Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant's Securities, 21940-22007 [2020-04776]

Download as PDF 21940 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations SECURITIES AND EXCHANGE COMMISSION Commission reference 17 CFR Parts 210, 229, 230, 239, 240, and 249 [Release No. 33–10762; 34–88307; 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: Final rule. AGENCY: The Securities and Exchange Commission (‘‘Commission’’) is adopting 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 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 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: Effective date: The final rules are effective on January 4, 2021. Compliance dates: See Section VI for further information on transitioning to the final rules. FOR FURTHER INFORMATION CONTACT: Jarrett Torno, Assistant Chief Accountant, at (202) 551–3400, John Fieldsend, Special Counsel, or Sean Harrison, Special Counsel, at (202) 551– 3430, in the Division of Corporation Finance, 100 F Street NE, Washington, DC 20549. SUPPLEMENTARY INFORMATION: The Commission is amending jbell on DSKJLSW7X2PROD with RULES2 SUMMARY: VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 Regulation S–X [17 CFR 210.1–01 through 210.13– 02]: Rule 3–10 .......................... Rule 3–16 .......................... Rule 8–01 .......................... Rule 8–03 .......................... Rule 10–01 ........................ Rule 13–01 ........................ Rule 13–02 ........................ Regulation S–K [17 CFR 229.10 through 229.1305]: Item 504 ............................ Item 601 ............................ Item 1100 .......................... Item 1112 .......................... Item 1114 .......................... Item 1115 .......................... Securities Act of 1933 (Securities Act) [15 U.S.C. 77a et seq.]: Rule 257 ............................ Form F–1 .......................... Form F–3 .......................... Form 1–A .......................... Form 1–K .......................... Form 1–SA ........................ Securities Exchange Act of 1934 (Exchange Act) [15 U.S.C. 78a et seq.]: Rule 12h–5 ........................ Form 20–F ........................ CFR citation (17 CFR) 210.3–10 210.3–16 210.8–01 210.8–03 210.10–01 210.13–01 210.13–02 229.504 229.601 229.1100 229.1112 229.1114 229.1115 230.257 239.31 239.33 239.90 239.91 239.92 240.12h–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 III. Amendments to Rule 3–10 and Partial Relocation to Rule 13–01 A. Overarching Principle B. Overview of the Proposed and Final 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 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 Revised Alternative Disclosures and Audit Requirement e. Recently Acquired Subsidiary Issuers and Guarantors f. Continuous Reporting Obligation D. Application of Amendments to Certain Types of Issuers 1. Foreign Private Issuers 2. Smaller Reporting Companies 3. Offerings pursuant to Regulation A PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 4. Issuers of Asset-Backed Securities— Third Party Financial Statements IV. Rule 3–16 of Regulation S–X V. Amendments to Rule 3–16 and Partial Relocation to Rule 13–02 A. Overarching Principle B. Overview of the Proposed and Final Amendments 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. Location of Disclosures and Audit Requirement G. Recently Acquired Affiliates Whose Securities Are Pledged as Collateral H. Application of Amendments to Certain Types of Issuers 1. Foreign Private Issuers 2. Smaller Reporting Companies 3. Offerings Pursuant to Regulation A VI. Transition to Final Amendments and Rule 3–16 Collateral Release Provisions A. Transition to Final Amendments B. Rule 3–16 Collateral Release Provisions VII. Other Matters VIII. Economic Analysis A. Introduction B. Baseline and Affected Parties 1. Market Participants 2. Market Conditions C. Anticipated Economic Effects 1. 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 Alternative Disclosures and Audit Requirement iv. Recently Acquired Subsidiary Issuers and Guarantors v. Continuous Reporting Obligation 2. Amendments to Rule 3–16 and Partial 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. Location of Disclosures and Audit Requirement e. Recently Acquired Affiliates Whose Securities Are Pledged as Collateral D. Anticipated Effects on Efficiency, Competition, and Capital Formation E. Consideration of Reasonable Alternatives 1. Alternative to Final Amendments to Existing Rule 3–10 2. Alternatives Common to Final Amendments to Existing Rule 3–10 and Existing Rule 3–16 IX. Paperwork Reduction Act A. Background B. Summary of Comment Letters C. Summary of the Impact on Collections of Information D. Burden and Cost Estimates to the Amendments X. Final Regulatory Flexibility Act Analysis E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations A. Need for, and Objectives of, the Amendments B. Significant Issues Raised by Public Comments C. Small Entities Subject to the Amendments D. Projected Reporting, Recordkeeping, and Other Compliance Requirements E. Agency Action To Minimize Effect on Small Entities XI. Statutory Authority I. Introduction jbell on DSKJLSW7X2PROD with RULES2 A. Background On July 24, 2018, the Commission proposed 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.1 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 2 when the consolidated financial statements of that parent company are filed and certain conditions are met. 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 the Commission proposed included 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.3 These proposed changes were 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. The proposal resulted from an ongoing, comprehensive evaluation of the Commission’s disclosure requirements.4 1 See Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities, Release No. 33–10526 (July 24, 2018) [83 FR 49630 (Oct. 2, 2018)] (‘‘Proposing Release’’). 2 The identity of the parent company depends on the particular corporate structure. See Section II.C of the Proposing Release. 3 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 in certain circumstances. See Sections III.C.2.c, ‘‘When Disclosure is Required’’ and V.E, ‘‘When Disclosure is Required,’’ below. 4 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 VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 We received over 30 comment letters in response to the proposed amendments.5 In general, commenters supported the proposed amendments. In certain instances, commenters opposed the proposed revisions and suggested modifications to the proposals. We have reviewed and considered all of the comments that we received on the proposed amendments. The final rules reflect changes made in response to many of these comments. We discuss our revisions with respect to each proposed rule and amendment in more detail throughout this release. B. Scope of Proposals The Commission proposed 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. Both rules affect disclosures made in connection with registered debt offerings 6 and subsequent periodic reporting.7 In the 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. 5 See, e.g., letters from American Bar Association, Federal Regulation of Securities Committee and the Law Accounting Committee of the Business Law Section (‘‘ABA’’); Association of the Bar of the City of New York, Securities Regulation Committee (‘‘NYC Bar’’); Ball Corporation (‘‘Ball Corp.’’); BDO USA, LLP (‘‘BDO’’); Center for Audit Quality (‘‘CAQ’’); Comcast Corporation (‘‘Comcast’’); Council of Institutional Investors (‘‘CII’’); Cravath, Swaine & Moore LLP (‘‘Cravath’’); The Credit Roundtable (‘‘Credit Roundtable’’); Davis Polk & Wardwell LLP (‘‘Davis Polk’’); Debevoise & Plimpton LLP (‘‘Debevoise’’); Dell Technologies, Inc. (‘‘Dell’’); Deloitte & Touche LLP (‘‘Deloitte’’); Eaton Corporation plc (‘‘Eaton Corp.’’); Edison Electric Institute and American Gas Association (‘‘EEI/AGA’’); Ernst & Young LLP (‘‘EY’’); FedEx Corporation (‘‘FedEx’’); Financial Executives International (‘‘FEI’’); Freeport-McMoRan Inc. (‘‘Freeport’’); Grant Thornton LLP (‘‘Grant Thornton’’); KPMG LLP (‘‘KPMG’’); Medtronic plc (‘‘Medtronic’’); Nareit (‘‘Nareit’’); PricewaterhouseCoopers LLP (‘‘PWC’’); Securities Industry and Financial Markets Association (‘‘SIFMA’’); Shearman & Sterling LLP (‘‘Shearman’’); Simpson Thacher & Bartlett LLP (‘‘Simpson Thacher’’); Sullivan & Cromwell LLP (‘‘Sullivan & Cromwell’’); T-Mobile US, Inc. (‘‘TMobile’’); Willis Towers Watson plc (‘‘WTW’’); Windstream Holdings, Inc. (‘‘Windstream’’); and XBRL US, Inc. The public comments we received are available on our website at https://www.sec.gov/ comments/s7-19-18/s71918.htm. 6 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. 7 The proposed amendments would not have affected the presentation of registrants’ consolidated financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles (‘‘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 PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 21941 Proposing Release, the Commission stated its belief 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.8 The proposed amendments were intended to benefit investors by simplifying and streamlining the disclosure provided to them about registered transactions and improving transparency in the market to the extent more offerings are registered.9 In addition, the Commission noted that, if the proposed changes reduce the burden associated with providing guarantees or pledges of affiliate securities as collateral,10 investors could 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.11 II. Rule 3–10 of Regulation S–X A. Background A guarantee of a debt or debt-like security (‘‘debt security’’) 12 is a separate as Form 10–K. The proposed amendments were focused on the supplemental information about subsidiary issuers and guarantors as well as affiliates whose securities are pledged as collateral. 8 See Section I of the Proposing Release. 9 Based on analysis performed by staff from the Commission’s Division of Economic and Risk Analysis, the registered debt market was approximately $1.1 trillion in 2018. In 2018, debt offerings under Securities Act Rule in 17 CFR 230.144A (‘‘Rule 144A’’) raised approximately $658 billion, based on staff analysis of data from the Mergent database. The dollar volume of registered debt and Rule 144A offerings generally appears to be higher in recent years (i.e., 2016, 2017, 2018) than in earlier years (i.e., 2013, 2014, 2015). See Section VIII.B.2, ‘‘Market Conditions.’’ 10 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 in Section VI.B ‘‘Rule 3–16 Collateral Release Provisions’’ below. In the Proposing Release, the Commission observed that registrants may cease structuring offerings to release such collateral if disclosure burdens would be reduced by the proposed amendments, which would benefit investors. See Section I.B of the Proposing Release. 11 15 U.S.C. 77k. 12 Rule 3–10 exceptions are available to issuers and guarantors of guaranteed securities that are ‘‘debt or debt-like.’’ In connection with amendments to Rule 3–10 in 2000 the Commission stated ‘‘[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.’’ 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’’) at Section III.A.4.b.i; see also Section II.H of the Proposing Release. E:\FR\FM\20APR2.SGM 20APR2 21942 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations security under the Securities Act 13 and, as a result, offers and sales of these guarantees 14 must be either registered or exempt from registration. If the offer and sale is registered, the issuer of the debt security and the guarantor 15 must each file its own audited annual and unaudited interim 16 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.17 Reporting under Section 15(d), among other things, requires filing periodic reports that must include audited annual and unaudited interim financial statements, for at least the fiscal year in which the related Securities Act registration statement became effective.18 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.’’ 19 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 13 See Section 2(a)(1) of the Securities Act. 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. 15 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. 16 A foreign private issuer need only provide interim period disclosure in certain registration statements. 17 See 15 U.S.C. 78o(d). 18 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. 19 See Section I of the 2000 Release. jbell on DSKJLSW7X2PROD with RULES2 14 These VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 guarantee together.20 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; 21 (2) the parent company controls each subsidiary issuer and guarantor, including having the ability to direct all debt-paying activities; 22 and (3) the financial information of each subsidiary issuer and guarantor is included as part of the consolidated financial statements of the parent company.23 In these circumstances, we believe full Securities Act and Exchange Act financial 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. 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 20 Parent company consolidated financial statements must be filed in all instances where the omission of financial statements of subsidiary issuers and guarantors is permitted under existing Rule 3–10. See paragraph (4) in each of Rules 3– 10(b) through (f). 21 Typically, all of a parent company’s subsidiaries support the parent company’s debtpaying ability. However, in the event of default, the holders of a debt security issued by a parent company are disadvantaged as compared to the direct creditors of any subsidiary not providing a guarantee because the holders can only make claims for payment directly against the issuer and any guarantors. In addition, in a bankruptcy proceeding, the assets of non-guarantor subsidiaries that are not issuers typically would be accessible only by the holder indirectly through the parent’s equity interest. 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 those subsidiaries. 22 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. 23 A parent company that prepares its financial statements in accordance with 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. PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 also sets forth five exceptions to this general rule.24 Each exception specifies conditions that must be met, including, in each case, that the parent company provide certain disclosures (‘‘Alternative Disclosures’’).25 If the conditions are met, separate financial statements of each qualifying subsidiary issuer and guarantor may be omitted from the Securities Act registration statement and subsequent Exchange Act reports. 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; 26 and • Each guarantee must be ‘‘full and unconditional.’’ 27 The form and content of the Alternative Disclosures are determined based on the facts and circumstances and can range from a brief narrative 28 to highly detailed condensed consolidating financial information (‘‘Consolidating Information’’).29 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.30 Recently acquired subsidiary issuers and guarantors are addressed separately within Rule 3–10. Rule 3–10(g) 31 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 24 See Rules 3–10(b) through (f) of Regulation S– X. See also Section II.F of the Proposing Release. 25 The Alternative Disclosures must be provided in the footnotes to the parent company’s consolidated financial statements. 26 See Section II.D of the Proposing Release. 27 See Section II.E of the Proposing Release. 28 See additional discussion of the brief narrative form of Alternative Disclosures in Section II.F of the Proposing Release. 29 See additional discussion of Consolidating Information in Section II.G of the Proposing Release. 30 See Section III.C.1 of the 2000 Release and additional discussion in Section II.J of the Proposing Release. 31 Rule 3–10(g) of Regulation S–X. See additional discussion in Section II.I of the Proposing Release. E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations 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. The requirements of existing Rule 3– 10 are discussed in further detail in Section II of the Proposing Release. III. Amendments to Rule 3–10 and Partial Relocation to Rule 13–01 jbell on DSKJLSW7X2PROD with RULES2 A. Overarching Principle The Commission proposed amendments to address the challenges posed by the current rules while 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.32 A number of commenters agreed with this overarching principle.33 Of these commenters, one asserted that this principle is particularly true when the parent company is fully obligated as either issuer or full and unconditional guarantor of the security; the parent company controls each subsidiary issuer and guarantor, including having the ability to direct all debt paying activities; and the financial information of each subsidiary issuer and guarantor is included as part of the consolidated financial statements of the parent company.34 Another of these commenters asserted investors in guaranteed securities rely primarily on the consolidated financial statements of the parent company when making investment decisions, and that these investors need only supplemental details about subsidiary issuers and guarantors.35 Other commenters noted that in addition to relying on the consolidated financial statements of the parent company, the key disclosure for investors in guaranteed securities is disclosure that enables them to evaluate the extent of their structural subordination risk.36 According to these commenters, the principal value of subsidiary guarantees to investors is that the guarantees improve the investor’s claim on the assets of the subsidiaries in the event of a default and therefore supplemental financial information for subsidiary guarantees should focus on 32 See discussion in Section II.A, ‘‘Background.’’ e.g., letters from Ball Corp., Cravath, Davis Polk, Eaton Corp., EY, FEI, Freeport, Nareit, Shearman, and T-Mobile. 34 See letter from Freeport. 35 See letter from Eaton Corp. 36 See letters from Cravath, Davis Polk and Shearman. 33 See, VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 factors impacting structural subordination, not the financial ability of any individual subsidiary guarantor to make payment under the guarantee.37 B. Overview of the Proposed and Final 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’’). 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.38 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, as defined in 17 CFR 210.1–02(bb)(1) 39 (‘‘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 making an investment decision with respect to 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 37 See id. disclosures specified in proposed Rule 13– 01(a) would be required ‘‘[f]or 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)). . .’’ As a technical modification, final Rule 13–01(a) has been revised to require the disclosures specified therein ‘‘[f]or each guaranteed security subject to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and for each guaranteed security the offer and sale of which is being registered under the Securities Act of 1933, for which the registrant is the parent company (as that term is defined in § 210.3–10(b)(1)) of one or more subsidiaries that issue or guarantee the guaranteed security . . .’’ 39 Rule 1–02(bb)(1) of Regulation S–X. 38 The PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 21943 registration statement covering the offer and sale of the subject securities and any related prospectus, and in certain Exchange Act reports filed 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 were intended to simplify and streamline the rule structure in several ways. Most significantly, under the proposed amendments there would be only a single set of eligibility criteria that would apply to all issuer and guarantor structures instead of 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. In the Proposing Release, the Commission expressed its belief that these changes would simplify the rule structure and facilitate compliance.40 After considering public comments, we are adopting these amendments substantially as proposed with certain modifications. Specifically, the final rule: • Modifies the proposed requirement to disclose additional information that would be material to holders of the guaranteed security to be more specific by requiring disclosure of additional information about each guarantor that would be material for investors to evaluate the sufficiency of the guarantee, consistent with existing Rule 3–10; • Permits the amended supplemental financial and non-financial disclosure about the subsidiary issuers and/or guarantors and the guarantees (‘‘Revised Alternative Disclosures’’) to be provided outside the footnotes to the parent company’s audited annual and unaudited interim consolidated financial statements in all cases rather 40 See E:\FR\FM\20APR2.SGM Section III of the Proposing Release. 20APR2 21944 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations than only in the proposed circumstances; • Eliminates the requirement to provide pre-acquisition financial statements of recently acquired subsidiary issuers and guarantors as proposed, but requires, in certain instances, pre-acquisition Summarized Financial Information about significant recently acquired subsidiary issuers and guarantors; and • Reflects other modifications from the proposed amendments as described below. The proposed and final amendments, along with our consideration of public comments, are discussed in detail below. C. Conditions To Omit the Financial Statements of a Subsidiary Issuer or Guarantor Under the proposed amendments, 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 debt or debt-like; 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. The proposed amendments, comments received, and final amendments to the eligibility conditions are described below. 1. Eligibility Conditions a. Parent Company Financial Statements Condition jbell on DSKJLSW7X2PROD with RULES2 i. Proposed Amendments 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 be defined as in the VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 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 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.41 Instead, the third condition would be that the entity consolidates each subsidiary issuer and guarantor in its consolidated financial statements.42 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. The note to existing Rule 3–10(a)(2) states that ‘‘the financial statements of an entity that is not an issuer or guarantor of the registered security cannot be substituted for those of the parent company.’’ Because the definition of parent company was included in proposed Rule 3–10(b)(1), which states that the parent company must be an issuer or guarantor of the guaranteed security, the note to existing Rule 3–10(a)(2) was deemed unnecessary and excluded from the proposed rule. ii. Comments on the Proposed Amendments We received one comment on this aspect of the proposed amendments, which was supportive. The commenter specifically supported the proposed conforming revision to the definition of ‘‘parent company,’’ stipulating that the entity must consolidate each subsidiary issuer and guarantor in its consolidated financial statements.43 iii. Final Amendments We are adopting the amendments as proposed. The parent company’s financial statements will continue to be required to be filed pursuant to amended Rule 3–10(a). Previously, a definition of ‘‘parent company’’ was set forth in the 2000 Release but was not included in existing Rule 3–10 itself. For clarity, and given the importance of appropriately identifying the issuer or guarantor that is the ‘‘parent company,’’ the revised definition has been included in amended Rule 3–10(b)(1). Due to the 41 See Section III.A.6. of the 2000 Release. discussion in Section III.C.1.b, ‘‘Consolidated Subsidiary.’’ 43 See letter from FEI. 42 See PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 inclusion of this definition, as proposed, we have eliminated the note to existing Rule 3–10(a)(2). b. Consolidated Subsidiary Condition i. Proposed Amendments 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.44 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 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 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.45 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.46 For example, if, through its ability to exercise significant influence 47 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 44 See supra note 23. discussion in Section III.C.2.b, ‘‘NonFinancial Disclosures.’’ 46 See discussion in Section III.C.2.a.ii, ‘‘Presentation on a Combined Basis.’’ 47 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. 45 See E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations the Summarized Financial Information attributable to that subsidiary guarantor. ii. Comments on the Proposed Amendments Comments were supportive of these proposals. Many commenters supported the proposed revisions to Rule 3–10 to require the subsidiary issuer or guarantor to be a consolidated subsidiary of the parent company pursuant to the relevant accounting standards already in use.48 One commenter indicated that the proposed requirement to describe any factors that may affect payments to holders of the guaranteed security would elicit the necessary material disclosures for a consolidated subsidiary issuer or guarantor that is less than 100%owned.49 Several commenters asserted that the existing rule’s 100%-owned requirement was overly restrictive 50 or burdensome.51 One commenter indicated that the proposed condition that each issuer and guarantor be a consolidated subsidiary of the parent company would provide more flexibility to issuers.52 Several commenters asserted that there is no practical difference between whether a subsidiary is 100%-owned or is consolidated when making an evaluation of the subsidiary’s creditworthiness 53 and noted that, in either case, the minority equity interests are subordinated to the subsidiary’s debt obligation.54 jbell on DSKJLSW7X2PROD with RULES2 iii. Final Amendments We are adopting the amendments as proposed. Amended Rule 3–10(a) requires the subsidiary issuer or guarantor to be a consolidated subsidiary of the parent company as one condition of eligibility that must be met to omit the subsidiary issuer’s or guarantor’s financial statements. Additionally, 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, is required by Rule 13– 01(a)(3),55 and separate disclosure of Summarized Financial Information for the issuers and guarantors to which 48 See, e.g., letters from Comcast, Cravath, Davis Polk, EEI/AGA, FedEx, FEI, Nareit, NYC Bar, and Sullivan & Cromwell. 49 See letter from NYC Bar. 50 See letters from Comcast, Cravath, and Davis Polk. 51 See letter from Nareit. 52 See letter from NYC Bar. 53 See letters from Comcast, Cravath, Davis Polk, and FEI. 54 See letters from Cravath, Davis Polk, and Nareit. 55 See discussion in Section III.C.2.b, ‘‘NonFinancial Disclosures.’’ VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 those factors apply is required by Rule 13–01(a)(4)(iv).56 Under the existing rule, we understand that a parent company with a consolidated but less than 100%owned subsidiary generally would avoid designating that subsidiary as a guarantor of the debt in a registered offering, would issue registered debt without subsidiary guarantees, or would avoid registering the offering altogether due to the requirement to provide that subsidiary’s separate financial statements. These choices may lead to a higher cost of capital and less protection for investors than if the subsidiary were designated as a guarantor.57 Consistent with the view expressed in the Proposing Release, 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.58 Specifically, we believe that where a parent company is obligated as an issuer or a 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 Revised Alternative Disclosures would enable investors to evaluate and sufficiently assess the risks associated with an investment in such guaranteed debt security. We expect this change will cause more subsidiary issuers and guarantors to be eligible to omit their financial statements, while continuing to provide the information about subsidiary issuers and guarantors that investors need to make informed investment decisions. This change may also result in parent companies no longer omitting consolidated but less than 100%-owned subsidiaries as guarantors in registered offerings, possibly reducing the cost of capital. We also note that the final amendments will require specific disclosure about any material factors 56 See discussion in Section III.C.2.a.ii, ‘‘Presentation on a Combined Basis.’’ As described therein, in limited circumstances, a brief narrative is permitted in lieu of separate Summarized Financial Information of the affected issuers and guarantors. 57 For example, if an offering of guaranteed debt securities was conducted on a registered basis but the subsidiary was not added as a guarantor, the claims of a holder against the non-guarantor subsidiary may be structurally subordinate to the claims of other creditors. See supra note 21. 58 See Section III.C.1.b of the Proposing Release. PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 21945 that may affect payments to holders, including the rights of a non-controlling interest holder. This disclosure should more directly provide insight into any competing common equity interest in the assets or revenues of a subsidiary, in contrast to the indirect disclosure in the form of separate financial statements of the consolidated subsidiary issuer or guarantor that an investor receives under the existing rule. We also expect this change will reduce costs and burdens for consolidated but less than 100%-owned subsidiary issuers and guarantors, which are currently required to provide separate financial statements. c. Debt or Debt-Like Securities Condition i. Proposed Amendments The exceptions in existing Rules 3– 10(b) through (f) are available only to issuers and guarantors of debt securities.59 Similarly, the proposed rule would be available only for issuers and guarantors of 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.’’ 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,60 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 would 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,61 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 59 See Section II.H of the Proposing Release. Section III.A.4 of the 2000 Release. 61 See Section III.A.4.b.i of the 2000 Release. 60 See E:\FR\FM\20APR2.SGM 20APR2 21946 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations 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. ii. Comments on the Proposed Amendments We received one comment supporting this aspect of the proposed amendments. The commenter supported the ‘‘debt or debt-like’’ condition in proposed Rule 3–10, stating that the proposed revision would be a useful modification to Rule 3–10.62 iii. Final Amendments We are adopting the amendments as proposed. Amended Rule 3–10(a)(1) requires that the guaranteed security must be ‘‘debt or debt-like,’’ and amended Rule 3–10(b)(2) specifies when a guaranteed security would be considered ‘‘debt or debt-like’’ as proposed. d. Eligible Issuer and Guarantor Structures Condition i. Proposed Amendments 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; 63 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.64 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 full and unconditional. Accordingly, under the proposed rule, the parent company’s role as issuer,65 co-issuer,66 or full and unconditional 62 See letter from Sullivan & Cromwell. Rule 3–10(a)(1)(i). 64 Proposed Rule 3–10(a)(1)(ii). 65 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. 66 When acting as a co-issuer with one or more of its consolidated subsidiaries, all co-issuers would be required to be jointly and severally liable under the security. This would obligate each of the parent company and its subsidiary co-issuers to all legal jbell on DSKJLSW7X2PROD with RULES2 63 Proposed VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 guarantor with respect to the guaranteed security 67 would determine whether the issuer and guarantor structure is eligible.68 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,69 and subsidiary guarantees would no longer be required to be full and unconditional as a condition of eligibility.70 Although responsibilities of an issuer, including making scheduled payments on the security in full when they come due. 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 security. 67 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 section III.A.1.b of the 2000 Release, and would be included in proposed Rule 3–10(b)(3). The 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. 68 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. 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.’’ 69 While not specified in the proposed eligible categories of issuer and guarantor structures, the role of subsidiary guarantors and their guarantees would, however, 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 factors exist that may affect payments to holders, such as factors affecting guarantee enforceability, disclosure of the factors would be required by proposed Rule 13–01(a)(3), to the extent material. Furthermore, proposed Rule 13–01(a)(4) would require separate disclosure of Summarized Financial Information applicable to subsidiary guarantors to which such factors apply, to the extent material. 70 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. Because the nature of the guarantee of a subsidiary guarantor does not affect whether the issuer and guarantor structure is eligible under PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 one or more other subsidiaries of the parent company may, and the Commission expected often would, guarantee the security, in the Proposing Release, the Commission stated its belief that the eligibility of an issuer and guarantor structure should depend on the role of the parent company.71 Accordingly, under the proposed amendments separate financial statements of consolidated subsidiary guarantors may be omitted for each eligible issuer and guarantor structure if the other conditions of proposed Rule 3–10 are met. ii. Comments on the Proposed Amendments Comments on the proposals were generally supportive. Commenters generally supported the simplified and streamlined approach of the proposed amendments that replaced 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 of eligible issuer and guarantor structures.72 One commenter suggested that an exemption to the required financial disclosures about guarantors should be permitted if the issuer of the debt is the parent company.73 This commenter stated that, for registrants that issue securities only from the parent entity, the relevant financial information could be derived from the parent’s consolidated financial statements. Two commenters supported the proposed requirement that only the parent company’s guarantee need be full and unconditional,74 of which one stated that ‘‘disclosure of the limitations on the scope of the guarantee is more important to investors than providing separate financial statements of the issuer of a limited guarantee.’’ 75 This same commenter indicated that local law requirements in many foreign jurisdictions preclude the issuance of a guarantee that satisfies the Commission’s definition of ‘‘full and unconditional,’’ and that historically, it 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) and separate disclosure of Summarized Financial Information applicable to that subsidiary guarantor would be required by proposed Rule 13–01(a)(4). 71 See Section III.C.1.d of the Proposing Release. 72 See, e.g., letters from FEI and NYC Bar. 73 See letter from Ball Corp. 74 See letters from Cravath and FEI. 75 See letter from Cravath. E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations was rare for foreign subsidiaries to guarantee debt of domestic registrants due to potentially adverse tax consequences.76 Another commenter asserted that the proposed amendments contemplate changing the definition of ‘‘full and unconditional’’ and recommended that, if such changes were adopted, the Commission provide guidance around the definition akin to what was provided in the 2000 Release.77 iii. Final Amendments We are adopting the amendments substantially as proposed. Consistent with the proposal, the specific issuer and guarantor structures permitted under the five exceptions in existing Rules 3–10(b) through (f) will be replaced with the proposed twocategory framework. As shown in the table below, issuer and guarantor structures that currently fall under existing Rules 3–10(b), (c), or (d) align with the eligible categories in amended 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, align with the first category in amended Rule 3–10(a)(1)(i). Existing rule Amended 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) ....................................................................... Under the amended rules, the ability to provide the Revised Alternative Disclosures in lieu of separate subsidiary issuer and guarantor financial statements is only available when the parent company’s obligation is full and unconditional. We are not adopting one commenter’s suggestion to permit the omission of the required financial disclosures about guarantors if the issuer of the debt is the parent company.78 Consistent with the rationale cited in our discussion of the overarching principle and overview of the amendments above,79 we believe the financial information about the Obligor Group included in the Revised Alternative Disclosures is an important supplement to the consolidated financial statements of the parent company for investors when making investment decisions about guaranteed debt securities. Therefore, providing the Revised Alternative Disclosures is a condition that must be met to permit the omission of a subsidiary issuer’s or guarantor’s financial statements. Consistent with the proposed rule, the status of subsidiary guarantors is not specified in the categories of eligible issuer and guarantor structures in the final rule. Although one or more other 76 See letter from Cravath. letter from Debevoise. The Proposing Release requested comment on the definition of ‘‘full and unconditional,’’ but the proposed rules would not change the definition. The Proposing Release states, ‘‘[f]or 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.’’ 78 See letter from Ball. 79 See discussion in Sections III.A ‘‘Overarching Principle’’ and ‘‘III.B, ‘‘Overview of the Proposed and Final Amendments.’’ 77 See jbell on DSKJLSW7X2PROD with RULES2 21947 VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 subsidiaries of the parent company may, and we expect often would, guarantee the security, the eligibility of an issuer and guarantor structure depends on the role of the parent company as issuer, coissuer, or full and unconditional guarantor with respect to the guaranteed security. Separate financial statements of consolidated subsidiary guarantors may be omitted for each issuer and guarantor structure that is eligible if the other conditions of amended Rule 3–10 are met. Despite not affecting whether that issuer and guarantor structure is eligible, the role of subsidiary guarantors in an issuer and guarantor structure and their guarantees do affect what disclosure is required. In this regard, the subsidiary guarantors are required to be identified pursuant to Rule 13–01(a)(1), and disclosure of the terms and conditions of the guarantees is required by Rule 13–01(a)(2),80 which includes but is not limited to any limitations and conditions of a subsidiary’s guarantee, whether the guarantee is joint and several with other guarantees, and any guarantee release provisions. Further, separate disclosure of Summarized Financial Information applicable to subsidiary guarantors to which such disclosures apply is required by Rule 13–01(a)(4)(iv).81 As was proposed, an issuer and guarantor structure involving a finance subsidiary 82 used to issue a debt security guaranteed by the parent company 83 will be addressed by amended Rule 3–10(a)(1)(ii) or, if the security were to be co-issued, jointly and severally, with its parent, amended Rule 3–10(a)(1)(i) will apply. Also as proposed, the final rule will no longer require a subsidiary issuer or guarantor to be designated as a ‘‘finance subsidiary’’ for purposes of determining whether the issuer and guarantor structure is eligible.84 Consistent with the proposed amendments, the final rule also eliminates the ‘‘operating subsidiary’’ definition in existing Rule 3–10(h)(8). 80 See discussion in Section III.C.2.b, ‘‘NonFinancial Disclosures.’’ 81 See discussion in Section III.C.2.ii, ‘‘Presentation on a Combined Basis.’’ In limited circumstances, a brief narrative is permitted in lieu of separate Summarized Financial Information of the affected guarantors. 82 Under existing 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.’’ 83 This issuer and guarantor structure is included in the exception in existing Rule 3–10(b) of Regulation S–X. See Section II.F of the Proposing Release. 84 As proposed, the ‘‘finance subsidiary’’ definition at existing Rule 3–10(h)(7) would have been eliminated. However, as described below, the final rule specifies certain circumstances involving a ‘‘finance subsidiary’’ when we believe the required supplemental financial information is not material to an investment decision and may be omitted. As part of this change, an amended definition of ‘‘finance subsidiary’’ has been incorporated in the note to new Rule 13– 01(a)(4)(vi)(C) and (D). See Section III.C.2.c, ‘‘When Disclosure is Required.’’ PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 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. The Commission proposed to retain the requirement to provide Alternative Disclosures, with E:\FR\FM\20APR2.SGM 20APR2 21948 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations modifications, as it believed the disclosures are an important supplement to the consolidated parent company disclosures. If the eligibility conditions in proposed Rule 3–10(a) introductory text and (a)(1) are satisfied, a parent company would be required to 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.85 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. The proposed amendments, comments received, and final amendments to the disclosure requirements are described below. a. Financial Disclosures As discussed below,86 the financial disclosure requirements in proposed Rule 13–01 were tailored to the type of material information, in addition to the parent company’s consolidated financial statements, that the Commission believed investors in registered offerings need to make informed investment decisions about guaranteed debt securities. 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 generally 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.87 i. Level of Detail jbell on DSKJLSW7X2PROD with RULES2 (A) Proposed Amendments 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 (Rule 10–01) of Regulation S–X 88 85 This requirement would be specified in proposed Rule 3–10(a)(2). 86 See discussion in Section III.C.2.a.i, ‘‘Level of Detail.’’ 87 As a result of the adoption of the proposed financial disclosures as described below, which replace Consolidating Information, the final rule eliminates the instructions in existing Rule 3–10(i). 88 17 CFR 210.10–01. VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 requires to be shown separately in interim financial statements. The proposed amendments were based on requiring supplemental financial information about issuers and guarantors that would be focused on the information that the Commission believed is most likely to be material to an investment decision. 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 have been required by proposed Rule 13–01(a)(5), to the extent they are material to an investment decision. While investors are provided cash flow information at the parent company consolidated level, supplemental cash flow information about subsidiary issuers and guarantors would not be a required disclosure under the proposed rule. (B) Comments on the Proposed Amendments Comments on the proposed amendments were generally supportive. Many commenters supported the proposal to replace Consolidating Information with Summarized Financial Information, as defined in Rule 1– 02(bb)(1) of Regulation S–X.89 Some commenters asserted that providing Summarized Financial Information rather than Consolidating Information would reduce disclosure burdens 90 while continuing to provide investors with material information to make an informed investment decision.91 Some commenters noted that many issuers’ information systems are not normally designed to provide the level of detail currently required by Rule 3– 10, which, according to these commenters, makes complying with the rule burdensome.92 Some commenters stated that investors have expressed little interest in the detailed disclosures required by existing Rule 3–10.93 A number of commenters stated that the proposal to require only Summarized Financial Information rather than Consolidating Information was an improvement, but recommended 89 See, e.g., letters from Ball Corp., Comcast, Davis Polk, Dell, Eaton Corp., EEI/AGA, EY, FedEx, FEI, Freeport, KPMG, Medtronic, Nareit, NYC Bar, Sullivan & Cromwell, T-Mobile, and WTW. 90 See, e.g., letters from Ball Corp., Eaton Corp., EY, FEI, Freeport, KPMG, NYC Bar, Sullivan & Cromwell, and T-Mobile. 91 See, e.g., letters from Ball Corp., EY, FedEx, FEI, Freeport, and Sullivan & Cromwell. 92 See letters from Dell, FEI, and Freeport. 93 See, e.g., letters from Ball Corp., Freeport, Windstream, and WTW. PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 that the final rules should permit registrants to provide even less disclosure.94 In this regard, a few commenters noted that Rule 144A offerings 95 may include less disclosure than what is required in Summarized Financial Information.96 Some commenters suggested that registrants should be allowed to provide only balance sheet information because balance sheet information should be sufficient disclosure for investors to make an informed investment decision.97 One commenter contended that guarantor revenues, guarantor operating income (or a similar metric), and assets and liabilities of the issuer and guarantors were the most useful disclosures for making an investment decision and stated that these disclosures are what typically is provided in Rule 144A offerings.98 Several commenters recommended other modifications to the proposed amendments. One commenter suggested that Summarized Financial Information may be too condensed and asserted that users of financial statements would be better informed if balance sheet and income statement information similar to the level of detail specified in Rule 10– 01 of Regulation S–X were provided.99 Another commenter recommended requiring disclosure of investments held by the Obligor Group in non-obligated subsidiaries; intercompany or relatedparty transactions between the obligated and non-obligated groups; and whether the obligated group includes variable interest entities, which should crossreference the relevant disclosures in the consolidated financial statements.100 Another commenter stated that ‘‘related party transactions with [other subsidiaries] is an example of additional information that may be material to 94 See, e.g., letters from Comcast, Davis Polk, Eaton Corp., FEI, Medtronic, and NYC Bar. 95 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 U.S. Sec. & Exch. Comm’n, Div. of Econ. & Risk Analysis, Access to Capital and Market Liquidity 96 (Aug. 2017) (‘‘Access to Capital and Market Liquidity Report’’), available at https:// www.sec.gov/files/access-to-capital-and-marketliquidity-study-2017.pdf, 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), available at https:// www.sec.gov/dera/staff-papers/white-papers/ 30oct15_white_unregistered_offering.html. 96 See, e.g., letters from Davis Polk, Eaton Corp., and NYC Bar. 97 See, e.g., letters from Comcast, Eaton Corp., FEI, and Medtronic. 98 See letter from T-Mobile. 99 See letter from PWC. 100 See letter from EY. E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations investor decisions, and thus may require disclosure.’’ 101 This commenter also stated that it would be even more meaningful to simply exclude such balances and transactions altogether. One commenter suggested that the Commission should consider whether requiring separate disclosure of the amounts in each caption of the combined Summarized Financial Information related to the non-obligated entities would enhance the usefulness of the information.102 This commenter also suggested that the Commission consider whether using different measures, such as operating income, instead of, or in addition to, net income would provide valuable information to investors. A few commenters suggested requiring certain financial information of the non-guarantor subsidiaries,103 stating that such disclosures would be consistent with information provided in Rule 144A offerings or high yield Rule 144A offerings.104 One of these commenters suggested requiring disclosure of debt and other liabilities of the non-guarantor subsidiaries and that any profitability metrics about the obligated entities (or non-obligated subsidiaries) should be capital-structure neutral by excluding interest expense.105 Another commenter suggested only requiring disclosure of revenue, operating income, assets and liabilities of the non-guarantors as a group.106 This commenter suggested permitting the financial disclosures to be of the non-guarantors as a group, rather than requiring such disclosure of the Obligor Group. Yet another commenter suggested that the Commission require disclosure of a metric of earnings of the non-guarantors, 101 See letter from FEI. letter from Deloitte. 103 See in Section III.C.2.a.ii, ‘‘Presentation on a Combined Basis’’ regarding presentation of nonguarantor information. 104 See letters from Davis Polk, NYC Bar, and Shearman. Two of these commenters stated that their recommendations for required disclosures were based on the information they believe allows investors to evaluate structural subordination. See letters from Davis Polk and Shearman. 105 See letter from Shearman. This commenter asserted that, in default, the levered equity value of the obligors is irrelevant because the capital structure will be readjusted through a reorganization or liquidation, and that where profitability metrics are included in Rule 144A offering documents, they generally consist of operating income or earnings before interest, taxes, depreciation, and amortization (‘‘EBITDA’’), each excluding interest expense. This commenter further stated that in contrast with these measures, the proposed Summarized Financial Information would consist of income from continuing operations and net income, both of which include interest expense allocated within the corporate group under the predefault capital structure. 106 See letter from NYC Bar. jbell on DSKJLSW7X2PROD with RULES2 102 See VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 which the issuer should be able to choose, as well as the assets and liabilities of the non-guarantors as a single group.107 One commenter recommended that the Commission consider requiring registrants to evaluate and disclose information in their Management Discussion and Analysis (‘‘MD&A’’) section with respect to known trends and uncertainties that have had or are reasonably expected to have a material impact on the results and operations or capital resources of the Obligor Group and other issuers and guarantors whose information is required to be presented separately.108 One commenter contended that holders of debt securities are expected to be interested in debt service and may need cash flow information for the Obligor Group and recommended that the Commission consider input from investors with respect to the need for summarized cash flow information.109 Other commenters, however, stated that supplemental cash flow information should not be required.110 Some of these commenters asserted such information would not be meaningful information as investors look primarily to the parent company’s consolidated cash flow 111 and that preparing this disclosure would be costly.112 One commenter advocated that the Commission consider replacing the parent company-only condensed financial statements required by 17 CFR 210.5–04 (‘‘Rule 5–04 of Regulation S– X’’) and 210.12–04 (‘‘Rule 12–04 of Regulation S–X’’) with parent-only summarized financial information when there is a specified level of restriction on an issuer’s subsidiaries’ ability to transfer funds to the parent.113 (C) Final Amendments We are adopting the amendments in substantially the form proposed, but with modifications in response to comments received. As adopted, Rule 13–01(a)(4) will require disclosure of Summarized Financial Information for each issuer and guarantor. As described above, some commenters suggested requiring different or more limited information than what is required by Summarized Financial Information, or 107 See letter from Davis Polk. letter from Grant Thornton. 109 See letter from Grant Thornton. 110 See, e.g., letters from Eaton Corp., Sullivan & Cromwell, T-Mobile, and Windstream. 111 See letters from Sullivan & Cromwell and TMobile. 112 See letter from Eaton Corp. 113 See letter from BDO. This recommendation would affect situations beyond disclosures about issuers and guarantors of guaranteed securities and is beyond the scope of the amendments considered herein. 