the
structures
permitted in
existing Rules
3-10(b)
through (f).
[[Page 49686]]
Conditions to Omit Separate If an issuer and The applicable
Subsidiary Issuer and guarantor structure conditions,
Guarantor Financial matches one of the set forth in
Statements. exceptions in Rules 3- proposed Rule
10(b) through (f), the 3-10, include:
conditions in the
applicable exception Consolidated
paragraph must be met, financial
including: statements of
Consolidated the parent
financial statements of company have
the parent company have been filed
been filed; (proposed Rule
each subsidiary 3-10(a));
issuer and guarantor is the
``100% owned'' by the subsidiary
parent company; issuer or
each guarantee guarantor is a
is ``full and consolidated
unconditional'' and, subsidiary of
where there are multiple the parent
guarantees, joint and company
several; and (proposed Rule
the parent 3-10(a));
company provides the the
Alternative Disclosures guaranteed
in its financial security is
statement footnotes. debt or debt-
Additionally, the 2000 like (proposed
Release states the Rule 3-
guaranteed security must 10(a)(1));
be debt or debt-like. the
issuer and
guarantor
structure must
match one of
the eligible
issuer and
guarantor
structures
(proposed Rule
3-10(a)(1)(i)
or (ii)); and
the
parent company
provides the
Proposed
Alternative
Disclosures
(proposed Rule
3-10(a)(2)).
Parent Company Financial The identity of the ``Parent
Statements Condition. parent company will vary company''
based on the particular would be
corporate structure; defined in
however, the 2000 proposed Rule
Release stated three 3-10(b)(1) and
conditions must be met require that
before an entity can be the entity:
considered a ``parent Is an
company,'' including issuer or
that the entity: guarantor of
Is an issuer or the guaranteed
guarantor of the subject security;
securities; is an
is an Exchange Exchange Act
Act reporting company, reporting
or will be one as a company, or
result of the subject will become
Securities Act one as a
registration statement; result of the
and subject
owns 100% of Securities Act
each subsidiary issuer registration
or guarantor directly or statement; and
indirectly.
consolidates
each
subsidiary
issuer and/or
guarantor in
its
consolidated
financial
statements.
Ownership Condition......... The exceptions in Rules 3- Proposed Rule 3-
10(b) through (f) 10(a) would
require that each require that
subsidiary issuer or the subsidiary
guarantor must be 100% issuer or
owned by the parent guarantor be a
company to omit its consolidated
separate financial subsidiary of
statements. the parent
company
pursuant to
the relevant
accounting
standards
already in
use.
......................... Proposed Rule
13-01(a)(3)
would require,
to the extent
material, a
description of
any factors
that may
affect
payments to
holders of the
guaranteed
security, such
as the rights
of a non-
controlling
interest
holder.
Proposed Rule
13-01(a)(4)
would require
separate
disclosure of
Summarized
Financial
Information
for subsidiary
issuers and
guarantors
affected by
those factors.
Debt or Debt-Like Security Rule 3-10 does not define Proposed Rule 3-
Definition: when a security is 10(a)(1) would
``debt or debt-like;'' state
however, the 2000 explicitly
Release described that the
characteristics of a guaranteed
debt or debt-like security must
security, including: be ``debt or
The issuer has a debt-like''
contractual obligation and proposed
to pay a fixed sum at a Rule 3-
fixed time; and 10(b)(2) would
where the state that a
obligation to make such guaranteed
payments is cumulative, security would
a set amount of interest be considered
must be paid. ``debt or debt-
like'' if:
The
issuer has a
contractual
obligation to
pay a fixed
sum at a fixed
time; and
where
the obligation
to make such
payments is
cumulative, a
set amount of
interest must
be paid.
Subsidiary Guarantee The exceptions in Rule 3- The parent
Eligibility Requirements. 10(b) through (f) company's role
specify that a guarantee with respect
be full and to the
unconditional and, when guaranteed
there are multiple security would
guarantees, be joint and determine
several. The whether the
requirements are imposed structure is
on the guarantee eligible to
regardless of whether provide the
the guarantor is the Proposed
parent company or a Alternative
subsidiary. Disclosures.
The parent
company must
be the issuer
or full and
unconditional
guarantor of
the guaranteed
security
(proposed
Rules 3-
10(a)(1)(i)
and (ii)).