108 See PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 21949 balance sheet only information, whereas one commenter recommended more detailed information. However, many other commenters supported the use of Summarized Financial Information, and we believe the select balance sheet and income statement line items it requires are focused on the information that is most likely to be material to an investment decision. Under the final amendments, disclosure of additional line items of financial information beyond the line items specified in Summarized Financial Information is required if necessary to comply with Rule 13–01(a)(6) and (7).114 For example, if substantially all of the obligated entities’ non-current assets consisted of goodwill, separate presentation of goodwill from noncurrent assets would be required if the parent company concludes such disclosure would be material for investors to evaluate the sufficiency of the guarantee. We agree with several commenters that requiring Summarized Financial Information 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. We recognize that some of this information may go beyond what some commenters assert is typically provided in Rule 144A debt offerings, but we believe this is appropriate in light of the broader range of potential investors that may participate in a registered offering. The Proposing Release included an example of when incremental disclosure of related party revenues would be required under the proposed rule.115 Specifically, if a material amount of reported revenues of the obligated entities were derived from transactions with related parties, such as non-issuer and non-guarantor subsidiaries of the 114 Proposed Rule 13–01(a)(1) through (4) set forth proposed requirements to disclose specific financial and non-financial information. Proposed Rule 13– 01(a)(5), which would have required disclosure of ‘‘any other quantitative or qualitative information that would be material to making an investment decision with respect to the guaranteed security,’’ was included to require disclosure about the obligated entities and the guarantees that would be material but was not otherwise already required by the specified proposed financial and non-financial disclosures. Instead of proposed Rule 13–01(a)(5), the final amendments include Rules 13–01(a)(6) and (7), which require disclosure of ‘‘[a]ny financial and narrative information about each guarantor if the information would be material for investors to evaluate the sufficiency of the guarantee,’’ and ‘‘[s]ufficient information so as to make the financial and non-financial information presented not misleading,’’ respectively. See discussion in Section III.C.2.c, ‘‘When Disclosure is Required.’’ 115 See Section III.C.2.a.i of the Proposing Release. Such disclosure would have been required by proposed Rule 13–01(a)(5). E:\FR\FM\20APR2.SGM 20APR2 21950 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES2 parent company, separate disclosure of those amounts would be necessary. Instead of including this as an example of when disclosure would be required under Rule 13–01(a)(6) and (7), we agree with those commenters that recommended including a requirement to separately disclose an issuer’s or guarantor’s balance sheet and income statement amounts related to nonobligated subsidiaries.116 Accordingly, as adopted, Rule 13–01(a)(4)(iii) requires an issuer’s or guarantor’s amounts due from, amounts due to, and transactions with non-obligated subsidiaries and related parties to be presented in separate line items, to the extent material.117 We believe that clearly establishing this expectation as a stated requirement will assist in the preparation of the disclosures and provide material information to investors, and agree with one commenter that such separate disclosure enhances the transparency of the Summarized Financial Information presented.118 Unlike Consolidating Information, Summarized Financial Information does not include cash flow statement information. As described above, of the commenters that specifically discussed supplemental cash flow information, several supported not requiring such information,119 while one suggested considering input from investors.120 Similar to some commenters, we believe 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,121 and we heard no feedback from investors suggesting otherwise. As such, final Rule 13–01 116 In recommending separate disclosure of these amounts, one commenter cited enhancement of the transparency of Summarized Financial Information related to the Obligor Group (See letter from EY), and another cited enhanced usefulness (See letter from Deloitte). Given that a guarantor’s transactions with a related party may not be conducted on an arm’s length basis, we agree it could be useful to highlight such transactions for investors by requiring presentation of such information in a separate line item. 117 One commenter suggested flexibility to provide these disclosures as either explanatory notes or separate line items. See letter from EY. Based on the nature of these items, and to drive consistency in the disclosures between parent companies, Rule 13–01(a)(4)(iii) requires the amounts to be in separate line items. 118 See letter from EY. 119 See, e.g., letters from Eaton, Sullivan, TMobile, Willis, and Windstream. 120 See letter from Grant. No investor commenters provided feedback specific to supplemental cash flow information. 121 See, e.g., letters from Eaton and T-Mobile. VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 does not require supplemental cash flow information of the obligated entities. Lastly, certain of the proposed amendments would have each required additional disclosure regarding their basis of presentation.122 Rather than including multiple separate requirements to explain the basis of presentation for individual disclosure requirements, final Rule 13–01(a)(4) includes a requirement to briefly describe the basis of presentation applicable to each of the required financial disclosures therein. In addition to simplifying the final rule, we believe this requirement will better inform users about the form and content of the disclosures provided pursuant to final Rule 13–01(a)(4).123 We believe such disclosure enhances the understandability of the financial information provided. ii. Presentation on a Combined Basis (A) Proposed Amendments 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. 122 For example, proposed Rule 13–01(a)(4) would have required disclosure of ‘‘[t]he method selected to present investments in subsidiaries that are not issuers or guarantors . . .’’ to inform investors about the basis of presentation of the financial information of the Obligor Group. Two commenters supported this disclosure requirement. See letters from CAQ and Deloitte. Instead of this proposed requirement, final Rule 13–01(a)(4)(iii) requires the financial information of non-issuer and non-guarantor subsidiaries to be completely excluded. See discussion in Section III.2.a.ii.(C), ‘‘Presentation on a Combined Basis,’’ below. Rather than including a separate requirement within final Rule 13–01(a)(4)(iii) to disclose that financial information of non-issuer and non-guarantor subsidiaries was excluded, such disclosure will be required pursuant to the new requirement to describe the basis of presentation of the financial information presented under final Rule 13–01(a)(4). 123 Such disclosure could state, for example, that the financial information presented is that of the issuers and guarantors of the guaranteed security, and that the financial information of non-issuer and non-guarantor subsidiaries has been excluded. If applicable, the disclosure could also state, for example: That the financial information of issuers and guarantors is presented on a combined basis; intercompany balances and transactions between issuers and guarantors have been eliminated; that the issuer’s or guarantor’s amounts due from, amounts due to, and transactions with non-issuer and non-guarantor subsidiaries and related parties have been presented in separate line items; and that financial information of certain identified subsidiary issuers and guarantors has been presented separately due to disclosed facts and circumstances applicable to those subsidiaries (as required by Rule 13–01(a)(4)(iv)). PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 The proposed rule took into consideration 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. The proposed rule would no longer require separate disclosure of the financial information of non-guarantor subsidiaries. Because non-guarantor subsidiaries are not obligated to make payments as either issuer or guarantor, the proposed rule assumed separate supplemental disclosure of their financial information as required under the existing rule is not likely to be material to an investment decision. 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. Proposed Rule 13– 01(a)(4) would continue to exclude the financial information of non-issuer and non-guarantor subsidiaries from the Summarized Financial Information of the Obligor Group, even if those nonissuer and non-guarantor subsidiaries would be consolidated by an issuer or guarantor. However, the proposed rule would have allowed 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 was disclosed and was used for all nonissuer and non-guarantor subsidiaries for all classes of guaranteed securities for which the disclosure was required, and was reasonable in the circumstances.124 For example, the 124 This proposed amendment might have resulted 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, the Commission considered the costs to the parent E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations parent company could have excluded the assets, liabilities, and operations of non-issuer and non-guarantor subsidiaries by using the equity method of accounting for those subsidiaries. (B) Comments on the Proposed Amendments Comments were supportive of this aspect of the proposal. Many commenters generally supported permitting Summarized Financial Information of each issuer and guarantor that is consolidated in the parent company’s consolidated financial statements to be presented on a combined basis with the parent company’s Summarized Financial Information.125 Some of these commenters indicated that providing this information on a combined basis would continue to provide investors with material information for making an informed investment decision,126 while also reducing a burdensome requirement for issuers.127 One commenter supported streamlining the disclosures, but asserted that the proposed amendments would likely only benefit a small number of issuers.128 This commenter noted that the proposed amendments could lead to complexities and unintended consequences in presenting the Summarized Financial Information as proposed, regardless of the method of accounting selected.129 Another commenter noted that, although such a combined presentation might provide some useful information when the guarantors are single-tiered operating companies with no subsidiaries, the accounting presentation becomes less meaningful when the guarantors are holding companies.130 A few commenters recommended requiring disclosure only of the nonguarantor subsidiaries,131 and another commenter recommended requiring certain balance sheet information about the non-guarantor subsidiaries and profitability metrics about the Obligor Group or the non-guarantor subsidiaries.132 These commenters stated that such disclosures 133 would be consistent with the information provided in Rule 144A offerings 134 or high yield Rule 144A offerings.135 In response to the Commission’s request for comment on whether the proposed amendments should specify an accounting method (e.g., the equity method) that must be used to exclude the financial information of nonobligated subsidiaries from the Summarized Financial Information of the Obligor Group, some commenters recommended that the Commission specify acceptable accounting methods in the rule.136 Some commenters agreed with the proposed rule permitting the parent company to determine which method to use in excluding the financial information of non-issuer and nonguarantor subsidiaries.137 A few commenters supported the requirement to disclose and/or apply consistently the selected method.138 Several commenters recommended modifications to the proposed amendments. A few commenters recommended that the Commission allow issuers to use only certain prescribed accounting methods, including those consistent with U.S. 130 See letter from Comcast. letters from Davis Polk and NYC Bar. 132 See letter from Shearman. 133 Two of these commenters stated their recommendations for required disclosures were based on the information they believe allows investors to evaluate structural subordination. See letters from Davis Polk and Shearman. 134 See letters from Davis Polk and NYC Bar. 135 See letter from Shearman. 136 See, e.g., letters from BDO, Deloitte and PWC. One of these commenters stated that questions may arise from the proposed flexibility in the method of excluding non-issuer and non-guarantor information, as the proposed amendments do not address the option to fully exclude investments in non-issuer and non-guarantor subsidiaries from the summarized financial information of the Obligor Group, and that providing a list of acceptable methods would indicate whether complete exclusion is an acceptable option. See letter from BDO. Another commenter stated that the Commission should consider specifically identifying and describing the acceptable methods of exclusion if the final rule permits the use of methods other than those based on existing U.S. GAAP principles. See letter from Deloitte. 137 See, e.g., letters from ABA, Dell, Eaton Corp., EY, Grant, and PWC. 138 See letters from CAQ and Deloitte. jbell on DSKJLSW7X2PROD with RULES2 131 See 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. The Commission expected 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). 125 See, e.g., letters from ABA, Davis Polk, Dell, Eaton Corp., FedEx, FEI, KPMG, Medtronic, Nareit, NYC Bar, PWC, and Sullivan & Cromwell. 126 See letters from Dell, FedEx, and Sullivan & Cromwell. 127 See letters from Davis Polk, KPMG, and Sullivan & Cromwell. 128 See letter from KPMG. 129 See letter from KPMG. This commenter stated, as an example, that registrants may not experience a reduction in burdens in preparing guarantor disclosures that exclude the non-obligor group either using the equity method, cost method, or excluding the non-obligated subsidiaries entirely, when a registrant must account for the non-obligor subsidiaries for consolidation purposes. VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 21951 GAAP 139 or IFRS,140 those permitted under the accounting framework used to prepare their financial statements or otherwise specified in Regulation S– X,141 the equity method,142 the fair value method,143 and the cost method (or the fair value practical expedient for equity securities without a readily determinable fair value model as contemplated in U.S. GAAP 144).145 One commenter stated that, if the Commission decides to require the financial information to be audited, any acceptable method should be objectively auditable.146 One commenter contended that the proposed requirement that the parent company disclose its basis for the accounting method it applied to exclude the financial information of non-issuer and non-guarantor subsidiaries from the Proposed Alternative Disclosures added an unnecessary element of complexity.147 Alternatively, a few commenters suggested the Commission consider completely excluding the financial information of non-issuer and non-guarantor subsidiaries.148 One of these commenters stated that the Summarized Financial Information is more meaningful if it excludes the financial information of non-issuer and non-guarantor subsidiaries,149 and another stated that excluding balances related to investments in non-obligated subsidiaries altogether would eliminate the possible confusion over including amounts attributable to the nonobligated subsidiary investments within the Obligor Group financial information. Two commenters asserted that the proposed amendments would require parent companies to present the Summarized Financial Information separately if the required qualitative disclosures differed within the group of subsidiary issuers or guarantors, which these commenters maintained was overly prescriptive.150 These commenters recommended permitting greater flexibility in such instances, such as allowing the parent company to present Summarized Financial Information for the aggregate group with supplemental qualitative or quantitative 139 See letters from CAQ, Deloitte, and EY. letters from CAQ and EY. 141 Letter from Grant Thornton. 142 See letters from Deloitte, KPMG, and PWC. 143 See letters from Deloitte and PWC. 144 ASC 321–10–35–2, Investments—Equity Securities. 145 See letters from Deloitte, KPMG, and PWC. 146 See letter from Deloitte. 147 See letter from ABA. 148 See, e.g., letters from BDO, KPMG, and PWC. 149 See letter from BDO. 150 See letter from EY and Grant Thornton. 140 See E:\FR\FM\20APR2.SGM 20APR2 21952 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations disclosure regarding material differences within the group. jbell on DSKJLSW7X2PROD with RULES2 (C) Final Amendments After considering the public comments, we are adopting the amendments substantially as proposed with modifications, including separating certain requirements within proposed Rule 13–01(a)(4) into distinct subparagraphs for clarity. As supported by several commenters, we are adopting the amendment that permits the supplemental financial disclosures of issuers and guarantors specified in Rule 13–01(a)(4) to be provided on a combined basis. Specifically, final Rule 13–01(a)(4)(i) permits 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, and Rule 13–01(a)(4)(ii) requires intercompany balances and transactions between issuers and guarantors whose information is presented on a combined basis to be eliminated.151 We agree with those commenters that said providing this information on a combined basis would provide investors with material information in making an investment decision 152 while also reducing the burden on issuers.153 The proposed rule would have permitted the parent company to determine the method of excluding the financial information of non-issuer and non-guarantor subsidiaries from the Proposed Alternative Disclosures. Although most line items required to be disclosed under Summarized Financial Information would be unaffected, under the proposed approach, the effect on the financial information of the Obligor Group could have varied depending on the method used to exclude non-issuer and non-guarantor subsidiary financial information. For example, under the equity method, the investments in those subsidiaries would have continued to be included within the Obligor Group’s non-current assets, and earnings or losses from those subsidiaries would have continued to be included in income or loss of the Obligor Group. A 151 Proposed Rule 13–01(a)(4) would have required, in part, that ‘‘[i]ntercompany transactions between issuers and guarantors whose summarized financial information is presented on a combined basis shall be eliminated.’’ While we are adopting the amendments substantially as proposed, final Rule 13–01(a)(4)(ii) clarifies that intercompany ‘‘balances’’ must also be eliminated in this regard. 152 See, e.g., letters from Dell, FedEx, and Sullivan & Cromwell. 153 See, e.g., letters from Davis Polk, KPMG, and Sullivan & Cromwell. VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 similar effect would likely exist under certain other methods described above that were suggested by commenters, such as the fair value method or the cost method as previously contemplated by U.S. GAAP. Instead of adopting the proposed approach, or specifying certain methods of accounting that should be used, we agree with those commenters that recommended completely excluding the financial information of non-issuer and non-guarantor subsidiaries. In particular, we agree with one commenter that said excluding balances related to investments in non-obligated subsidiaries altogether would eliminate the possible confusion over including amounts attributable to the non-issuer and non-guarantor subsidiaries within the financial information of the Obligor Group.154 In this regard, amounts attributable to non-issuer and nonguarantor subsidiaries are not generally available for payment of debt or useful for evaluating debt-paying ability. As such, we believe excluding non-issuer and non-guarantor subsidiary information will enhance the Revised Alternative Disclosures for investors. Accordingly, under the final amendments, Rule 13–01(a)(4)(iii) requires subsidiaries that are not issuers or guarantors to be excluded from the Summarized Financial Information. Pursuant to this requirement, all nonissuer and non-guarantor subsidiary financial information must be entirely removed from the financial information of the Obligor Group, even if an issuer or guarantor would otherwise consolidate such non-issuer and nonguarantor subsidiaries. An issuer or guarantor would not present its investments in non-issuer and nonguarantor subsidiaries in the Summarized Financial Information. While we continue to expect that most line items required by Summarized Financial Information would have been unaffected by the particular method selected by a parent company to exclude non-issuer and non-guarantor subsidiary information under the proposed rule, after considering the comments received, we now believe that requiring complete exclusion of the financial information of such non-issuer and nonguarantor subsidiaries in all cases will avoid potential confusion on the part of both issuers and investors about the appropriate method of exclusion. We note that a parent company may have experienced lower costs under the proposed amendments by being able to select the method of excluding nonissuer and non-guarantor subsidiary 154 See PO 00000 letter from PWC. Frm 00014 Fmt 4701 Sfmt 4700 information that its systems were already designed to produce. However, under the final amendments, a parent company is not required to justify that its selected method was reasonable under the circumstances as was proposed, and we expect in most circumstances that requiring complete exclusion of non-issuer and nonguarantor subsidiary financial information will be a less costly presentation than methods that would have required the disclosure of such financial information. We are also adopting, substantially as proposed, the requirement that when information provided in response to Rule 13–01 is applicable to one or more, but not all, issuers and guarantors, separate disclosure of Summarized Financial Information for the issuers and guarantors to which the information applies is required. This requirement is stated in Rule 13–01(a)(4)(iv). For clarity, the final rule includes an example of disclosure required by Rule 13–01 that would trigger separate disclosure for the affected issuers and guarantors.155 The example is disclosure that is required by Rule 13–01(a)(3): ‘‘factors that may affect payments to holders of the guaranteed security.’’ One commenter suggested that the Commission provide a framework for presenting Summarized Financial Information for the affected issuers and guarantors in aggregate based on the nature of disclosures.156 We believe a parent company should consider materiality 157 and exercise judgement in determining the appropriate level of aggregation of issuers and guarantors based on the nature of the disclosure. In this regard, it may be useful to consider quantitative factors, such as the financial significance of the affected issuers and guarantors, and qualitative factors, such as the nature of the facts and circumstances applicable to the issuers and guarantors. For example, if the same contractual or statutory restrictions affect some but not all subsidiary guarantors, and such subsidiary guarantors represent a substantial portion of the Obligor 155 This example is being included to clarify one situation requiring separate presentation of the Summarized Financial Information applicable to some but not all issuers and guarantors. 156 See letter from Grant. 157 The disclosures specified in Rule 13–01(a) are required to the extent material. Rules 13–01(a)(6) and (7) require disclosure of ‘‘[a]ny financial and narrative information about each guarantor if the information would be material for investors to evaluate the sufficiency of the guarantee,’’ and ‘‘[s]ufficient information so as to make the financial and non-financial information presented not misleading,’’ respectively. See discussion within Section III.C.2.c, ‘‘When Disclosure is Required.’’ E:\FR\FM\20APR2.SGM 20APR2 jbell on DSKJLSW7X2PROD with RULES2 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations Group, aggregation of the Summarized Financial Information of such subsidiary guarantors may be appropriate. Conversely, it may not be appropriate to aggregate the Summarized Financial Information of such subsidiary guarantors where the contractual or statutory restrictions are different. Another commenter stated its belief that requiring separate presentation of the Summarized Financial Information applicable to affected issuers and guarantors under proposed Rule 13– 01(a)(4) is overly prescriptive.158 While we continue to believe that separate disclosure of Summarized Financial Information for the affected issuers and guarantors is appropriate in most cases, we also agree with this commenter’s suggestion that it could be acceptable to present Summarized Financial Information for the aggregate Obligor Group with supplemental qualitative or quantitative disclosure to inform investors about the disclosures affecting one or more, but not all issuers and guarantors. Accordingly, final Rule 13– 01(a)(4)(iv) permits, in limited circumstances, narrative disclosure to be provided in lieu of the separate Summarized Financial Information of the affected issuers and guarantors which the paragraph otherwise requires. The limited circumstances when a narrative may be provided are when such separate financial information applicable to the affected issuers and guarantors can be easily explained and understood. For example, if contractual or statutory restrictions are applicable to one subsidiary guarantor, and that subsidiary guarantor constitutes a similar percentage of the Obligor Group’s assets, liabilities, and operations, narrative disclosure may be permissible depending on the facts and circumstances. In other circumstances, such as if the subsidiary guarantor’s financial significance to the Obligor Group is not easily explained (e.g., the subsidiary guarantor constitutes varying proportions of each line item within the Obligor Group’s Summarized Financial Information), narrative disclosure is unlikely to be sufficient. Although a few commenters recommended that the required financial disclosures depict nonguarantor subsidiaries,159 the final amendments continue to focus on issuers and guarantors because those are the entities a holder can make claims against in the event of default. While the final rules do not require financial information to be disclosed about 158 See 159 See letter from EY. letters from Davis Polk and Shearman. VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 subsidiaries not obligated under the guarantee or guaranteed debt security, a parent company may separately provide supplemental information about nonissuer and non-guarantor subsidiaries. iii. Periods to Present (A) Proposed Amendments Instead of the periods specified in 17 CFR 210.3–01 and 210.3–02 160 required by the existing rule, the proposed rule would require Summarized Financial Information only as of, and for, the most recently ended fiscal year and year-todate interim period, if applicable. In addition, because Item 1 of Part I of Form 10–Q 161 requires a registrant to provide the information required by Rule 10–01 of Regulation S–X, the Commission proposed adding Rule 10– 01(b)(9) to require compliance with Rules 3–10 and 13–01. (B) Comments on the Proposed Amendments Comments on the proposed amendments were mixed. A number of commenters agreed with the proposed amendments, which would limit the periods for which Summarized Financial Information is required to the most recently ended fiscal year and the year-to-date interim period.162 One commenter stated that the periods in the proposed rules were consistent with disclosures that are typically provided in Rule 144A and 17 CFR 230.901 through 230.905 163 debt offerings.164 Some commenters suggested that only the current period of the Summarized Financial Information, either annual or interim, should be required because it is the most relevant for an investment decision, especially because many issuers experience legal-entity structure changes.165 Other commenters, however, disagreed with the proposed requirement to include the interim period of Summarized Financial Information in all cases.166 Some commenters suggested not requiring interim disclosures unless there has been a material change since the most recent annual period,167 which certain commenters noted is consistent with 160 Rules 3–01 and 3–02 of Regulation S–X. CFR 249.308a. 162 See, e.g., letters from Cravath, Davis Polk, EEI/ AGA, FEI, Freeport, Grant Thornton, Nareit, NYC Bar, and Sullivan & Cromwell. 163 Regulation S. 164 See letter from Cravath. 165 See, e.g., letters from Eaton Corp., FEI, and Medtronic. 166 See, e.g., letters from ABA, Ball Corp., Comcast, Dell, Deloitte, Eaton Corp., EY, FedEx, FEI, and PWC. 167 See, e.g., letters from ABA, Ball Corp., Comcast, Dell, Deloitte, EY, FedEx, FEI, and PWC. 161 17 PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 21953 Article 10 of Regulation S–X.168 Some of these commenters indicated that the costs of providing interim information when no material change has occurred would be overly burdensome 169 and, without that disclosure, investors would still receive information necessary to make an informed investment decision.170 (C) Final Amendments After considering the comments received, we are adopting the amendments as proposed, with one clarification. As adopted, Rule 13– 01(a)(4)(v) requires the financial disclosures to be provided as of and for the most recently ended fiscal year and year-to-date interim period included in the parent company’s consolidated financial statements, which as described above many commenters supported. When used in conjunction with the parent company’s consolidated financial statements, we continue to believe the most recent full fiscal year and year-todate interim period should provide investors the additional information about the Obligor Group necessary for an informed investment decision and eliminate unnecessary compliance costs for registrants. We are not adopting the approach some commenters recommended, which would have required the most recent interim period in limited circumstances, such as when there had been a material change since the most recent annual period. We continue to believe, as stated in the Proposing Release, that the most recent interim period should be provided so that investors can make decisions based on the most recent information available.171 We also are not adopting an approach suggested by some commenters that would require only the most recent interim or annual period.172 We believe that investors should be provided with the most recent annual period of financial information about issuers and guarantors as a supplement to the parent company consolidated financial statements in all cases, and the most recent interim period, if applicable. While we acknowledge the concerns about the burden to provide interim information in all cases, we note that the final amendments already significantly reduce the burdens on parent companies by eliminating the earliest two years of required Summarized Financial Information and, in filings on 168 See, e.g., letters from Deloitte, FEI, and PWC. e.g., letters from Ball Corp. and FedEx. 170 See letter from FedEx. 171 See Section III.C.2.iii of the Proposing Release. 172 See, e.g., letters from Eaton and Medtronic. 169 See, E:\FR\FM\20APR2.SGM 20APR2 21954 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations Form 10–Q, by eliminating both the quarter-to-date interim period requirement in filings covering more than one fiscal quarter and comparable prior year interim period(s), as applicable. Under the final rules, investors will continue to receive the most recent interim and annual period information, and we continue to believe this is the most appropriate approach to reducing burdens for parent companies while providing investors with the information they need to make informed investment decisions. Proposed Rule 13–01(a)(4) did not specify that the required interim period was only for the most recent year-todate period. In certain filings, such as a parent company’s Form 10–Q for its second and third fiscal quarters, both year-to-date and quarter-to-date interim financial statements are required to be presented for the parent company. To avoid any confusion, and consistent with the proposed rule’s intent and suggestions from certain commenters,173 the final rule’s interim period requirement has been revised to clarify that only the most recent year-to-date interim period is required. Finally, as proposed, we are adopting Rule 10–01(b)(9) to require compliance with Rules 3–10 and 13–01 in quarterly reports on Form 10–Q. b. Non-Financial Disclosures i. Proposed Amendments When Consolidating Information is presented, the existing rule requires limited non-financial disclosures about the issuers and guarantors and the guarantees,174 restricted net assets,175 and certain types of restrictions on the ability of the parent company or any guarantor to obtain funds from their subsidiaries.176 In addition to proposing amendments to existing Rule 3–10 for financial disclosures, the Commission also proposed amendments to require specific non-financial disclosures. These amendments were proposed to enhance the information provided about subsidiary issuers and guarantors, particularly in light of the proposal to require Summarized Financial Information for those subsidiaries. Proposed Rules 13–01(a)(1) through (3) would require certain disclosures about the issuers and guarantors, the terms and conditions of the guarantees, and jbell on DSKJLSW7X2PROD with RULES2 173 See, e.g., letters from EY and PWC. Rules 3–10(i)(8)(i) through (iii) require 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. 175 Rule 3–10(i)(10) of Regulation S–X. 176 Rule 3–10(i)(9) of Regulation S–X. 174 Existing VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 how the issuer and guarantor structure and other factors may affect payments to holders of the guaranteed securities. Disclosure of additional non-financial disclosures beyond what is specified in proposed Rules 13–01(a)(1) through (3) would have been required by proposed Rule 13–01(a)(5), to the extent they are material to an investment decision. ii. Comments on the Proposed Amendments Some commenters expressed general support for the proposed requirements regarding non-financial disclosures.177 One commenter noted that the proposed amendments would be less burdensome on registrants than existing requirements under Rule 3–10.178 Another commenter did not discuss the specific proposed non-financial disclosures, but stated its belief that qualitative disclosures are important to the debt holder’s understanding of the overall picture of credit quality and suggested that, in certain instances, qualitative disclosures alone may be sufficient information for investors.179 One commenter stated that, outside of the registration statement and/or the related prospectus that would identify the issuers and guarantors of the security, it was not clear why identification and disclosure of such entities would be meaningful to an investor in the context of financial disclosures.180 The commenter recommended that the issuer and guarantors of the guaranteed security should be identified in the registration statement, but not in other filings, such as periodic reports. This commenter also suggested that, if the Commission believes this information should be presented in connection with an annual report, the disclosure should be included as an exhibit to such filing. iii. Final Amendments After considering the comments received, we are adopting the amendments largely as proposed with certain modifications based on comments received. Final Rules 13– 01(a)(1) through (3) will require certain disclosures 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. Consistent with the proposal, we believe these requirements will result in enhanced 177 See, e.g., letters from Davis Polk, Freeport, and NYC Bar. 178 See letter from Davis Polk. 179 See letter from Comcast. 180 See letter from PWC. PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 narrative disclosures that will improve investor understanding of the issuers, guarantors, and guarantees, and make the financial disclosures they accompany easier to understand. While the adopted non-financial disclosures are composed of the items we believe are most likely to be material to an investor, disclosure of additional facts and circumstances is required if necessary to comply with Rule 13– 01(a)(6) and (7).181 Additionally, when a non-financial disclosure is applicable to one or more, but not all, issuers and guarantors, Rule 13–01(a)(4)(iv) requires, to the extent it is material, separate disclosure of Summarized Financial Information for the issuers and guarantors to which the nonfinancial disclosure applies.182 We are not adopting one commenter’s suggestion that disclosure of the identity of the issuers and guarantors should be required only at the time of registration of the offer and sale of guaranteed securities.183 These entities are legally obligated under the guaranteed security along with the parent company, and we believe such information is material to investors in ongoing periodic reports. However, we are adopting the commenter’s alternative suggestion that the disclosures be included in an exhibit to the subject filing.184 After considering this commenter’s suggestion, we believe that the nature of this information is better suited for disclosure in an exhibit as it can efficiently be provided in list form, and, depending on the number of subsidiary issuers and guarantors, this information could distract investor focus from the other financial and non-financial disclosures required by final Rule 13–01 if presented alongside them. 181 Supra note 114. discussion in Section III.C.2.ii, ‘‘Presentation on a Combined Basis.’’ 183 See letter from PWC. 184 See amended Item 601(a) and new Item 601(b)(22) of Regulation S–K. A parent company will be required to list, under an appropriately captioned heading that identifies the associated securities, each of its subsidiaries that is a guarantor, issuer, or co-issuer of each guaranteed security registered or being registered that the parent company issues or guarantees. A subsidiary need not be listed more than once so long as its role as issuer, co-issuer, or guarantor of a guaranteed security is clearly indicated with respect to each applicable security. This exhibit will be required in Forms S–1 [17 CFR 239.11], S–3 [17 CFR 239.13], S–4 [17 CFR 239.25], SF–1 [17 CFR 239.44], SF–3 [17 CFR 239.45], S–11 [17 CFR 239.18], F–1 [17 CFR 239.31], F–3 [17 CFR 239.33], F–4 [17 CFR 239.34], 10 [17 CFR 249.210], 10–Q [17 CFR 249.308a], and 10–K [17 CFR 249.310]. In addition, we are making corresponding revisions to the exhibit requirements of Form 20–F by creating new Exhibit 17 within Item 19, and Form 1–A by creating new Exhibit 17 within Item 17. This exhibit will also be required in Forms 1–K and 1–SA. See discussion in Section V.H.3.c, ‘‘Offerings pursuant to Regulation A’’. 182 See E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations Furthermore, if the entities required to be disclosed do not change from period to period, the parent company could refer to an earlier filing’s exhibit rather than filing the exhibit again. Because registrants are required to hyperlink to each exhibit filed with, or incorporated by reference to a filing,185 this information will be easily accessible to investors. Due to this change, we have revised Rule 13–01(a)(1) to require a description of the issuers and guarantors of the guaranteed security, instead of their identification, in Securities Act registration statements and Exchange Act registration statements and periodic reports. We believe this approach will provide the information to investors in a more efficient manner and make the accompanying financial and nonfinancial disclosures easier to understand. c. When Disclosure Is Required i. Proposed Amendments 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 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,’’ 186 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.187 Under these thresholds, minor changes in circumstances can result in dramatically different disclosures being required. Existing Rules 3–10(i)(11)(i) and (ii) provide that Rule 3–10 disclosure may not omit any financial and narrative information about each guarantor if it would be material for investors to evaluate the sufficiency of the guarantee, and shall include sufficient information so as to make the financial information presented not misleading. This disclosure is required when Consolidating Information is disclosed. The proposed amendments would eliminate the ‘‘no independent assets or operations’’ and ‘‘minor’’ thresholds, as well as the brief narrative form of Alternative Disclosures, and instead jbell on DSKJLSW7X2PROD with RULES2 185 See 17 CFR 232.102(d) [Rule 102(d) of Regulation S–T]. 186 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 discussion in Section II.F of the Proposing Release. 187 See discussion of existing requirements in Section II.F of the Proposing Release. VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 require financial and non-financial disclosures to the extent material to holders of the guaranteed security. 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. While the disclosures specified in proposed Rule 13–01(a)(1) through (4) could have been omitted if not material to holders of the guaranteed security, for clarity, proposed Rule 13– 01(a)(4) would have required the registrant to include a statement that those financial disclosures have been omitted and disclose the reason(s) why the disclosures are not considered to be material. While the proposed rules include 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 have required disclosure of any information that would be material to making an investment decision with respect to the guaranteed security, rather than the sufficiency of the guarantee as stated in the existing rule. This requirement would have applied in all cases, including when the proposed Summarized Financial Information is omitted in accordance with the proposed rule. ii. Comments on the Proposed Amendments Comments were mixed on these proposals. A number of commenters generally supported the proposed elimination of existing Rule 3–10’s numerical thresholds in favor of allowing issuers to provide the specified disclosures based on what information the issuer believes is material to investors.188 However, a few commenters supported some type of numerical threshold for establishing whether financial information of an obligor group should be deemed material.189 One commenter suggested establishing a 50% threshold as a nonexclusive safe harbor for guarantee significance.190 This commenter stated 188 See, e.g., letters from CII, FedEx, FEI, Nareit, and Sullivan & Cromwell. 189 See letters from SIFMA and T-Mobile. 190 See letter from SIFMA. This commenter said that significance under this suggestion would be measured in a manner consistent with the existing rule’s determination of a ‘‘minor’’ subsidiary specified in Rule 3–10(h)(6), except that 50% would be substituted for the existing rule’s 3% threshold. See additional discussion in Section II.F of the Proposing Release. PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 21955 that if the significance is at or below 50%, the alternative disclosures should be deemed not material and not required to be disclosed; while if it is above 50%, issuers should still be able to conclude that the Proposed Alternative Disclosures are not required if they would not provide material information. Another commenter recommended that the Commission establish a quantitative test that would allow issuers to evaluate whether Summarized Financial Information of an Obligor Group may be omitted.191 Some commenters opposed the requirement in proposed Rule 13– 01(a)(4) that would require a registrant to disclose, if the required financial disclosures were omitted because they were not material, a statement to that effect and the reasons therefore.192 Some commenters asserted that such disclosure would not be useful to investors,193 could possibly result in an increase in liability,194 and was counter to the Commission’s objective of focusing on material disclosures and providing a principles-based framework.195 One commenter suggested that, if the proposal were adopted, the Commission should make clear that issuers would only need to make a simple statement that management does not believe the information is material.196 In contrast, one commenter specifically supported this part of proposed Rule 13–01(a)(4), asserting that the requirement would provide clarity about which disclosures were omitted and why.197 A number of commenters opposed proposed Rule 13–01(a)(5), which would have required disclosure of any information that would be material to making an investment decision with respect to the guaranteed security.198 Several of these commenters contended that the proposed requirement is overly broad. Some commenters asserted that the proposed requirement would cause uncertainty for issuers and auditors as 191 See letter from T-Mobile. This commenter did not provide a specific figure for a quantitative threshold, but noted that the threshold should be higher than existing Rule 3–10’s thresholds for minor subsidiaries. The commenter asserted that using the criteria for being considered a ‘‘significant subsidiary’’ specified in § 210.1–02(w) would better reflect materiality to investors compared to the existing definition of minor subsidiaries. 192 See, e.g., letters from Debevoise, EY, KPMG, and SIFMA. 193 See letters from Debevoise and KPMG. 194 See letters from Debevoise and SIFMA. 195 See letter from Debevoise. 196 See letter from SIFMA. 197 See letter from CII. 198 See, e.g., letters from ABA, BDO, CAQ, Comcast, Cravath, Davis Polk, Deloitte, EY, Freeport, KPMG, PWC, Shearman, and Sullivan & Cromwell. E:\FR\FM\20APR2.SGM 20APR2 21956 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations they seek to apply and assess the adequacy of the disclosures.199 One commenter asserted that the proposed requirement would override all other relevant disclosure obligations; 200 another commenter questioned whether the Commission is proposing to modify the overall materiality assessment in its disclosure framework; 201 and a third commenter stated its belief that in addition to creating litigation risk, the proposed rule could extend the duty to disclose material information beyond information specific to the guarantee, such as pending merger negotiations and other potential transactions.202 However, one commenter supported this proposed requirement ‘‘because it would provide relevant information, not otherwise explicitly required by the [p]roposed [r]ule, which would likely render the disclosures taken as a whole to be more useful for investment decisions.’’ 203 In response to the Commission’s request for comment on whether the proposed amendments were sufficiently clear about the disclosures that should be provided and when, one commenter recommended that the final rules should provide explicit objectives related to assessing the guarantee, which would help issuers to prepare their disclosures.204 Some commenters suggested that it would be helpful for the final rules to provide additional guidance or examples of information that may be material to investors.205 One commenter recommended that the rules expressly provide that the Alternative Disclosures need not be included in a registration statement at the time of effectiveness so long as they are provided prior to an offering of the securities in respect of which the Alternative Disclosures are required.206 Another commenter asserted that a parent company could conclude that disclosure is not material if no investor owns (or is currently being offered) the specific guaranteed or collateralized security and therefore the disclosure could be excluded based on proposed Rule 13–01.207 jbell on DSKJLSW7X2PROD with RULES2 iii. Final Amendments We are adopting the amendments largely as proposed with modifications based on comments received. 199 See, e.g., letters from BDO, CAQ, EY, and PWC. 200 See letter from Cravath. 201 See letter from Deloitte. 202 See letter from Shearman. 203 See letter from CII. 204 See letter from EY. 205 See, e.g., letters from KPMG and Shearman. 206 See letter from Cravath. 207 See letter from PWC. VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 As supported by several commenters,208 the existing ‘‘no independent assets or operations’’ and ‘‘minor’’ numerical thresholds used to determine the form and content of disclosure have been replaced with a requirement to provide all disclosures specified in the final rule, unless such information is not material.209 Whereas proposed Rule 13–01(a) required the proposed financial and non-financial disclosures ‘‘to the extent material to holders of the guaranteed security,’’ the final rule has been revised to require the financial and non-financial disclosures ‘‘to the extent material,’’ which is discussed in further detail below. A few commenters suggested including numerical thresholds in the rule for determining whether financial information may be omitted,210 while others requested that we provide additional guidance or examples of what information may be material.211 While we appreciate the desire for certainty about when disclosure is required, determinations of what information is material are highly dependent on the applicable facts and circumstances, and we are concerned that specifying numerical thresholds or providing detailed guidance could undermine the principles-based nature of this provision, to the detriment of both investors and issuers. We are therefore not adopting these suggestions. Instead, akin to the suggestion of one commenter,212 the final rule identifies four non-exclusive scenarios in which the required information could be omitted on the basis that it is not material, provided the applicable scenario is disclosed to 208 See, e.g., letters from CII, FedEx, FEI, Nareit, and Sullivan & Cromwell. 209 This requirement is specified in new Rule 13– 01(a). Whether a disclosure specified in new Rule 13–01 may be omitted 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). 210 See letters from SIFMA and T-Mobile. 211 See, e.g., letters from KPMG and Shearman. 212 See letter from SIFMA. This commenter recommended the Commission establish, as a nonexclusive safe harbor, ‘‘a numerical threshold of guarantee significance at or below which [the required disclosures] would be deemed immaterial and thus not required and above which registrants would still be able to conclude that [the required disclosures] are not required because they would not provide material information.’’ We are not adopting the commenter’s suggestion of a numerical threshold of significance, but we have identified four non-exclusive scenarios in which the required information could be omitted as discussed below. PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 investors. We discuss these four scenarios in further detail below. The proposed rule sets forth financial and non-financial disclosures that were focused on the information the Commission expected was most likely to be material. It also included proposed Rule 13–01(a)(5), which would have required disclosure of ‘‘any other quantitative or qualitative information that would be material to making an investment decision with respect to the guaranteed security.’’ The intent of this proposed requirement was to elicit disclosure about the obligated entities and the guarantees that would be material but was not otherwise specifically required by the proposed financial and non-financial disclosures. While one commenter supported this proposed requirement, many others did not. Instead of proposed Rule 13–01(a)(5), we are adopting new Rules 13–01(a)(6) and (7), which retain the requirements in existing Rules 3–10(i)(11)(i) and (ii),213 respectively, as suggested by several commenters.214 However, we are aligning the wording of existing Rules 3–10(i)(11)(i) and (ii) to the structure of Rule 13–01. We are also modifying the requirement in existing Rule 3– 10(i)(11)(ii) to make reference to nonfinancial information, in addition to financial information, because we see no reason to limit such disclosure to financial information. Parent companies are already required to comply with existing Rule 3–10(i)(11)(i) and (ii), and we are not aware of any issues surrounding their application. We believe these existing requirements capture the disclosures the proposed rule was intended to elicit while addressing the concerns raised by commenters as discussed above. Notwithstanding these requirements in the final rule, in 17 CFR 230.408(a) 215 and 17 CFR 240.12b–20 216 require a parent company to disclose, in addition to the information expressly required to be included, such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made not misleading. While some commenters indicated these requirements provide sufficient investor protections,217 we believe retaining the requirements in existing Rule 3– 10(i)(11)(i) and (ii), in addition to those 213 See Section III.C.2.c.i, ‘‘When Disclosure is Required,’’ for a discussion of the requirements in existing Rules 3–10(i)(11)(i) and (ii). 214 See, e.g., letters from BDO, PWC, and Shearman. 215 Securities Act Rule 408(a). 216 Exchange Act Rule 12b–20. 217 See, e.g., letters from Deloitte and EY. E:\FR\FM\20APR2.SGM 20APR2 jbell on DSKJLSW7X2PROD with RULES2 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations other requirements, will help to ensure that material information is provided to investors. Based on comments received on proposed Rule 13–01(a)(5), we have also revised Rule 13–01(a) for clarity. Proposed Rule 13–01(a) would have required disclosures ‘‘to the extent material to holders of the guaranteed security’’ and was not intended to introduce a nuanced or different materiality analysis specific to these disclosure requirements. A parent company’s responsibility to determine whether the disclosures specified in Rule 13–01 are material is not different from how it assesses materiality in connection with other information it files with the Commission. Accordingly, we have revised final Rule 13–01 to require the financial and non-financial disclosures ‘‘to the extent material.’’ Proposed Rule 13–01(a)(4) would have required, if the financial disclosures specified in proposed Rule 13–01(a)(4) were omitted because they are not material, disclosure of a statement to that effect and the reasons therefore. Most of the commenters that discussed this proposed requirement did not support it.218 The intent of the proposed rule was not to require a parent company to disclose the analysis supporting its conclusion that the financial disclosures were not material. Rather, it was to inform an investor that financial information about issuers and guarantors was not being provided and the basic reason(s) for the omission, similar to the narrative forms of Alternative Disclosures in existing Rule 3–10.219 In response to these comments, we are not adopting this requirement as proposed. Instead, we are adopting an approach that should help address concerns 220 about the need for greater certainty as to the circumstances when the omission of financial disclosures may be appropriate while continuing to provide investors with the basic reasons as to why the financial information was omitted in a manner similar to existing Rule 3–10’s narrative exceptions. As adopted, Rule 13–01(a)(4)(vi) includes four scenarios, which we believe are the most common situations under which the financial information would not be material.221 If the scenario is applicable and disclosed, the parent company could then omit the financial disclosures. The four scenarios are: (1) The assets, liabilities and results of operations of the combined issuers and guarantors of the guaranteed security are not materially different than corresponding amounts presented in the consolidated financial statements of the parent company; 222 (2) The combined issuers and guarantors, excluding investments in subsidiaries that are not issuers or guarantors, have no material assets, liabilities or results of operations; 223 (3) The issuer is a finance subsidiary of the parent company, the parent company has fully and unconditionally guaranteed the security, and no other subsidiary of the parent company guarantees the security; 224 and (4) The issuer is a finance subsidiary that co-issued the security, jointly and severally, with the parent company, and no other subsidiary of the parent company guarantees the security.225 While we believe these scenarios encompass most of the situations under which the required financial information would not be material, these scenarios are not intended to be exclusive. As discussed below, there may be other circumstances in which it would be appropriate to omit the required financial information on the basis that it is not material. In the first scenario, we believe financial information of the combined Obligor Group would not be material to an investor as it is not materially different than that of the consolidated parent company.226 If the related scenario was disclosed, investors would not need supplemental financial information as it would largely duplicate the corresponding information in the parent company’s consolidated financial statements. In the second scenario, we believe disclosure that the combined Obligor Group has no 218 See, e.g., letters from Debevoise, EY, KPMG, and SIFMA. 219 The content of the brief narratives is specified within each of the exceptions of existing Rules 3– 10(b) through (f) based on the applicable facts and circumstances. For example, if the conditions are met, existing 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.’’ 220 See, e.g., letter from Shearman. 221 These scenarios were discussed in the Proposing Release. See Section III.C.2.c of the Proposing Release. 222 This scenario is contained in Rule 13– 01(a)(4)(vi)(A). 223 This scenario is contained in Rule 13– 01(a)(4)(vi)(B). 224 This scenario is contained in Rule 13– 01(a)(4)(vi)(C). 225 This scenario is contained in Rule 13– 01(a)(4)(vi)(D). 226 Rule 13–01(a)(4)(vi) clarifies that this scenario does not apply where separate disclosure of the Summarized Financial Information of one or more, but not all issuers and/or guarantors, is required by Rule 13–01(a)(4)(iv). VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 21957 material assets, liabilities or results of operations obviates the need for supplemental disclosures as an investor would know such information would not be material. The third and fourth scenarios involve finance subsidiary issuers or finance subsidiaries that coissue securities with the parent company. These last two scenarios, which are generally consistent with existing Rule 3–10(b) narrative disclosures involving finance subsidiaries,227 inform investors that the finance subsidiary issuer or co-issuer has no independent material debtpaying ability and has no material assets or operations other than those related to the issuance, administration, and repayment of the guaranteed security such that supplemental financial disclosures are not material. Rule 13–01(a)(4)(vi)(C) applies to a finance subsidiary issuer of a security that the parent company has fully and unconditionally guaranteed, and Rule 13–01(a)(4)(vi)(D) applies to a finance subsidiary that co-issues a security, jointly and severally, with the parent company. No other subsidiaries of the parent company may guarantee the security under either of these scenarios. Rule 13–01(a)(4)(vi) defines when a subsidiary is a ‘‘finance subsidiary’’ for the purposes of the rule. This definition is consistent with the definition in existing Rule 3–10(h)(7) except that the amended definition does not make reference to revenues, which we believe are subsumed by the reference to ‘‘operations,’’ and does not make reference to ‘‘cash flows,’’ as cash flow information is not a required financial disclosure under the amended rule. While we believe these scenarios generally capture the situations under which the financial information would not be material and may be omitted, there may be other scenarios under which the parent company may conclude Summarized Financial Information is not necessary. These scenarios would be evaluated under the 227 See discussion above in Section III.C.1.d.iii. As one of the conditions to omit the financial statements of the finance subsidiary issuer under existing Rule 3–10(b), the parent company must provide the narrative disclosure in paragraph (4) of existing Rule 3–10(b), which is that ‘‘the issuer is a 100%-owned finance subsidiary of the parent company and the parent company has fully and unconditionally guaranteed the securities. The footnote also must include the narrative disclosures specified in paragraphs (i)(9) and (i)(10) of this section.’’ The Note to existing Rule 3–10(b) states that ‘‘[p]aragraph (b) is available if a subsidiary issuer satisfies the requirements of this paragraph but for the fact that, instead of the parent company guaranteeing the security, the subsidiary issuer coissued the security, jointly and severally, with the parent company. In this situation, the narrative information required by paragraph (b)(4) must be modified accordingly.’’ E:\FR\FM\20APR2.SGM 20APR2 21958 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations general materiality provision of Rule 13–01(a). Based on this analysis, if a parent company determines that not all of the required financial information is material, the information that is not material may be omitted without additional disclosure or explanation. Thus, under the final rule, the parent company could either rely on one of the identified scenarios, if applicable, to omit information that is not material, or make its own assessment based upon a consideration of other relevant facts and circumstances.228 We believe this approach will preserve the principlesbased nature of Rule 13–01 while providing greater certainty for issuers, and appropriate transparency for investors, regarding the information required to be disclosed. Two commenters encouraged the Commission to expressly provide that the Proposed Alternative Disclosures need not be provided at the time of effectiveness so long as they are provided prior to an offering of the guaranteed securities,229 with one of these commenters suggesting that we amend 17 CFR 230.430B(a) 230 to cover information required by proposed Rule 13–01.231 We are not amending Rule 430B as suggested. Issuers meeting the definition of Well-Known Seasoned Issuer (‘‘WKSI’’) are currently afforded significant flexibility under Rule 430B(a), which would include the flexibility to omit the information specified in Proposed Rule 13–01 at effectiveness so long as the information is added when the shelf registration statement is amended to identify subsidiary issuers and guarantors.232 We acknowledge that non-WKSI issuers are not similarly able to omit this information but note that WKSIs are afforded substantially greater latitude in registering and marketing securities.233 d. Location of Revised Alternative Disclosures and Audit Requirement i. Proposed Amendments The primary source of financial information provided to investors—the consolidated financial statements of the parent company—is required to be jbell on DSKJLSW7X2PROD with RULES2 228 To provide clarity to an issuer that its ability to omit the Summarized Financial Information required by final Rule 13–01(a)(4) is not limited to the four scenarios discussed herein, final Rule 13– 01(a)(4)(vi) states: ‘‘Notwithstanding that a parent company may omit this summarized financial information if not material . . .’’ 229 See letters from Cravath and PWC. 230 Securities Act Rule 430B(a). 231 See letter from Cravath. 232 See Securities Act Rule 430B(a) and Securities Offering Reform, Release No. 33–8591 (July 19, 2005) [70 FR 44722 (Aug. 3, 2005)] (‘‘Securities Offering Reform’’) at text accompanying note 520. 233 See Securities Offering Reform at note 220. VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 audited as specified in Regulation S– X.234 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. The proposed rule would provide 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 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 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 have allowed the parent company to provide the Proposed Alternative Disclosures in a footnote to its consolidated financial statements or, alternatively, in MD&A,235 in the 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 236 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 were to elect to provide the disclosures in its audited financial statements, the Proposed Alternative Disclosures would be required to be audited.237 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 234 Rules 235 See 3–01 and 3–02 of Regulation S–X. 17 CFR 229.303 (Item 303 of Regulation S–K). 236 These proposed amendments also would 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. 237 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. PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 following pricing information described in 17 CFR 229.503(c) (‘‘Item 503(c) of Regulation S–K’’).238 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 have been required to provide the Proposed Alternative Disclosures in a footnote to its consolidated financial statements in its annual and quarterly reports. 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.239 ii. Comments on the Proposed Amendments Comments on the proposed amendments were mixed. A few commenters generally supported the flexibility under the proposed amendments for the parent company to provide the Proposed Alternative Disclosures in specified locations outside its consolidated financial statements in the subject registration statement and Forms 10–K and 10–Q required to be filed during the fiscal year in which the first bona fide sale of the debt securities is completed, but would have required the parent company to provide the disclosures in a footnote to its consolidated financial statements in its annual and quarterly reports starting with its annual report filed on Form 10–K for the fiscal year during which the first bona fide sale of the debt securities is completed.240 A number of commenters stated that the Proposed Alternative Disclosures should be permitted to be presented outside of the parent company’s consolidated financial statements in all cases, not just in the registration statement and Forms 10–K and 10–Q required to be filed during the fiscal year in which the first bona fide sale of 238 Subsequent to the issuance of the Proposing Release, the Commission amended and relocated the requirements previously contained in Item 503(c) to 17 CFR 229.105 [new Item 105 of Regulation S–K]. See FAST Act Modernization and Simplification of Regulation S–K, Release No. 33– 10618 (Mar. 20, 2019) [84 FR 12674 (Apr. 2, 2019)]. 239 See Section III.D, ‘‘Application of Amendments to Certain Types of Issuers,’’ below. 240 See letters from Ball Corp., Nareit, and WTW. While one commenter expressed support for the proposed amendment that would allow locating the disclosures outside the footnotes of the financial statements in certain instances, the commenter stated its belief that having a requirement for the disclosures to be audited creates additional cost over an area of accounting and disclosure where there is limited focus from the investment community. See letter from WTW. E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES2 the subject securities is completed.241 One commenter suggested that the existing rule’s requirement that the disclosures be included in the audited financial statements has driven wouldbe registered debt issuers to the Rule 144A debt market,242 an effect other commenters asserted would continue if the Proposed Alternative Disclosures were required to be included in the consolidated financial statements in subsequent Exchange Act reports.243 Several commenters asserted that not requiring these disclosures to be audited would reduce costs 244 and possibly allow issuers to more quickly register guaranteed debt securities and access capital markets.245 A few commenters stated that requiring an audit of the Proposed Alternative Disclosures would provide little marginal benefit to investors.246 Other commenters, however, asserted that the flexibility to determine the location of the Proposed Alternative Disclosures under the proposed amendments could lead to investor confusion about the location of the disclosures,247 and uncertainty as to the level of audit assurance that applied to the disclosures.248 One commenter contended that the Proposed Alternative Disclosures should be required to be presented in a single location to avoid inconsistencies in the location and varied reliance by investors.249 Another commenter stated that companies should not have the option to choose where their disclosures will appear, and that reported disclosures should be consistently reported in the same location.250 One commenter did not support locating the Proposed Alternative Disclosures outside the financial statements,251 and another suggested either requiring the Proposed Alternative Disclosures to be audited or limiting unaudited disclosures to underwritten offerings.252 One of these commenters argued that many investors place significant value on having 241 See, e.g., letters from ABA, Cravath, Davis Polk, Dell, Freeport, SIFMA, Simpson Thacher and Sullivan & Cromwell. 242 See letter from Cravath. 243 See letters from Dell and Sullivan & Cromwell. 244 See, e.g., letters from ABA, Ball Corp., Cravath, Davis Polk, Dell, Freeport, SIFMA, Simpson Thacher, Sullivan & Cromwell, and WTW. 245 See, e.g., letters ABA, BDO, Cravath, Davis Polk, Dell, and Simpson Thacher. 246 See, e.g., letters from Davis Polk, Dell, Freeport, and Sullivan & Cromwell. 247 See letters from Deloitte, FedEx, and PWC. 248 See letters from Deloitte and KPMG. 249 See letter from KPMG. 250 See letter from XBRL US, Inc. 251 See letter from CII. 252 See letter from BDO. VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 required disclosures subject to annual audit and/or interim review, internal control over financial reporting, and XBRL tagging requirements, and not being subject to the forward-looking statements safe harbor.253 Another commenter did not express a view on where the disclosures should be located, but indicated that investors may benefit from having the disclosures in the financial statements because they would be subject to audit and interim review requirements.254 Other commenters, however, recommended the disclosures be located outside the financial statements in all cases.255 One of these commenters argued presentation outside the financial statements in all cases was appropriate as the Proposed Alternative Disclosures are supplementary to the financial statements.256 This commenter asserted that this change would reduce costs of preparing the disclosures by allowing the information to be unaudited, and noted that the disclosures would still be subject to the parent company’s disclosure controls and procedures and required certifications. Another of these commenters recommended the disclosures be required in the liquidity and capital resources section of the MD&A or in a separate section following ‘‘Risk Factors’’ as is currently done in the Rule 144A market and has been accepted by the investor community.257 This commenter also observed that if disclosure outside the financial statements is sufficient at the time of the initial investment decision, it should be sufficient for future periods. Yet another of these commenters observed the Proposed Alternative Disclosures would be better presented in a discussion about a parent’s liquidity in the MD&A as opposed to in the financial statements given the objective of the disclosures to provide an investor in a debt security with information about the related guarantee.258 Some commenters emphasized that, even if the Proposed Alternative Disclosures are allowed to be located outside of the financial statements, these disclosures would be derived from the same internal accounting records used to prepare the parent company’s audited consolidated financial statements 259 and would be subject to the parent company’s disclosure controls and procedures 260 and certification by the parent company’s principal executive and principal financial officers.261 Some commenters asserted that underwriters will likely request independent auditors to provide comfort on financial information provided outside the consolidated financial statements in connection with registered offerings.262 Two of these commenters indicated this would involve performing limited procedures on such information under Public Company Accounting Oversight Board (‘‘PCAOB’’) Auditing Standard 6101, Letters for Underwriters and Certain Other Requesting Parties.263 One commenter suggested that such procedures may not result in a decrease in effort or cost for either auditors or registrants,264 while the other commenter stated that while the scope and time required to perform such procedures is less than an audit, the auditor involvement may delay the time to market for underwritten offerings.265 Another commenter noted that the proposed rules would cause issuers to incur costs related to the incremental procedures necessary for such comfort procedures but investors would lose the benefit arising out of the audit of the disclosures.266 Another commenter recommended that, if the final rules allow issuers the flexibility to determine the location of the Proposed Alternative Disclosures, the Commission should provide examples to clarify when the Proposed Alternative Disclosures must be in the financial statements.267 Some commenters suggested that because the Proposed Alternative Disclosures would be relevant only to the investors of the guaranteed security, if these disclosures were required to be audited, this information should be included in an audited supplemental schedule that could be filed as an exhibit to the filing, similar to the supplemental schedules required under 17 CFR 210.12–01 through 210.12–29 (‘‘Article 12 of Regulation S–X’’).268 iii. Final Amendments After considering comments received, we are adopting the amendments largely as proposed, with modifications. As discussed above, while a few 260 See letters from Cravath and EY. letter from FedEx. 262 See, e.g., letters from BDO, EY, Grant Thornton, KPMG, and Windstream. 263 See letters from BDO and KPMG. 264 See letter from KPMG. 265 See letter from BDO. 266 See letter from Grant Thornton. 267 See letter from Deloitte. 268 See letters from CAQ, EY, and PWC. 261 See 253 See letter from CII. letter from CAQ. 255 See, e.g., letters from FedEx, NYC Bar and PWC. 256 See letter from FedEx. 257 See letter from NYC Bar. 258 See letter from PWC. 259 See letters from Davis Polk and Freeport. 254 See PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 21959 E:\FR\FM\20APR2.SGM 20APR2 21960 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES2 commenters either did not support locating the disclosures outside the financial statements or suggested limiting unaudited disclosures to underwritten offerings, others recommended the disclosures be located outside the financial statements in all cases. We continue to believe, however, that it is appropriate to provide parent companies the flexibility to select the location of the disclosures, including locating them outside the parent company’s consolidated financial statements. In this regard, and consistent with the views of several commenters, we expect not requiring the disclosures to be audited will reduce costs and allow issuers to register guaranteed debt securities and access capital markets faster, which may encourage more such registered offerings.269 Although we appreciate that some investors may place a value on having financial information subject to annual audit and/or interim review and other requirements that flow from including disclosures in the parent company’s financial statements, the proposed flexibility afforded to the parent company in selecting the location of the Proposed Alternative Disclosures, including locating them outside the parent company’s audited financial statements, took into account the nature of those disclosures as a supplement to the parent company’s consolidated financial statements. We also agree with those commenters who observed that, even if the Revised Alternative Disclosures are located outside the financial statements, they would be derived from the same internal accounting records and subject to the parent company’s disclosure controls and procedures and management certification requirements. Accordingly, and consistent with the proposed rule, final Rule 13–01(b) 270 permits the parent company to provide the Revised Alternative Disclosures in a footnote to its consolidated financial statements or alternatively, in MD&A. If the disclosures are not otherwise 269 We acknowledge that underwriters may request independent auditors to provide comfort on financial information provided outside the financial statements for registered offerings, which could limit the expected cost savings and delay the time to market. However, providing this flexibility will enable issuers and underwriters the option to present this supplemental information outside the financial statements when it is cost- and timeeffective to do so and therefore may reduce frictions associated with registered offerings of guaranteed debt securities. We also observe, as one commenter noted, that the scope and time required to perform comfort procedures is less than an audit. See letter from BDO. 270 Whereas this requirement was included in a note to proposed Rule 13–01(a), the final rule includes it in a separate paragraph, Rule 13–01(b). VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 included in the consolidated financial statements or in MD&A, the final rule requires the parent company to include the disclosures in its prospectus immediately following ‘‘Risk Factors,’’ if any, or otherwise, immediately following pricing information described in Item 105 of Regulation S–K.271 As discussed above, some commenters suggested that the proposed flexibility in selecting the location of the disclosure may cause investors confusion about the location and level of assurance applied. While the proposed rule provided flexibility on where to locate the disclosures, we believe the locations where disclosures may be provided are clearly specified and that investors generally understand the levels of assurance applied to disclosures included inside or outside the parent company’s consolidated financial statements. If provided in the parent company’s consolidated financial statements, consistent with existing Rule 3–10, the disclosures must be included in a footnote. If provided outside the parent company’s consolidated financial statements, they must be included in MD&A, or in other specified locations if the parent company’s consolidated financial statements and MD&A are not otherwise included in the filing.272 Consistent with the proposed rule, if the parent company elects to provide the Revised Alternative Disclosures in a footnote to its audited consolidated financial statements, the Revised Alternative Disclosures must be audited. Conversely, the Revised Alternative Disclosures need not be audited if the parent company provides them outside the audited consolidated financial statements. A few commenters recommended that, if audited, the information be included in a supplemental schedule similar to the ones required by Article 12 of Regulation S–X. Under the existing rule, a parent company must include the Alternative Disclosures in financial statements footnotes but has discretion over where to locate them. We are not aware of any practice issues associated with this discretion, and believe investors understand how to locate the 271 17 CFR 229.105. As described above, subsequent to the issuance of the Proposing Release, the Commission amended and relocated the requirements previously contained in Item 503(c) of Regulation S–K to new Item 105 of Regulation S–K. The final amendments have been revised to reflect this change. 272 These circumstances include when the consolidated financial statements and MD&A are included in previously filed reports that are incorporated by reference. In such instances, the disclosures are required to be provided in specified prominent locations. PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 disclosures and understand the level of audit assurance associated with the disclosures if included in the financial statement footnotes. We are therefore not adopting this suggestion. Under the proposed rule, although the parent company would initially have the flexibility to locate the disclosures outside of its consolidated financial statements in the subject registration statement and certain periodic reports filed thereafter, the parent company would have been required to provide the disclosures in a footnote to its consolidated financial statements starting with its annual report filed on Form 10–K for the fiscal year during which the first bona fide sale of the subject securities is completed. A number of commenters did not support this proposed requirement, and stated that the disclosures should be permitted to be presented outside of the parent company’s consolidated financial statements in all cases, as described above. Some commenters asserted that it was incongruous for a heightened compliance obligation to apply after an offering,273 and others expressed the view that if audited information is not necessary for an investment decision, it is not necessary thereafter.274 One commenter noted that this requirement is disproportionally burdensome on repeat issuers of debt securities,275 and another asserted that eliminating this proposed requirement would allow issuers to provide their disclosure in a consistent location and avoid unnecessarily providing it in different locations.276 We considered responses to the Commission’s request for comment on the potential benefits or concerns for investors and issuers with either permitting the parent company to provide the proposed disclosures outside its financial statements in the proposed circumstances or permitting the parent company to provide the proposed disclosures outside its financial statements in all circumstances. Having considered these comments, and in light of the benefits of the proposed flexibility discussed above, we are persuaded that there is no reason to limit this flexibility to the subject registration statement and certain periodic reports filed thereafter. Thus, under the final rule, the parent company will have flexibility to locate the disclosures in a footnote to its consolidated financial statements or in 273 See, e.g., letters from Cravath, Freeport, and Simpson Thacher. 274 See, e.g., letters from Davis Polk and PWC. 275 See letter from Simpson Thacher. 