......................... If a subsidiary
guarantee is
not full and
unconditional,
or where there
are multiple
guarantees,
not joint and
several,
disclosure of
such terms and
conditions
would be
required by
proposed Rule
13-01(a)(2),
to the extent
material.
Proposed Rule
13-01(a)(4)
would require
separate
disclosure of
the Summarized
Financial
Information
for subsidiary
guarantor(s)
to which such
terms and
conditions
apply, to the
extent
material.
Alternative Disclosures & To be eligible to omit The proposed
Proposed Alternative the separate financial rule would
Disclosures. statements of a replace the
subsidiary issuer or brief
guarantor, each narrative form
exception in Rules 3- and
10(b) through (f) Consolidating
requires that the parent Information
company must provide the form of
Alternative Disclosures Alternative
in the footnotes to its Disclosure
consolidated financial with the
statements. The form and Proposed
content of the Alternative
Alternative Disclosures Disclosures
are determined based on specified in
the facts and proposed Rule
circumstances and are 13-01.
either a brief narrative Specific
or Consolidating elements of
Information. Specific the Proposed
elements of Alternative
Consolidating Disclosures
Information are are discussed
discussed below. below.
Alternative Disclosures The Proposed
may consist of a brief Alternative
narrative instead of Disclosures
Consolidating would be
Information when: required in
The subsidiary all cases, to
is a finance subsidiary, the extent
and the parent company material to
is the only guarantor of holders of the
the securities; guaranteed
security
(proposed Rule
13-01(a)).
Additionally,
proposed Rule
13-01(a)(5)
would require
disclosure of
any
quantitative
or qualitative
information
that would be
material to
making an
investment
decision with
respect to the
guaranteed
security.
the parent
company of the
subsidiary issuer has
no independent assets
or operations, the
parent company
guarantees the
securities, no
subsidiary of the
parent company
guarantees the
securities, and any
subsidiaries of the
parent company other
than the issuer are
minor; and
the parent
company issuer has no
independent assets or
operations and all of
the parent company's
subsidiaries, other
than minor
subsidiaries,
guarantee the
securities.
Consolidating Information The instructions for The proposed
and Proposed Alternative preparing Consolidating rule would
Disclosures--Level of Information are require the
Detail. specified in Rule 3- Proposed
10(i). Consolidating Alternative
Information includes all Disclosures
major captions of the specified in
balance sheet, income proposed Rule
statement, and cash flow 13-01.
statement that are Proposed Rule
required to be shown 13-01(a)(4)
separately in interim would require,
financial statements for each
prepared under Article issuer and
10 of Regulation S-X. guarantor,
Rules 3-10(i)(11)(i) and Summarized
(ii), respectively, Financial
require disclosure of Information,
any financial and as specified
narrative information in Rule 1-
about each guarantor if 02(bb) of
it would be material for Regulation S-
investors to evaluate X, which would
the sufficiency of the include select
guarantee, and balance sheet
disclosure of sufficient and income
information to make the statement line
financial information items.
presented not Disclosure of
misleading. additional
line items of
financial
information
beyond what is
specified in
proposed Rule
13-01(a)(4)
would be
required by
proposed Rule
13-01(a)(5),
to the extent
material. If
the
disclosures
required by
proposed Rule
13-01(a)(4)
are omitted
because they
are
immaterial,
proposed Rule
13-01(a)(4)
requires
disclosure to
that effect
and the
reasons.
[[Page 49687]]
Consolidating Information The applicable exception Proposed Rule
and Proposed Alternative in Rule 3-10(c) through 13-01(a)(4)
Disclosures--Combined Basis. (f) specifies the would permit
columns of information the Summarized
that must be presented, Financial
and Rule 3-10(i)(6) Information of
describes circumstances each issuer
when additional columns and guarantor
are required. consolidated
To distinguish the in the parent
assets, liabilities, company's
operations, and cash consolidated
flows of the entities financial
that are legally statements to
obligated to make be presented
payments under the on a combined
guarantee from those basis with the
that are not, the Summarized
columnar presentation Financial
must show: Information of
A parent the parent
company's investments in company.
all consolidated However, if
subsidiaries based upon information
its proportionate share provided in
of their net assets response to
(Rule 3-10(i)(3)); and disclosures
subsidiary specified in
issuer and guarantor proposed Rule
investments in certain 13-01 is
consolidated applicable to
subsidiaries using the one or more,
equity method of but not all,
accounting (Rule 3- issuers and
10(i)(5). guarantors,
proposed Rule
13-01(a)(4)
would require,
to the extent
it is
material,
separate
disclosure of
Summarized
Financial
Information
for the
issuers and
guarantors to
which the
information
applies.
The proposed
rule would no
longer require
separate
disclosure of
the financial
information of
non-guarantor
subsidiaries.
Proposed Rule
13-01(a)(4)
would allow
the parent
company to
determine
which method
best meets the
objective of
excluding the
financial
information of
non-issuer and
non-guarantor
subsidiaries
from the
Proposed
Alternative
Disclosures,
so long as the
selected
method is
disclosed and
used for all
non-issuer and
non-guarantor
subsidiaries
for all
classes of
guaranteed
securities for
which the
disclosure is
required, and
is reasonable
in the
circumstances.
Consolidating Information Consolidating Information Proposed Rule
and Proposed Alternative must be provided as of, 13-01(a)(4)
Disclosures--Periods to and for, the same would require
Present. periods as the parent Summarized
company's consolidated Financial
financial statements Information to
(Rule 3-10(i)(2)). be provided as
of, and for,
the most
recently ended
fiscal year
and year-to-
date interim
period, if
applicable,
included in
the parent
company's
consolidated
financial
statements.
Consolidating Information Rule 3-10 requires Proposed Rules
and Proposed Alternative certain non-financial 13-01(a)(1)
Disclosures--Non-Financial disclosures, including: through (3)
Disclosures. Disclosure, if would require
true, that each disclosures,
subsidiary issuer or to the extent
subsidiary guarantor is material,
100% owned by the parent about the
company, that all issuers and
guarantees are full and guarantors,
unconditional, and where the terms and
there is more than one conditions of
guarantor, that all the
guarantees are joint and guarantees,
several (Rules 3- and how the
10(i)(8)(i)-(iii); issuer and
restricted net guarantor
assets (Rule 3- structure and
10(i)(10); and other factors
certain types of may affect
restrictions on the payments to
ability of the parent holder of the
company or any guarantor guaranteed
to obtain funds from securities.
their subsidiaries (Rule Additionally,
3-10(i)(9). proposed Rule
13-01(a)(5)
would require
disclosure of
any facts and
circumstances
specific to
particular
issuers and
guarantors
that would be
material to
holders of the
guaranteed
security that
are not
specifically
required by
proposed Rules
13-01(a)(1)
through (3).
Rules 3-10(i)(11)(i) and
(ii), respectively,
require disclosure of
any financial and
narrative information
about each guarantor if
it would be material for
investors to evaluate
the sufficiency of the
guarantee, and
disclosure of sufficient
information to make the
financial information
presented not
misleading.
Location and Audit The exceptions in Rules 3- The note to
Requirement of Alternative 10(b) through (f) proposed Rule
Disclosures and Proposed require the Alternative 13-01(a) would
Alternative Disclosure. Disclosures to be allow the
included in the notes to parent company
the parent company's to provide the
consolidated financial Proposed
statements. Rule 3- Alternative
10(i)(2) requires Disclosures in
Consolidating a footnote to
Information to be its
audited for the same consolidated
periods that the parent financial
company financial statements or
statements are required alternatively,
to be audited. in MD&A in its
registration
statement
covering the
offer and sale
of the subject
securities and
any related
prospectus,
and in
Exchange Act
reports on
Form 10-K,
Form 20-F, and
Form 10-Q
required to be
filed during
the fiscal
year in which
the first bona
fide sale of
the subject
securities is
completed. If
a parent
company elects
to provide the
disclosures in
its audited
financial
statements,
the Proposed
Alternative
Disclosures
would be
required to be
audited. If
not otherwise
included in
the
consolidated
financial
statements or
in MD&A, the
parent company
would be
required to
include the
Proposed
Alternative
Disclosures in
its prospectus
immediately
following
``Risk
Factors,'' if
any, or
otherwise,
immediately
following
pricing
information
described in
Item 503(c) of
Regulation S-
K. The parent
company would
be required to
provide the
Proposed
Alternative
Disclosures in
a footnote to
its
consolidated
financial
statements in
its annual and
quarterly
reports
beginning with
its annual
report filed
on Form 10-K
or Form 20-F
for the fiscal
year during
which the
first bona
fide sale of
the subject
securities is
completed.