276 See letter from ABA. E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations the locations specified in Rule 13–01(b) in all of its filings, consistent with the recommendations of many commenters. e. Recently Acquired Subsidiary Issuers and Guarantors i. Proposed Amendments The proposed rule would eliminate the requirement in existing Rule 3–10(g) to provide pre-acquisition audited financial statements of a recently acquired subsidiary issuer or guarantor in certain circumstances.277 Although the proposed rule would not require specific disclosures about recentlyacquired subsidiary issuers and guarantors, information about these recently acquired subsidiaries would have been 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), the Commission also proposed a conforming change to remove paragraph (b) of Rule 12h–5.278 jbell on DSKJLSW7X2PROD with RULES2 ii. Comments on the Proposed Amendments Many commenters expressed general support for the proposed elimination of Rule 3–10(g).279 Several of these commenters contended that existing Rule 3–10(g) was burdensome and that existing 17 CFR 210.3–05 280 already requires disclosure of pre-acquisition financial statements of a significant acquired business.281 One commenter asserted that the existing Rule 3–10(g) requirements often results in more detailed disclosure being provided for recently acquired entities than for other subsidiary issuers and guarantors.282 Another commenter maintained that the requirements of existing Rule 3–10(g) caused it to alter guarantor structures in certain debt offerings.283 277 See Section II.I of the Proposing Release for a detailed description of the pre-acquisition financial statements requirements of existing Rule 3–10(g). 278 If the proposed removal of paragraph (b) of existing Rule 12h–5 was 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. 279 See, e.g., letters from Cravath, Davis Polk, Dell, EY, FEI, Nareit, and T-Mobile. 280 Rule 3–05 of Regulation S–X. 281 See, e.g., letters from Cravath, Davis Polk, Dell, FEI, and Nareit. 282 See letter from FEI. 283 See letter from T-Mobile. This commenter stated that the resources needed to compile the information necessary to meet the disclosure requirements of Regulation S–X and availability of the information related to pre-acquisition financial statements of recently acquired subsidiaries have directly resulted in alterations to the contemplated VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 In response to the Commission’s request for comment whether some other type of disclosure about recently acquired subsidiary issuers and guarantors should be required instead of pre-acquisition financial statements, one commenter recommended that the Commission consider requiring Summarized Financial Information of a recently acquired guarantor in registration statements if the guarantor is not already included in the Summarized Financial Information of the Obligor Group (i.e., it is acquired after the most recent balance sheet date) and if the guarantor had a material effect on the financial capacity of the obligated group.284 Some commenters noted that although the proposed amendments would not include a requirement similar to existing Rule 3– 10(g), information about recently acquired subsidiaries would be required if material to an investment decision in the guaranteed security under proposed Rule 13–01(a)(5).285 One commenter encouraged the Commission ‘‘not to perpetuate separate disclosure rules in this context for recently acquired subsidiaries.’’ 286 Another commenter indicated that the existing disclosure requirements under ASC 805, Business Combinations, would continue to provide sufficient information related to material subsidiaries acquired and their impact on the consolidated entity.287 iii. Final Amendments After considering the public comments, we are adopting the proposed changes with certain modifications. We agree with those commenters that supported the proposed elimination of the preacquisition financial statements requirement of existing Rule 3–10(g), most of which cited the burdensome nature of the requirement and that existing Rule 3–05 of Regulation S–X already requires pre-acquisition financial statements of significant acquired business as reasons not to include such a requirement in the final rules.288 Accordingly, as proposed, the final rule will not include such a requirement. Under the proposed rule, although the requirement to provide pre-acquisition guarantor structure in its debt offerings where it would have been unable to provide the required disclosures, resulting in the exclusion of guarantees that would have otherwise been made available to investors. 284 See letter from EY. 285 See letters from Cravath and Nareit. 286 See letter from Cravath. 287 See letter from T-Mobile. 288 See, e.g., letters from Cravath, Davis Polk, Dell, FEI, and Nareit. PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 21961 financial statements of recently acquired subsidiary issuers and guarantors in existing Rule 3–10(g) would be eliminated, information about such recently acquired subsidiaries would have been required if material to an investment decision in the guaranteed security pursuant to proposed Rule 13– 01(a)(5).289 As described above, we received limited comments specific to this requirement, with one commenter opposing separate disclosure rules for recently acquired subsidiary issuers and guarantors in this context 290 and another stating that existing disclosures required by U.S. GAAP were sufficient.291 However, we agree with another commenter 292 that suggested Summarized Financial Information for recently acquired subsidiary guarantors should be included in registration statements if the guarantor is not already included in the Summarized Financial Information of the Obligor Group.293 In this regard, under the proposed and final amendments, a subsidiary issuer or guarantor acquired after the parent company’s most recent balance sheet date would not be included in the Summarized Financial Information specified in Rule 13– 01(a)(4).294 To address this potential information gap, and similar to the commenter’s suggestion, the final rule requires, in certain circumstances (discussed below), pre-acquisition Summarized Financial Information for recently acquired subsidiary issuers and guarantors to be provided in a Securities Act registration statement 295 filed in 289 The requirements applicable to recently acquired subsidiary issuers and guarantors have been included in final Rule 13–01(a)(5). Proposed Rule 13–01(a)(5) would have required disclosure of ‘‘any other quantitative or qualitative information that would be material to making an investment decision with respect to the guaranteed security.’’ Instead of this proposed requirement, the final amendments include Rules 13–01(a)(6) and (7). See discussion in Section III.C.2.c, ‘‘When Disclosure is Required.’’ 290 See letter from Cravath. 291 See letter from T-Mobile. 292 See letter from EY. 293 While this commenter’s suggestion only referred to recently acquired subsidiary guarantors, we believe this information need similarly extends to recently acquired subsidiary issuers. 294 Unless disclosure is otherwise required (e.g., the parent company provides disclosure pursuant to ASC 805, Business Combinations, or IFRS 3, Business Combinations, as applicable, or preacquisition financial statements are required due to the acquisition exceeding 50% significance under Rule 3–05 of Regulation S–X), an investor may not receive information about a subsidiary issuer or guarantor acquired after the balance sheet date. Additionally, such disclosures do not take into consideration that only certain entities within an acquired business may be obligated as issuers or guarantors. 295 Consistent with existing Rule 3–10(g), this requirement is only applicable to Securities Act E:\FR\FM\20APR2.SGM Continued 20APR2 21962 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES2 connection with the offer and sale of the subject guaranteed security. When considering pre-acquisition financial information requirements, we believe issuers benefit from certainty as to when such information is required.296 We also believe that the pre-acquisition Summarized Financial Information required by the final rule should be consistent with what Rule 13–01(a)(4) requires for existing issuers and guarantors, as we do not see a basis for requiring varying levels of detail in this context.297 Accordingly, final Rule 13– 01(a)(5) will require pre-acquisition Summarized Financial Information when a parent company has acquired a significant ‘‘business’’ after the date of its most recent balance sheet included in its consolidated financial statements,298 and that acquired business and/or one or more of its registration statements. In subsequent Exchange Act reports, financial information of a recently acquired subsidiary issuer or guarantor will be included in the financial information of issuers and guarantors required by final Rule 13–01(a)(4). 296 As described above, information about recently acquired subsidiaries would have been required under the proposed rule if material to an investment decision in the guaranteed security. Unlike disclosure that relates solely to the Obligor Group, which will be prepared by the parent company on an ongoing basis, and where materiality will therefore be evaluated regularly, in an acquisition context parent companies must rely on information provided by third parties to make a determination of whether the acquisition is significant and whether the related disclosure is material. A numerical threshold-based significance test provides parent companies with a level of certainty that allows them to efficiently make determinations of what level of disclosure is required in an environment where delay is costly. Also, where a parent company determines not to provide disclosure, investors would not receive information about the recently acquired subsidiary issuer’s or guarantor’s financial impact on the Obligor Group until the operating results of the acquired business have subsequently been reflected in the Summarized Financial Information of the Obligor Group. As a result, the impact of the acquisition may be difficult for investors to discern from other events affecting the Obligor Group, even where the acquisition may be economically significant. Thus, we expect a numerical threshold in the case of these disclosures could be less costly for parent companies and result in more consistent disclosure to investors where transactions are of economic significance. 297 As pointed out by one commenter, the preacquisition financial statements required by existing Rule 3–10(g) result in more detail for recently acquired entities than for other subsidiary issuers and guarantors. See letter from FEI. 298 Under the final amendments, pre-acquisition financial information of recently acquired subsidiary issuers and/or guarantors will not be required for acquisitions that occur before the date of the parent company’s most recent balance sheet included in the parent company’s financial statements. By contrast, under existing Rule 3– 10(g), pre-acquisition financial statements are required if such subsidiary issuers and/or guarantors have not yet been included in the parent company’s audited consolidated financial statements for nine months and the acquisition is significant. VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 subsidiaries are obligated as issuers and/or guarantors.299 Whether a ‘‘business’’ has been acquired will be determined in accordance with the guidance set forth in 17 CFR 210.11– 01(d),300 and the parent company would also need to treat acquisitions of related businesses as a single business acquisition in a manner consistent with Rule 3–05(a)(3). An acquired business will be deemed significant if it meets any of the conditions specified in the definition of significant subsidiary in Rule 1–02(w),301 substituting 20 percent for 10 percent each place it appears therein, based on a comparison of the most recent annual financial statements of the acquired business and the parent company’s most recent annual consolidated financial statements filed at or prior to the date of acquisition. To simplify compliance and provide certainty as to when disclosure is required, these significance tests are the same tests used to determine whether pre-acquisition financial statements are required for an acquired business pursuant to Rule 3–05 of Regulation S– X.302 Generally, under the final rule, a parent company will be required to provide pre-acquisition Summarized Financial Information of a recently acquired issuer or guarantor for those acquisitions where it will be required to provide pre-acquisition financial statements of the acquired business pursuant to Rule 3–05 of Regulation S– X.303 We recognize that not all of the 299 In our experience, recently acquired subsidiary issuers and guarantors would typically be considered a business because separate entities, subsidiaries, or divisions are presumed to be businesses. 300 Rule 11–01(d). 301 17 CFR 210.1–02(w). 302 Rule 3–05 provides for use of a 20% significance threshold, rather than the 10% threshold indicated in Rule 1–02(w). We note that the Commission has proposed amendments to the significance tests used in Rule 3–05 of Regulation S–X. See Amendments to Financial Disclosures About Acquired and Disposed Businesses, Release No. 34–85765 (May 3, 2019) [84 FR 24600 (May 28, 2019)]. Certain of these proposed amendments would affect the tests used to determine whether an acquired business is significant. If these significance tests are amended, the trigger for determining whether pre-acquisition financial information about recently acquired subsidiary issuers and guarantors would also change. We believe the alignment of these significance tests simplifies compliance for issuers while providing material information about recently acquired subsidiary issuers and guarantors for investors. 303 There may be some circumstances where a registrant is required to provide this pre-acquisition Summarized Financial Information of a recently acquired issuer or guarantor, but is not required to provide pre-acquisition financial statements of the acquired business pursuant to Rule 3–05 of Regulation S–X. For example, a parent company that is a foreign private issuer that consummates an acquisition of a significant business after the date PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 entities that compose an acquired business may be issuers and/or guarantors. Accordingly, the required Summarized Financial Information will only be for those entities acquired that are issuers or guarantors, and follows the form and content prescribed in new Rule 13–01(a)(4). We also recognize that the pre-acquisition Summarized Financial Information may be required in advance of when pre-acquisition financial statements are required pursuant to Rule 3–05 of Regulation S– X.304 However, we believe investors in a registered debt offering should be provided with information about issuers and guarantors in advance of an investment decision, and we note that the level of detail required is far less than pre-acquisition financial statements required by Rule 3–05. In sum, while the adopted approach differs from the more principles-based approach in the proposal, we believe it will continue to alleviate burdens on issuers while providing greater certainty about when pre-acquisition financial information should be provided by identifying specific circumstances in which such information is likely to be material to an investment decision. We also are adopting the conforming change to remove paragraph (b) of Exchange Act Rule 12h–5, as proposed.305 f. Continuous Reporting Obligation i. Proposed Amendments 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 of the most recent balance sheet presented would be required to provide pre-acquisition Summarized Financial Information of a recently acquired issuer or guarantor pursuant to new Rule 13–01(a)(5), but may be able to omit the pre-acquisition financial statements of a greater than 20% but less than 50% significant acquired business from its registration statement pursuant to Rule 3–05(b)(4) and from any subsequent Exchange Act filings. 304 For example, Rule 3–05(b)(4) of Regulation S– X in part permits, in certain circumstances, preacquisition financial statements of an acquired business to be omitted from a registration statement if the significance of the acquisition does not exceed 50% and the registration statement is declared effective no more than 74 calendar days after consummation of the acquisition. We note that filing requirements in Items 2.01 and 9.01 of Form 8–K may differ. 305 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 Exchange Act Rule 12h–5 will continue to be exempt from Exchange Act reporting through amended Rule 12h–5. E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES2 Act.306 Section 12(b) registration is required only for so long as the class of securities is listed for trading on a national securities exchange.307 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.308 Section 15(d)(1) 309 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,310 or bank holding company,311 by fewer than 1,200 persons, the registrant’s Section 15(d) reporting obligation is automatically suspended with respect to that class.312 Title 17 CFR 240.12h–3 (‘‘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.313 A foreign private issuer likewise may terminate its Exchange Act reporting obligation regarding a class of equity securities under either Section 12(g) or Section 15(d) if it complies with the conditions of 17 CFR 240.12h–6 (‘‘Rule 12h–6’’).314 Similarly, the periodic and 306 Section 12(g) registration is triggered when an issuer exceeds specified asset and ownership thresholds and only applies to equity securities. 307 Accordingly, Section 12(b) reporting obligations are terminated when, for example, the class is delisted by the exchange or the registrant determines to no longer list the securities on a national securities exchange. 308 15 U.S.C. 78 j(a)(3). 309 15 U.S.C. 78o(d)(1). 310 As that term is defined in Section 10 of the Home Owners’ Loan Act, 12 U.S.C. 1461. 311 As that term is defined in Section 2 of the Bank Holding Company Act of 1956, 12 U.S.C. 1841. 312 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. 313 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. 314 Rule 12h–6 permits the termination of Exchange Act reporting regarding a class of equity securities under either Section 12(g) or Section 15(d) of the Exchange Act by a foreign private issuer if the U.S. average daily trading volume of the VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 current reporting requirements applicable to an issuer that has filed an offering statement for a Tier 2 offering that has been qualified pursuant to Regulation A 315 may be suspended if the issuer complies with the requirements of 17 CFR 230.257(d) (‘‘Rule 257(d)’’).316 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.317 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. The Commission proposed 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 subject class of securities has been no greater than 5 percent of the average daily trading volume of that class of securities on a worldwide basis for a recent 12-month period; and the issuer has been an Exchange Act reporting company for at least one year, has filed or submitted all Exchange Act reports required for this period, and has filed at least one Exchange Act annual report; has not sold its securities in a registered offering in the United States, except for specified offerings, during the preceding 12 months (except for exempted securities offerings); and has maintained a listing on one or more exchanges for at least a year in a foreign jurisdiction that, either singly or together with one other foreign jurisdiction, constitutes the primary trading market for the issuer’s subject class of securities. The proposed and final amendments also apply to foreign private issuers. See Section III.D.1, ‘‘Foreign Private Issuers,’’ below. 315 17 CFR 230.251–230.263. 316 Rule 257(d) permits A Tier 2 issuer that has filed all reports required by Regulation A for the shorter of: (1) The period since the issuer became subject to such reporting obligation, or (2) its most recent three fiscal years and the portion of the current year preceding the date of filing Form 1– Z to immediately suspend its ongoing reporting obligation under Regulation A at any time after completing reporting for the fiscal year in which the offering statement was qualified, if the securities of each class to which the offering statement relates are held of record by fewer than 300 persons (1,200 persons for a bank or bank holding company) and offers or sales made in reliance on a Tier 2 offering statement are not ongoing. See generally, Securities Act Rules 257(d)(2) through (4). The proposed and final amendments apply to issuers offering securities pursuant to Regulation A and the forms applicable to such entities. See Section III.D.3, ‘‘Offerings pursuant to Regulation A,’’ below. 317 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.’’). PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 21963 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 under the proposed rule, a parent company would be required to 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 would be permitted to cease providing the Proposed 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 and consistent with the 2000 Release,318 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, 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. 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 318 See E:\FR\FM\20APR2.SGM Section III.C.3. of the 2000 Release. 20APR2 21964 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations able to present the Proposed Alternative Disclosures that proposed Rule 3–10 would have allowed it to present for historical periods. ii. Comments on the Proposed Amendments jbell on DSKJLSW7X2PROD with RULES2 Comments on the proposed amendments were generally supportive. Many commenters supported eliminating the existing Rule 3–10 requirement that the parent company provide continuous reporting of the Alternative Disclosures for as long as the guaranteed securities are outstanding if the parent company elects to provide the Alternative Disclosures in lieu of separate financial statements of eligible subsidiary issuers and guarantors.319 One of these commenters stated that it ‘‘supports the Commission’s proposal to harmonize the treatment of the duration of the continuing reporting requirements so registrants that meet the criteria for presenting alternative disclosures and elect to do so are not unfairly burdened compared to those that elect to file separate audited annual and unaudited interim financial statements.’’ 320 Another commenter stated that the existing rule’s continuous reporting requirement ‘‘is highly anomalous and frequently results in an expensive ongoing disclosure cost with no discernable benefit to investors following business combination transactions.’’ 321 Some commenters suggested that eliminating these requirements would reduce burdens on issuers.322 Two commenters opposed eliminating existing Rule 3–10’s continuous reporting requirement and suggested that the Commission retain the requirement.323 These commenters argued that the Proposed Alternative Disclosures would be important to investors, and therefore the Commission should require continuous reporting for as long as the securities were outstanding.324 One of these commenters contended that a failure to provide continuous reporting could result in a ratings withdrawal by a nationally recognized statistical rating organization (‘‘NRSRO’’) that tracks the security, and asserted that many 319 See, e.g., letters from Cravath, Davis Polk, FedEx, Freeport, Nareit, PWC, and Sullivan & Cromwell. 320 See letter from Freeport. 321 See letter from Cravath. 322 See, e.g., letters from Cravath, Freeport, Nareit, and Sullivan & Cromwell. 323 See letters from CII and Credit Roundtable. 324 See letters from CII and Credit Roundtable. VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 investors cannot invest in securities without a rating.325 A few commenters asserted that requiring continuous reporting when an issuer’s reporting obligation could be suspended is an anomaly.326 One commenter indicated that the requirement is not needed because it has become commonplace for issuers to tailor contractual reporting obligations to meet the perceived needs of investors.327 iii. Final Amendments After considering the comments received as well as the benefits and burdens of continued Exchange Act reporting when a subsidiary issuer or guarantor would otherwise be able to suspend its reporting obligations, we are eliminating, as proposed, the requirement that the parent company must continue to provide the Alternative Disclosures in its periodic reports for as long as the subject securities are outstanding. Instead, the parent company will be permitted to cease providing the 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, thereby harmonizing the existing rule with the statutory reporting regime and the Commission’s rules that govern when an issuer may terminate or suspend reporting. We agree with those commenters who stated that requiring continuous reporting when a subsidiary issuer’s or guarantor’s reporting obligation could be suspended is an anomaly and that eliminating such requirements would reduce burdens on issuers. We also do not believe it is necessary to require the parent company to continue providing the Revised Alternative Disclosures when the corresponding reporting obligations of its subsidiary issuers and guarantors with respect to the guaranteed security have been suspended or terminated. For similar reasons, we are making conforming amendments to provide analogous relief with respect to subsidiary issuers or guarantors that meet the definition of foreign private issuer and terminate their reporting obligations through compliance with Rule 12h–6, and subsidiary issuers or guarantors that have filed an offering statement for a Tier 2 offering that has been qualified pursuant to Regulation A and suspend their reporting obligations through compliance with Rule 257(d). 325 See letter from Credit Roundtable. letters from Cravath and Davis Polk. 327 See letter from Cravath. 326 See PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 In these circumstances, we see no reason why reporting obligations should be different for parent companies of these types of subsidiary issuers and guarantors. Although these amendments may result in fewer entities providing the Revised Alternative Disclosures in periodic reports, if continued reporting is necessary due to the necessity of maintaining a rating for the debt security by a NRSRO or for other reasons, debt issuers and investors are free to negotiate the terms of debt instruments, including with respect to information to be provided about subsidiary issuers and guarantors, and to include the reporting requirements in the indentures governing the debt as they have done in the past.328 Also, as described above, a parent company would continue to be required to provide the Revised Alternative Disclosures with respect to securities that are traded on a national securities exchange. Today’s amendments do not change this requirement. Lastly, under the final amendments, consistent with the Proposing Release and the 2000 Release,329 if a subsidiary issuer or guarantor with an Exchange Act reporting obligation for the guaranteed securities were initially eligible to omit its financial statements, because it met the requirements of amended Rule 3–10 and could rely on amended Rule 12h–5, but later ceased to satisfy those requirements, that subsidiary will be required to begin filing Exchange Act reports for the period during which it ceased to satisfy the requirements of amended Rule 3–10. In addition, the subsidiary is required to present the financial statements that are required by Regulation S–X at the time a report is due and is not able to present the Revised Alternative Disclosures that amended Rule 3–10 would have allowed it to present for historical periods. D. Application of Amendments to Certain Types of Issuers Rule 3–10’s requirements apply to several categories of issuers, including foreign private issuers,330 smaller reporting companies (‘‘SRCs’’),331 and issuers offering securities pursuant to Regulation A. The proposed amendments also would apply to these types of issuers. In certain circumstances, Rule 3–10 also applies to the financial information of third parties 328 See letter from Cravath. Section III.C.3. of the 2000 Release. 