Recently-Acquired Subsidiary If a parent company The proposed
Issuers and Guarantors. acquires a new rule would not
subsidiary issuer or include this
guarantor, Rule 3-10(g) requirement.
requires the parent Proposed Rule
company to provide one 13-01(a)(5)
year of audited pre- would require
acquisition financial information
statements of the newly- about recently-
acquired issuer or acquired
guarantor (and, if subsidiary
applicable, unaudited issuers and
interim financial guarantors if
statements) when the: it would be
Parent company material to an
acquires the new investment
subsidiary during or decision in
subsequent to one of the the guaranteed
periods for which security.
financial statements are
presented in a
Securities Act
registration statement
filed in connection with
the offer and sale of
the debt securities;
subsidiary is
deemed
``significant'' (Rule
3-10(g)(1)(ii); and
subsidiary is
not reflected in the
audited consolidated
results of the parent
company for at least
nine months of the
most recent fiscal
year (Rule 3-
10(g)(1)).
[[Page 49688]]
Exchange Act Reporting and Subsidiary issuers and Subsidiary
Continuous Reporting guarantors that avail issuers and
Obligation. themselves of an guarantors
exception that allows that are
for the Alternative permitted to
Disclosures in lieu of omit their
separate financial financial
statements are exempt statements
from Exchange Act under proposed
reporting by Rule 12h-5. Rule 3-10
The parent company, would continue
however, must continue to be exempt
to provide the from Exchange
Alternative Disclosures Act reporting
for as long as the under Rule 12h-
guaranteed securities 5. The
are outstanding. This proposed rule
obligation continues would permit a
even if the subsidiary parent company
issuers and guarantors to cease
could have suspended providing the
their reporting Proposed
obligations under Alternative
Exchange Act Rule 12h-3 Disclosures if
or Section 15(d) of the the
Exchange Act, had they corresponding
chosen not to avail subsidiary
themselves of a Rule 3- issuer's or
10 exception and guarantor's
reported separately from Section 15(d)
the parent company. obligation is
suspended
automatically
by operation
of Section
15(d)(1) or
through
compliance
with Rule 12h-
3. As a
continued
condition of
eligibility to
omit the
financial
statements of
a subsidiary
issuer or
guarantor, a
parent company
must continue
providing the
Proposed
Alternative
Disclosures
for so long as
the subsidiary
issuer or
guarantor has
a Section
12(b)
reporting
obligation
with respect
to the
guarantee or
guaranteed
security.
------------------------------------------------------------------------
Summary of existing Rule Summary of
3-16 proposed rules
------------------------------------------------------------------------
Rule 3-16 Financial Rule 3-16(a) requires a Under the
Statements and Proposed registrant to provide proposed
Disclosures. separate annual and amendments,
interim financial Rule 3-16
statements for each Financial
affiliate whose Statements
securities constitute a would be
``substantial portion'' replaced with
of the collateral for a requirement
any class of securities that a
registered or being registrant
registered as if the provide the
affiliate were a financial and
separate registrant. non-financial
disclosures
about the
affiliate(s)
and the
collateral
arrangement
specified in
proposed Rule
13-02(a).
When Disclosure is Required. Rule 3-16 Financial Proposed Rule
Statements are required 13-02(a) would
when an affiliate's require the
securities constitute a disclosures
``substantial portion'' specified in
of the collateral for proposed Rule
the securities 13-02(a)(1)
registered or being through (4) in
registered. An all cases, to
affiliate's securities the extent
shall be deemed to material to
constitute a holders of the
``substantial portion'' collateralized
if the aggregate security.
principal amount, par Additionally,
value, or book value of proposed Rule
the securities as 13-02(a)(5)
carried by the would require
registrant, or the disclosure of
market value of such any
securities, whichever is quantitative
the greatest, equals 20 or qualitative
percent or more of the information
principal amount of the that would be
secured class of material to
securities (Rule 3- making an
16(b)). investment
decision with
respect to the
collateralized
security.