330 See 17 CFR 230.405 and 240.3b–4 (defining ‘‘foreign private issuer’’). 331 See 17 CFR 230.405 and 240.12b–2 (defining ‘‘smaller reporting company’’). 329 See E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations provided by issuers of asset-backed securities (‘‘ABS’’). 1. Foreign Private Issuers a. Proposed Amendments jbell on DSKJLSW7X2PROD with RULES2 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. The Commission also proposed 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, the Commission proposed 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.332 The Commission proposed 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. Although the reconciliation requirement would be eliminated, proposed Rule 13–01(a)(5) would have required 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. b. Comments on the Proposed Amendments One commenter agreed that the proposed amendments should apply to 332 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. VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 foreign private issuers.333 This commenter also recommended that the Commission confirm that the periods covered under the Summarized Financial Information would be required to track only those covered by a foreign private issuer’s consolidated financial statements.334 Another commenter suggested that, if the final amendments require interim reporting by issuers, the Commission should address the application of those requirements to foreign private issuers.335 One commenter opposed the proposal to eliminate the requirement that foreign private issuers using an accounting framework other than U.S. GAAP or IFRS reconcile that framework with U.S. GAAP.336 This commenter maintained reconciliation promotes accounting discipline and thoroughness of the financial information. This commenter also contended that reconciliation was a key tool in educating investors about substantive differences between U.S. GAAP and other accounting standards. Another commenter expressed concern that eliminating the reconciliation requirement could result in investors receiving less consistent and relevant information, and that its elimination appears to contradict the view that the Summarized Financial Information is material to investors.337 c. Final Amendments After considering public comments, we are adopting the amendments as proposed. Accordingly, foreign private issuers will be required to comply with amended Rule 3–10 as well as new Rule 13–01. A few commenters requested the Commission confirm or address the periods of Summarized Financial Information that foreign private issuers would be required to present.338 As specified in Rule 13–01(a)(4)(v), a parent company is required to disclose the Summarized Financial Information as of and for the most recently ended fiscal year and, if applicable, year-todate interim period, included in the parent company’s consolidated financial statements. Although a few commenters opposed or expressed concern about the proposed elimination of the existing Rule 3–10(i)(12) requirement for a parent company that prepares its financial statements on a 333 See letter from Sullivan & Cromwell. letter from Sullivan & Cromwell. 335 See letter from Deloitte. 336 See letter from CII. 337 See letter from KPMG. 338 See letters from Deloitte and Sullivan & Cromwell. 334 See PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 21965 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, we are eliminating this requirement as proposed. Because of the supplemental nature of the Revised 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 in the Revised Alternative Disclosures to U.S. GAAP is necessary. Although the reconciliation requirement would be eliminated, we note that Rules 13–01(a)(6) and (7) 339 require the parent company to disclose additional financial information about each guarantor if the information would be material for investors to evaluate the sufficiency of the guarantee, as well as sufficient information so as to make the financial and non-financial information presented not misleading. For the same reasons described above,340 we have created new Exhibit 17 within Item 19 of Form 20–F, which will require the identification of each subsidiary that is a guarantor, issuer, or co-issuer of each guaranteed security that the parent company issues or guarantees. When a Canadian parent company and one or more subsidiaries register the offer and sale of guaranteed securities under the multijurisdictional disclosure system (‘‘MJDS’’),341 the parent company and the subsidiaries incur reporting obligations under Section 15(d).342 When a subsidiary issuer or subsidiary guarantor is also eligible to register the offer and sale of its security under the MJDS,343 the financial 339 See discussion in Section III.C.2.c, ‘‘When Disclosure is Required.’’ 340 See discussion in Section III.C.2.b.iii, ‘‘NonFinancial Disclosures.’’ 341 The MJDS was adopted by the Commission to permit eligible Canadian issuers to satisfy the Commission’s registration and reporting requirements by providing disclosure documents prepared in accordance with the requirements of Canadian securities regulatory authorities. See Multijurisdictional Disclosure and Modifications to the Current Registration and Reporting System for Canadian Issuers, Release No. 33–6902 (June 21, 1991) [56 FR 30036 (July 1, 1991)]. 342 17 CFR 240.12h–4 (Exchange Act Rule 12h–4), however, exempts an issuer that has registered the offer and sale of securities under the Securities Act on Forms F–7, F–8 and F–80 from Section 15(d)’s Exchange Act reporting obligations, provided that the issuer is exempt from the obligations of Section 12(g) of the Exchange Act pursuant to 17 CFR 240.12g3–2(b) (Rule 12g3–2(b)). See Exchange Act Rule 12h–4. 343 General Instruction I.H of Form F–10 permits majority-owned subsidiaries to register the offer and E:\FR\FM\20APR2.SGM Continued 20APR2 21966 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations statements that would appear in the registration statement and in any annual report on Form 40–F 344 filed by the Canadian parent company would not be affected by amended Rule 3–10 or new Rule 13–01. Instead, the disclosure would be in accordance with Canadian disclosure standards. When a subsidiary issuer or subsidiary guarantor is not eligible to register the offer and sale of its security under the MJDS,345 however, the requirements of amended Rule 3–10 will be applicable to financial statements of that subsidiary. 2. Smaller Reporting Companies jbell on DSKJLSW7X2PROD with RULES2 a. Proposed Amendments 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 210.8–02.346 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 210.8–08 347 so long as the subsidiary issuer or guarantor qualifies as an SRC.348 Consistent with the existing rule, if the conditions of proposed Rule 3–10 are satisfied, the subsidiary issuer’s or guarantor’s financial statements could be omitted. While the substance of this requirement would not change, the Commission proposed 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, the Commission proposed 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 sale of securities on that form if various conditions are met. 344 17 CFR 249.240f. 345 This situation arises when the subsidiary issuer or subsidiary guarantor is not incorporated in Canada. In this situation, registrants have filed the registration statement on a combined form (e.g., Form F–10/S–4), depending on what registration form the subsidiary is eligible to use. 346 Rule 8–02 of Regulation S–X. 347 Article 8 of Regulation S–X. 348 17 CFR 229.10(f). VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 provide the information required by Rule 8–03 of Regulation S–X if it does not provide the information required by Rule 10–01, the proposed rule would add Rule 8–03(b)(7) to require compliance with Rules 3–10 and 13–01. b. Comments on the Proposed Amendments One commenter agreed that the proposed amendments should apply to SRCs.349 Another commenter supported the proposed amendments to Note 3 to Rule 8–01 of Regulation S–X to conform it to the streamlined structure of proposed amendments Rule 3–10(a).350 c. Final Amendments After considering the public comments, we are adopting the amendments as proposed. We believe that investors in smaller reporting companies will benefit from the simplified disclosures that will result from the amendments and that the cost of providing the disclosures will be reduced for smaller reporting companies. We are amending Note 3 to Rule 8–01 which, 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, will state that the requirements of Rule 3–10 are applicable to financial statements of the subsidiary issuer or guarantor. The final amendments also add a sentence to Note 3 to Rule 8–01 to require an SRC to provide the disclosures specified in proposed Rule 13–01. Finally, 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 have added Rule 8–03(b)(6) 351 to require compliance with Rules 3–10 and 13–01. 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,355 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 could be omitted. While the substance of this requirement would not change, the Commission proposed 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. b. Comments on the Proposed Amendments One commenter expressed support for applying the proposed amendments to Regulation A issuers.356 3. Offerings pursuant to Regulation A c. Final Amendments a. Proposed Amendments In connection with offerings made pursuant to Regulation A, Forms 1– A,352 1–K,353 and 1–SA 354 direct an entity (‘‘Regulation A Issuer’’) to present After considering the public comments, we are adopting the amendments as proposed with minor technical modifications. We believe that investors in Regulation A offerings will benefit from the simplified disclosures that will result from the amendments and that the cost of providing the disclosures will be reduced for Regulation A Issuers. 349 See letter from Sullivan & Cromwell. letter from ABA. 351 Proposed Rule 8–03(b)(7) would have sequentially followed existing 17 CFR 210.8– 03(b)(6) [Rule 8–03(b)(6) of Regulation S–X]. Subsequent to the issuance of the Proposing Release, the Commission eliminated Rule 8– 03(b)(6). See Disclosure Update and Simplification, Release No. 33–10532 (Aug. 17, 2018) [83 FR 50204 (Oct. 4, 2018)]. The final amendments have been revised to reflect this change. The requirements in proposed Rule 8–03(b)(7) have been included in new Rule 8–03(b)(6). 352 17 CFR 239.90. 353 17 CFR 239.91. 354 17 CFR 239.92. 350 See PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 355 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. The Commission did not propose any changes to these audit requirements for circumstances where the separate financial statements of subsidiary issuers and guarantors are filed. 356 See letter from Sullivan & Cromwell. E:\FR\FM\20APR2.SGM 20APR2 jbell on DSKJLSW7X2PROD with RULES2 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations 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 have been amended to state that the requirements of Rule 3–10 are applicable to financial statements of the subsidiary issuer or guarantor. The final amendments also modify each form to require the disclosures specified in Rule 13–01 and specify the location of the disclosures, similar to Rule 13–01(b) but consistent with the requirements of Regulation A. However, if a parent company elects to provide the disclosures in its audited financial statements, the Revised Alternative Disclosures will be required to be audited. The final amendments also include a technical modification to address the definition of the ‘‘parent company’’ as it relates to issuers under Regulation A. One element of the definition of ‘‘parent company’’ in amended Rule 3– 10(b)(1)(ii) is that the parent company ‘‘is, or as a result of the subject Securities Act registration statement will be, an Exchange Act reporting company.’’ As a result, strict application of this definition would exclude Regulation A Issuers that are not and will not become Exchange Act reporting companies (i.e., those issuers only report pursuant to Regulation A). As stated in the Proposing Release, we believe these amendments should apply to Regulation A Issuers. Accordingly, we are adopting a technical modification to Forms 1–A, 1–K, and 1– SA to clarify the applicability of the definition of parent company as it relates to Regulation A Issuers. In addition, as described above, 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. Regulation A does not currently provide for a similar exemption from reporting under the Rule 257(b) reporting requirements for subsidiary issuers and guarantors. As a further technical modification, to ensure consistency in the treatment of subsidiary issuers and guarantors under the Exchange Act and Regulation A, we are adding a new paragraph to Rule 257(b) of Regulation A specifying that subsidiary issuers and guarantors that are permitted to omit their separate financial statements from Forms 1–A, 1– K and 1–SA through the application of Rule 3–10 are automatically exempt from the periodic and current reporting requirements of Rule 257(b) of Regulation A. Consistent with Rule VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 12h–5, a subsidiary issuer or guarantor that later ceases to satisfy the requirements of Rule 3–10 (e.g., it ceases to be a consolidated subsidiary of the parent company), would then be required to begin filing reports under Rule 257(b) for the period during which it ceased to satisfy the requirements of Rule 3–10. Lastly, for the same reasons described above,357 we have created new Exhibit 17 within Item 17 of Form 1–A, which will require the identification of each subsidiary that is a guarantor, issuer, or co-issuer of each guaranteed security qualified or being qualified under Regulation A that the parent company issues or guarantees. This exhibit will also be required in Form 1–K by Item 8(b) of Part II of that form, and in Form 1–SA by Item 4(b) of that form. 4. Issuers of Asset-Backed Securities— Third Party Financial Statements a. Proposed Amendments The disclosure items for issuers of ABS, set forth in 17 CFR 229.1100 through 229.1125,358 specify circumstances when an ABS issuer must provide financial information for certain third parties 359 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 357 See discussion in Section III.C.2.b.iii, ‘‘NonFinancial Disclosures.’’ 358 Regulation AB. 359 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)). PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 21967 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. The Commission proposed conforming amendments to Items 1100(c)(2)(ii)(C) and (D) of Regulation AB because of the proposal 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, the Commission proposed 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. b. Comments on the Proposed Amendments We did not receive any comments that addressed the proposed conforming amendments to Regulation AB. c. Final Amendments We are adopting the amendments as proposed. Under the final amendments, rather than referring to the information requirements of Rule 3–10, Items 1100(c)(2)(ii)(C) and (D) instead state that disclosures specified in 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 Rule 3–10 are satisfied. The function of the eligible categories in Items 1100(c)(2)(ii)(C) and (D) will not change due to these revisions. Further, we have made 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.’’ These citations E:\FR\FM\20APR2.SGM 20APR2 jbell on DSKJLSW7X2PROD with RULES2 21968 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations have been updated to include Rules 13– 01 and 13–02 of Regulation S–X.360 V. Amendments to Rule 3–16 and Partial Relocation to Rule 13–02 B. Overview of the Proposed and Final Amendments IV. Rule 3–16 of Regulation S–X A. Overarching Principle 1. Proposed Amendments 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 361 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’’).362 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).363 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.364 The requirements in existing Rule 3– 16 have remained unchanged for many years,365 and we proposed changes to improve the disclosures required by the rule. The final 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, the final amendments to Rule 3–16 are based on our belief that the investors in securities that are collateralized by securities of a registrant’s affiliate(s) rely primarily on the consolidated financial statements of the registrant and supplemental details about the affiliate(s) whose securities are pledged when making investment decisions. 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.366 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. Several commenters expressed support for the overarching principle 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 affiliates.367 The proposed rule would 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. Similar to the proposed disclosures for issuers and guarantors of guaranteed securities discussed above, the proposed amendments would give registrants 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.368 Accordingly, the disclosure requirements in Rule 3–16 would have been amended and relocated to proposed Rule 13–02 and Rule 3–16 would have been removed and reserved. 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 the specified disclosures unless they are not material to holders of the collateralized security. Further, the proposed changes would have required disclosure of any additional information about the collateral arrangement and each affiliate whose security is pledged as collateral that would be material to making an investment decision with respect to the collateralized security. The proposed amendments, comments received, and final amendments are discussed further below. 360 Similar to the conforming amendments that update references to Regulation S–X to include new Rules 13–01 and 13–02, we have also made a similar conforming amendment to Item 1100(c)(2)(ii)(F) of Regulation AB. Item 1100(c)(2)(ii)(F) of Regulation AB referred to Regulation S–K, but the related citation extended only from §§ 229.10 through 229.1208. As Regulation S–K extends from §§ 229.10 through 229.1305, we have made a corresponding conforming change. 361 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. 362 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. 363 Rule 1–02(b) of Regulation S–X. 364 Rule 3–16(b) of Regulation S–X. 365 See Separate Financial Statements Required by Regulation S–X, Release No. 33–6359 (Nov. 6, 1981) [46 FR 56171 (Nov. 16, 1981)]. VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 366 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. 367 See, e.g., letters from Cravath, Davis Polk, EY, FEI, and Nareit. PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 2. Comments on the Proposed Amendments Comments on the proposed amendments were generally supportive. Several commenters supported the proposed amendments to replace existing Rule 3–16 with simplified financial and non-financial disclosures about the affiliates and collateral 368 See Section V.F, ‘‘Location of Disclosures and Audit Requirement,’’ below. E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations arrangements.369 Some commenters asserted the proposed amendments to Rule 3–16 would benefit investors, who would receive information critical to making informed decisions in a simpler format, as well as registrants by reducing the costs of conducting these types of debt offerings.370 Several commenters indicated that the requirements of existing Rule 3–16 were overly burdensome and have caused many issuers to structure transactions to avoid application of existing Rule 3–16, by either avoiding pledges of an affiliate’s securities or pursuing unregistered offerings where separate financial statements are not included.371 One commenter who expressed general support for the Commission’s effort to amend Rule 3–16 recommended that the Commission eliminate Rule 3–16 without amending or replacing it.372 This commenter asserted that other disclosure requirements and market incentives were sufficient to cause registrants to disclose relevant material information in offerings of debt secured by securities of affiliates. 3. Final Amendments jbell on DSKJLSW7X2PROD with RULES2 After considering the public comments, we are adopting the amendments largely as proposed, with modifications. Although one commenter recommended eliminating rather than amending or replacing existing Rule 3– 16, as supported by several other commenters, the final amendments replace the requirement to provide separate financial statements of an affiliate with financial and non-financial disclosures about the affiliate(s) and collateral arrangement(s). We agree with those commenters that asserted such a change will benefit investors who would receive information critical to making informed decisions in a simpler format, as well as registrants by reducing offering costs.373 These amended financial and non-financial disclosures will be included in new 369 See, e.g., letters from Davis Polk, Dell, EY, FEI, Grant Thornton, Nareit, NYC Bar, PWC, and Sullivan & Cromwell. 370 See, e.g., letters from Davis Polk, EY, and FEI. 371 See letters from Cravath, Davis Polk, Dell, NYC Bar, and PWC. 372 See letter from Cravath. 373 See, e.g., letters from Davis Polk, EY, and FEI. VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 Rule 13–02 374 and are discussed below.375 C. Financial Disclosures 1. Level of Detail a. Proposed Amendments Existing Rule 3–16 requires separate financial statements of each affiliate whose securities constitute a substantial portion of the collateral. These affiliates whose securities are pledged as collateral are almost always consolidated subsidiaries of the registrant, and their financial information is thus already reflected in the registrant’s consolidated financial statements. 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.376 Disclosure of additional line items of financial information beyond what is specified in proposed Rule 13–02(a)(4) would have been required by proposed Rule 13– 02(a)(5) if 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. The proposed rule did not include a financial statement requirement for when the affiliate is either a nonsubsidiary controlled affiliate of the registrant or a controlling affiliate of the issuer, 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 have required the registrant to disclose any other quantitative or 374 The disclosures specified in proposed Rule 13–02(a) would be required ‘‘[f]or each class of security registered or being registered . . .’’ As a technical modification, final Rule 13–02(a) has been revised to require the disclosures specified therein ‘‘[f]or each security subject to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and for each security the offer and sale of which is being registered under the Securities Act of 1933, . . .’’ 375 As a transitional matter, the final amendments do not eliminate existing Rule 3–16, which will continue to be applicable to registered collateralized securities with collateral release provisions issued and outstanding as of the effective date of the final amendments. See Section VI.B ‘‘Rule 3–16 Collateral Release Provisions.’’ 376 As with proposed Rule 13–01(a)(4), Summarized Financial Information would be the information specified in Rule 1–02(bb)(1) of Regulation S–X. PO 00000 Frm 00031 Fmt 4701 Sfmt 4700 21969 qualitative information that would be material to making an investment decision with respect to the collateralized security.377 Because the unconsolidated affiliate’s financial information is not included in the registrant’s consolidated financial statements, the Commission indicated in the Proposing Release that it would expect disclosure beyond what is specified in proposed Rule 13–02(a)(1) through (4) to be provided in these circumstances.378 In this regard, separate financial statements of the unconsolidated affiliate may be necessary if material to an investment decision.379 b. Comments on the Proposed Amendments Several commenters generally supported the proposal to replace the separate financial statements of an affiliate required by existing Rule 3–16 with Summarized Financial Information.380 Some commenters asserted that the proposed amendment would reduce a registrant’s costs and burdens 381 while still providing investors with clear and sufficient information.382 One commenter urged the Commission to adopt an even more simplified and flexible approach, based on the commenter’s assertion that offerings pursuant to Rule 144A include less detail than what is required in Summarized Financial Information.383 This commenter recommended that the final rule only require quantitative disclosure of revenue, operating income, assets, and liabilities of the relevant affiliates as a group. Additionally, although they mostly agreed with the proposed amendment to replace the separate financial statements of an affiliate with less detailed financial information, a few commenters stressed that the Commission should require more information than is called for by Summarized Financial Information.384 One commenter indicated that the final rule should include the balance sheet and income statement information of the collateralizing subsidiaries in a level of detail similar to that specified in Article 377 See Section V.E, ‘‘When Disclosure is Required.’’ 378 See Section V.C,1 of the Proposing Release. 379 See proposed Rule 13–02(a)(5). See also 17 CFR 210.3–13 (‘‘Rule 3–13 of Regulation S–X’’). 