Financial and Non-Financial Rule 3-16 Financial Proposed Rule
Disclosures. Statements are those 13-02(a)(4)
that would be required would require,
if the affiliate were a for each
separate registrant. affiliate
whose
securities are
pledged as
collateral,
Summarized
Financial
Information,
as specified
in Rule 1-
02(bb) of
Regulation S-
X, which would
include select
balance sheet
and income
statement line
items.
Disclosure of
additional
line items of
financial
information
beyond what is
specified in
proposed Rule
13-02(a)(4)
would be
required by
proposed Rule
13-02(a)(5),
to the extent
material. If
the
disclosures
required by
proposed Rule
13-02(a)(4)
are omitted
because they
are
immaterial,
proposed Rule
13-02(a)(4)
requires
disclosure to
that effect
and the
reasons
therefore.
......................... Proposed Rules
13-02(a)(1)
through (3)
would require
certain non-
financial
disclosures,
to the extent
material,
about the
securities
pledged as
collateral,
each affiliate
whose
securities are
pledged, the
terms and
conditions of
the collateral
arrangement,
and whether a
trading market
exists for the
pledged
securities.
Additionally,
proposed Rule
13-02(a)(5)
would require
disclosure of
any other
quantitative
or qualitative
information
that would be
material to
making an
investment
decision with
respect to the
collateralized
security.
Combined Basis.............. Separate Rule 3-16 Proposed Rule
Financial Statements are 13-02(a)(4)
required for each would permit
affiliate whose the Summarized
securities constitute a Financial
``substantial portion'' Information of
of the collateral for each affiliate
securities registered or consolidated
being registered. in the
registrant's
consolidated
financial
statements to
be presented
on a combined
basis.
However, if
information
provided in
response to
disclosures
specified in
proposed Rule
13-02 is
applicable to
one or more,
but not all,
affiliates,
proposed Rule
13-02(a)(4)
would require,
to the extent
it is
material,
separate
disclosure of
Summarized
Financial
Information
for the
affiliates to
which the
information
applies.
Periods Presented........... Rule 3-16 Financial Proposed Rule
Statements are required 13-02(a)(4)
for the same annual and would require
interim periods as if disclosure as
the affiliate were a of and for the
separate registrant. As most recently
such, the financial ended fiscal
statements are required year and
to be provided for the interim period
periods required by included in
Rules 3-01 and 3-02 of the
Regulation S-X. However, registrant's
Rule 3-16 Financial consolidated
Statements are not financial
required in quarterly statements.
reports, such as Form 10- Disclosure
Q. would be
required in
quarterly
reports, such
as Form 10-Q
(proposed Rule
10-01(b)(10)).
Location and Audit Rule 3-16 Financial The note to
Requirement of the Statements are required proposed Rule
Disclosure. to be audited for the 13-02(a) would
periods required by allow the
Rules 3-01 and 3-02 of registrant to
Regulation S-X. provide the
disclosures
required by
this section
in a footnote
to its
consolidated
financial
statements or
alternatively,
in MD&A in its
registration
statement
covering the
offer and sale
of the subject
securities and
any related
prospectus,
and in
Exchange Act
reports on
Form 10-K,
Form 20-F, and
Form 10-Q
required to be
filed during
the fiscal
year in which
the first bona
fide sale of
the subject
securities is
completed. If
a registrant
elects to
provide the
disclosures in
its audited
financial
statements,
the proposed
disclosures
would be
required to be
audited. If
not otherwise
included in
the
consolidated
financial
statements or
in MD&A, the
registrant
would be
required to
include the
disclosures in
its prospectus
immediately
following
``Risk
Factors,'' if
any, or
otherwise,
immediately
following
pricing
information
described in
Item 503(c) of
Regulation S-
K. The
registrant
would be
required to
provide the
disclosures in
a footnote to
its
consolidated
financial
statements in
its annual and
quarterly
reports
beginning with
its annual
report filed
on Form 10-K
or Form 20-F
for the fiscal
year during
which the
first bona
fide sale of
the subject
securities is
completed.
------------------------------------------------------------------------
[[Page 49689]]
[FR Doc. 2018-19456 Filed 10-1-18; 8:45 am]
BILLING CODE 8011-01-P