380 See, e.g., letters from Cravath, Davis Polk, EY, and FEI. 381 See, e.g., letters from Davis Polk, EY, FEI, and PWC. 382 See letters from EY and FEI. 383 See letter from NYC Bar. 384 See, e.g., letters from EY and PWC. E:\FR\FM\20APR2.SGM 20APR2 21970 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations 10 of Regulation S–X.385 Another commenter recommended that the Commission require additional disclosures regarding intercompany and related-party transactions to accompany and thereby enhance the transparency of the Summarized Financial Information when securities of affiliates are pledged as collateral in a manner similar to its recommendations for the level of detail in the proposed amendments to Rule 3– 10.386 c. Final Amendments We are adopting amendments in substantially the form proposed, but with modifications in response to comments received. As described above, one commenter recommended different and more limited information than what is required by Summarized Financial Information and another recommended more detailed information. However, and consistent with our rationale for the corresponding requirement in the final amendments to Rule 13–01(a)(4) discussed above,387 we agree with those commenters that supported requiring Summarized Financial Information. We believe the select balance sheet and income statement line items that Summarized Financial Information requires are focused on the information that is most likely to be material to an investment decision and should be less burdensome for registrants to prepare than Rule 3–16 Financial Statements. Under the final amendments, disclosure of additional line items of financial information beyond the line items specified in Summarized Financial Information is required if necessary to comply with Rule 13–02(a)(6) and (7).388 385 See letter from PWC. letter from EY. In its comments on the level of detail in the proposed amendments to Rule 3–10, the commenter recommended requiring disclosure of investments held by the obligated group in non-obligated subsidiaries, intercompany or related-party transactions between the obligated and non-obligated groups, and when the obligated group includes variable interest entities, a crossreference to the relevant disclosures in the consolidated financial statements. 387 See discussion in Section III.C.2.a.i.(C), ‘‘Level of Detail.’’ 388 Proposed Rule 13–02(a)(1) through (4) set forth proposed requirements to disclose specific financial and non-financial information. Proposed Rule 13– 02(a)(5), which would have required disclosure of ‘‘any other quantitative or qualitative information that would be material to making an investment decision with respect to the collateralized security,’’ was included to require disclosure about the collateral arrangements and affiliates whose securities are pledged that would be material but was not otherwise already required by the specified proposed financial and non-financial disclosures. Instead of proposed Rule 13–02(a)(5), the final amendments include Rules 13–02(a)(6) and (7), which require disclosure of ‘‘[a]ny financial and narrative information about each such affiliate if the jbell on DSKJLSW7X2PROD with RULES2 386 See VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 Although the Commission requested comment on whether the final rules should specifically address the rare circumstances where the affiliate is not a consolidated subsidiary of a registrant, we did not receive any comments. As such, consistent with the proposal, the final rule does not include requirements specific to non-subsidiary affiliates, such as a non-subsidiary controlled affiliate of the registrant or a controlling affiliate of the issuer. However, and also consistent with the proposal, in the rare circumstances where the affiliate is not a consolidated subsidiary of the registrant, Rules 13–02(a)(6) and (7) would require the registrant to provide any financial and narrative information about each such affiliate if the information would be material for investors to evaluate the pledge of the affiliate’s securities as collateral and sufficient information so as to make the financial and non-financial information presented not misleading.389 Because the unconsolidated affiliate’s financial information is not included in the registrant’s consolidated financial statements, in these circumstances disclosure beyond what is specified in Rule 13–02(a)(1) through (4) may need to be provided. In this regard, separate financial statements of the unconsolidated affiliate may be necessary to satisfy the requirements of Rules 13–02(a)(6) and (7).390 The Proposing Release included an example of when incremental disclosure of related party revenues would be required under the proposed rule.391 Specifically, 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. Instead of including this as an example of when disclosure would be required under Rule 13–02(a)(6) and (7), we agree with the commenter that recommended including a requirement to separately disclose intercompany and related-party transactions in addition to Summarized Financial Information, which the commenter asserted would enhance the transparency of the information would be material for investors to evaluate the pledge of the affiliate’s securities as collateral’’ and ‘‘[s]ufficient information so as to make the financial and non-financial information presented not misleading,’’ respectively. See discussion within Section V.E.3, ‘‘When Disclosure is Required.’’ 389 See Section V.E, ‘‘When Disclosure is Required.’’ 390 See also Rule 3–13 of Regulation S–X. 391 See Section V.C.1 of the Proposing Release. Such disclosure would have been required by proposed Rule 13–02(a)(5). PO 00000 Frm 00032 Fmt 4701 Sfmt 4700 Summarized Financial Information.392 Accordingly, as adopted, Rule 13– 02(a)(4)(iii) requires an affiliate’s amounts due from, amounts due to, and transactions with certain entities not included in that affiliate’s Summarized Financial Information to be presented in separate line items, to the extent material. Such entities include the registrant, any of the registrant’s subsidiaries not included in the Summarized Financial Information of the affiliate,393 and related parties. For example, material revenue transactions between an affiliate and a separate nonpledged subsidiary of the registrant that is not included in that affiliate’s financial information (i.e., the nonpledged subsidiary would not be a consolidated subsidiary of the affiliate) must be presented in a separate line item. If the transaction was between the affiliate and another affiliate whose securities are pledged, and those affiliates’ Summarized Financial Information is presented on a combined basis pursuant to Rule 13–02(a)(4)(i), separate presentation of the transaction is not required as it will be required to be eliminated in accordance with Rule 13–02(a)(4)(ii).394 We expect clearly establishing this expectation as a stated requirement will assist in the preparation of the disclosures and provide useful information to investors, and agree with one commenter that such separate disclosure enhances the transparency of the Summarized Financial Information presented.395 Lastly, for the same reasons described in connection with the corresponding requirement in final Rule 13–01(a)(4),396 final Rule 13–02(a)(4) includes a requirement to briefly describe the basis of presentation applicable to each of the required financial disclosures therein. In addition to simplifying the final rule, we believe this requirement will better inform users about the form and content of the disclosures provided pursuant to final Rule 13–02(a)(4).397 We believe 392 See letter from EY. This commenter suggested flexibility to provide these disclosures as either explanatory notes or separate line items. Based on the nature of these items, and to drive consistency in the disclosures between registrants, Rule 13– 02(a)(4)(iii) requires the amounts to be in separate line items. 393 These entities include, for example, other affiliates whose securities are pledged as collateral but whose Summarized Financial Information required by Rule 13–02(a)(4) is presented separately from the affiliate in question, as well as other subsidiaries of the registrant that are not subsidiaries of the affiliate. 394 See Section V.C.2, ‘‘Presentation on a Combined Basis.’’ 395 See letter from EY. 396 See Section III.C.2.a.i.(C), ‘‘Level of Detail.’’ 397 Such disclosure could state, for example, that the financial information presented is that of the E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations such disclosure enhances the understandability of the financial information provided. 2. Presentation on a Combined Basis a. Proposed Amendments jbell on DSKJLSW7X2PROD with RULES2 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. In the Proposing Release, the Commission noted that the existing requirements can result in potentially confusing disclosure about the extent of collateral.398 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). The proposed amendments would permit a registrant to disclose the financial information of 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.399 affiliates whose securities are pledged as collateral for the registered securities. If applicable, the disclosure could also state, for example: That the financial information of affiliates is presented on a combined basis; intercompany balances and transactions between affiliates have been eliminated; that the affiliate’s amounts due from, amounts due to, and transactions with the registrant, any of the registrant’s subsidiaries not included in the summarized financial information of the affiliate(s) subsidiaries, and related parties have been presented in separate line items; and that financial information of certain identified affiliates has been presented separately due to disclosed facts and circumstances applicable to those subsidiaries (as required by Rule 13–02(a)(4)(iv)). 398 See Section V of the Proposing Release. 399 Proposed Rule 13–01 would prohibit 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 VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 The proposed rule took into consideration 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 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. 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), which would have required disclosure of any other quantitative or qualitative information that would be material to making an investment decision with respect to the collateralized security. If such circumstances were applicable to one or more, but not all, affiliates, proposed Rule 13–02(a)(4) would require separate disclosure of Summarized Financial Information for the affiliates to which it is applicable. b. Comments on the Proposed Amendments The majority of comments we received on the proposed amendments supported permitting issuers to disclose the financial information of the group of consolidated affiliates whose securities are pledged on a combined rather than 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. PO 00000 Frm 00033 Fmt 4701 Sfmt 4700 21971 individual basis.400 One commenter contended that providing this type of disclosure would allow issuers to focus on disclosure that is material and important to investors for making an informed investment decision.401 Consistent with its comments on proposed Rule 13–01(a)(4), one commenter asserted the proposed amendment that would require registrants to separately present the Summarized Financial Information for an affiliate if the required qualitative disclosures differed within the group of affiliates was overly prescriptive.402 This commenter recommended permitting greater flexibility in such instances, such as allowing a registrant to present Summarized Financial Information for the aggregate group with supplemental qualitative or quantitative disclosure regarding material differences within the group. c. Final Amendments After considering the public comments, we are adopting the amendments substantially as proposed with modifications, including separating certain requirements within proposed Rule 13–02(a)(4) into distinct subparagraphs for clarity. As supported by several commenters, we are adopting the proposed amendment that permits the supplemental financial disclosures of affiliates specified in Rule 13–02(a)(4) to be provided on a combined basis. Specifically, Rule 13–02(a)(4)(i) will permit the Summarized Financial Information of each affiliate whose securities are pledged as collateral that is consolidated in the registrant’s consolidated financial statements to be presented on a combined basis, and Rule 13–02(a)(4)(ii) will require that intercompany balances and transactions between affiliates whose information is presented on a combined basis to be eliminated.403 We agree with the commenter that stated that the ability to provide the financial information on a combined basis would allow registrants to focus on disclosure that is material and important to investors without omitting information investors need for 400 See, e.g., letters from Cravath, Davis Polk, Dell, NYC Bar, and PWC. 401 See letter from Dell. 402 See letter from EY. 403 Proposed Rule 13–02(a)(4) would have required, in part, that ‘‘[i]ntercompany transactions between affiliates whose summarized financial information is presented on a combined basis shall be eliminated.’’ While we are adopting the amendments substantially as proposed, final Rule 13–02(a)(4)(ii) clarifies that intercompany ‘‘balances’’ must also be eliminated in this regard. E:\FR\FM\20APR2.SGM 20APR2 21972 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations an informed investment decision.404 Consistent with the proposed amendments, unlike the final 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 will be included in the Summarized Financial Information presented pursuant to Rule 13–02(a)(4), even if the securities of those subsidiaries are not pledged as collateral.405 We are adopting, substantially as proposed, the requirement that when information provided in response to Rule 13–02 is applicable to one or more, but not all, affiliates, separate disclosure of Summarized Financial Information for the affiliates to which the information applies is required. This requirement is stated in Rule 13– 02(a)(4)(iv). For clarity, the final rule includes an example of disclosure required by Rule 13–02 that would trigger separate disclosure for the affected affiliates.406 The example is disclosure that is required by Rule 13– 02(a)(3): ‘‘the trading market for the affiliate’s security pledged as collateral or a statement that there is no market.’’ Consistent with the corresponding requirement in final Rule 13– 01(a)(4)(iv), we believe a registrant should consider materiality 407 and exercise judgment in determining the appropriate level of aggregation of affiliates based on the nature of the disclosure. In this regard, it may be useful to consider quantitative factors, such as the financial significance of the affected affiliates, and qualitative factors, such as the nature of the facts and circumstances applicable to the affiliates. For example, if the trading 404 See letter from Dell. 13–01(a)(4)(iii) requires the financial information of non-issuer and non-guarantor subsidiaries of issuers and guarantors to be excluded from the financial information of issuers and guarantors in order to distinguish the financial information of entities that are legally obligated to pay from those that are not. 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. 406 This example is being included to clarify one situation requiring separate presentation of the Summarized Financial Information applicable to some but not all affiliates. 407 The disclosures specified in Rule 13–02(a) are required to the extent material. Rules 13–02(a)(6) and (7) require disclosure of ‘‘[a]ny financial and narrative information about each such affiliate if the information would be material for investors to evaluate the pledge of the affiliate’s securities as collateral,’’ and ‘‘[s]ufficient information so as to make the financial and non-financial information presented not misleading,’’ respectively. See discussion within Section V.E.3, ‘‘When Disclosure is Required.’’ jbell on DSKJLSW7X2PROD with RULES2 405 Rule VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 market for an affiliate’s security is the same as some but not all affiliates, and such similar affiliates represent a substantial portion of the Summarized Financial Information of the combined affiliates, aggregation of the Summarized Financial Information of such affiliates may be appropriate depending on the facts and circumstances. Conversely, it may not be appropriate to aggregate the Summarized Financial Information of such affiliates where the trading markets for the securities are different. One commenter stated its belief that requiring separate presentation of the Summarized Financial Information applicable to affected affiliates under proposed Rule 13–02(a)(4) is overly prescriptive.408 Consistent with final amendments to Rule 13–01(a)(4)(iv), while we do believe separate disclosure of Summarized Financial Information for the affected affiliates would be appropriate in most cases, we also agree with this commenter’s suggestion that it could be acceptable to present Summarized Financial Information for the combined affiliates with supplemental qualitative and/or quantitative disclosure to inform investors about the disclosures affecting one or more, but not all affiliates. Accordingly, Rule 13–02(a)(4)(iv) permits, in limited circumstances, narrative disclosure to be provided in lieu of the separate Summarized Financial Information of the affected affiliates to which the paragraph otherwise requires. The limited circumstances when a narrative may be provided are when such separate financial information applicable to the affected affiliates can be easily explained and understood. For example, if certain terms and conditions of the collateral arrangement are applicable to one affiliate, and that affiliate constitutes a similar percentage of the combined group of affiliates’ assets, liabilities, and operations, narrative disclosure may be permissible depending on the facts and circumstances. In other circumstances, such as if that affiliate’s financial significance to the combined group of affiliates is not easily explained (e.g., the affiliate constitutes varying proportions of each line item within the combined group of affiliates’ Summarized Financial Information), narrative disclosure would not be sufficient. As described in the Proposing Release, generally, a pledge of an affiliate’s securities as collateral includes all of the outstanding 408 See PO 00000 letter from EY. Frm 00034 Fmt 4701 Sfmt 4700 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 Rules 13–02(a)(6) and (7) if material for investors to evaluate the pledge of the affiliate’s securities as collateral, or so as to make the financial and non-financial information presented not misleading.409 If such circumstances are applicable to one or more, but not all, affiliates, Rule 13–02(a)(4)(iv) would require separate disclosure of Summarized Financial Information for the affiliates to which it is applicable. 3. Periods to Present a. Proposed Amendments 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. Under the existing rule, Rule 3–16 Financial Statements are not required in quarterly reports, such as on Form 10–Q.410 The proposed rule would require disclosure 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, the Commission proposed adding Rule 10– 01(b)(10) to require compliance with proposed Rule 13–02. b. Comments on the Proposed Amendments Comments on the proposed amendments were mixed. A few commenters supported providing the disclosure of the Summarized Financial Information as of, and for, the most recently ended fiscal year and interim period included in the registrant’s consolidated financial statements.411 However, some commenters suggested that the Commission should not require interim disclosures unless there had been a material change since the most recent annual period.412 Two of these commenters contended that this change would be consistent with Article 10 of Regulation S–X.413 One commenter 409 Supra note 388. Section III.A.6 of the 2000 Release. 411 See letters from Grant Thornton and NYC Bar. 412 See letters from Deloitte, EY, FEI, and PWC. 413 See letters from Deloitte and PWC. 410 See E:\FR\FM\20APR2.SGM 20APR2 jbell on DSKJLSW7X2PROD with RULES2 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations stated that interim reporting would be burdensome and costly.414 This commenter asserted annual disclosure should be sufficient for investors to make informed investment decisions. rule’s interim period requirement has been revised to clarify that only the most recent year-to-date interim period is required. c. Final Amendments After considering the comments received, we are adopting the amendments as proposed, with one clarification. As adopted, consistent with final Rule 13–01(a)(4)(v), final Rule 13–02(a)(4)(v) requires the financial disclosures to be provided as of and for the most recently ended fiscal year and year-to-date interim period included in the registrant’s consolidated financial statements. We are not adopting the approach some commenters recommended, which would have required the most recent interim period in limited circumstances, such as when there had been a material change since the most recent annual period. We continue to believe, as the Commission stated in the Proposing Release, that the most recent interim period should be provided so that investors can make decisions based on the most recent information available.415 Furthermore, while we acknowledge the concerns about the burden to provide interim information in all cases, consistent with our rationale for the corresponding requirement in the final amendments to Rule 13–01(a)(4)(v),416 we believe the adopted approach will significantly reduce burdens on issuers while providing investors with the information they need to make informed investment decisions. For similar reasons, we are adopting the proposal that requires the amended disclosures in quarterly filings, such as Form 10–Q. To accomplish this, 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 have added Rule 10–01(b)(10) to require compliance with Rule 13–02. Proposed Rule 13–02(a)(4) did not specify that the required interim period was only for the most recent year-to-date period. In certain filings, such as a registrant’s Form 10–Q for its second and third fiscal quarters, both year-to-date and quarter-to-date interim financial statements are required to be presented for the registrant. To avoid any such confusion, and consistent with the proposed rule’s intent and suggestions from certain commenters,417 the final 1. Proposed Amendments 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. In addition to proposing amendments to the financial information required about the affiliates whose securities are pledged as collateral, the proposed rule would also require specific non-financial disclosures to be provided. Proposed Rules 13–02(a)(1) through (3) would require 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. While the proposed requirements comprised the items the Commission believed would most likely be material to an investor, there could 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 have required disclosure of those facts and circumstances.418 Additionally, when a non-financial disclosure is applicable to one or more, but not all, affiliates, proposed Rule 13–02(a)(4) would require separate disclosure of Summarized Financial Information for the affiliates to which it is applicable.419 414 See letter from SIFMA. 415 See Section V.C.3 of the Proposing Release. 416 See discussion in Section III.C.2.a.iii.(C), ‘‘Periods to Present.’’ 417 See, e.g., letters from EY, FEI, and PWC. VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 D. Non-Financial Disclosures 2. Comments on the Proposed Amendments Comments on the proposed amendments were generally supportive. Some commenters generally supported the proposed rule’s requirement to provide, 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.420 One asserted that such disclosure would be helpful to investors.421 One commenter, however, stated that it was not clear why a description of the 418 See discussion in Section V.E, ‘‘When Disclosure is Required.’’ 419 See discussion in Section V.C.2, ‘‘Presentation on a Combined Basis.’’ 420 See letters from Davis Polk, FEI, and NYC Bar. 421 See letter from Davis Polk. PO 00000 Frm 00035 Fmt 4701 Sfmt 4700 21973 security pledged as collateral and disclosure of each affiliate whose security is pledged would be meaningful to an investor in the context of financial disclosures.422 This commenter recommended that the Commission consider requiring such disclosures be included as an exhibit to the filing similar to the list of subsidiaries required by Item 601. 3. Final Amendments After considering the comments received, we are adopting the amendments largely as proposed with modifications based on comments received. Consistent with the Proposing Release, we believe these requirements will 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 adopted non-financial disclosures are composed of the items we believe are most likely to be material to an investor, disclosure of additional facts and circumstances is required if necessary to comply with Rule 13–02(a)(6) and (7).423 Additionally, when a non-financial disclosure is applicable to one or more, but not all, affiliates, Rule 13– 02(a)(4)(iv) requires, to the extent it is material, separate disclosure of Summarized Financial Information for the affiliates to which the non-financial disclosure applies.424 Consistent with the final amendments to Rule 13–01 and our related rationale,425 while we are not adopting one commenter’s 426 suggestion that disclosure of the identification of the security pledged as collateral only be required upon registration of the collateralized securities and the related prospectuses, we are adopting the commenter’s alternative suggestion that this disclosure be included in an exhibit to the subject filing.427 Due to this 422 See letter from PWC. note 388. 424 See discussion in Section V.C.2, ‘‘Presentation on a Combined Basis.’’ 425 See discussion in Section III.C.2.b.iii, ‘‘NonFinancial Disclosures.’’ 426 See letter from PWC. 427 See amended Item 601(a) and new Item 601(b)(22) of Regulation S–K. A registrant will be required to list, under an appropriately captioned heading that identifies the associated securities, each of its affiliates whose security is pledged as collateral for the registrant’s security registered or being registered. For each affiliate, the security or securities pledged as collateral must also be identified. An affiliate need not be listed more than once so long as its role as affiliate whose security is pledged as collateral for a registrant’s security is clearly indicated with respect to each applicable security. Similarly, if an affiliate required to be 423 Supra E:\FR\FM\20APR2.SGM Continued 20APR2 21974 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations change, we have revised Rule 13– 02(a)(1) to require a description of the securities pledged as collateral and the affiliates whose securities are pledged as collateral. We believe this approach will provide the information to investors in a more efficient manner and make the accompanying financial and nonfinancial disclosures easier to understand. E. When Disclosure Is Required jbell on DSKJLSW7X2PROD with RULES2 1. Proposed Amendments As discussed above,428 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. The proposed rule would replace this test with one based on materiality, similar to the framework in proposed Rule 13– 01.429 Under this approach, investors would be provided with disclosure where it is material, whereas under the existing rule, no disclosure would be provided unless the collateral represented a ‘‘substantial portion.’’ Proposed Rule 13–02(a) would have required 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 identified in this exhibit is also required to be identified as an issuer, co-issuer, or guarantor of a guaranteed security in this exhibit, the entity need not be listed more than once so long as its role as issuer, co-issuer, or guarantor of a guaranteed security and/or as affiliate whose security is pledged as collateral for a registrant’s security is clearly indicated with respect to each applicable security. This exhibit will be required in Forms S– 1, S–3, S–4, SF–1, SF–3, S–11, F–1, F–3, F–4, 10, 10–Q, and 10–K. In addition, we are making corresponding revisions to the exhibit requirements of Form 20–F by creating new Exhibit 17 within Item 19, and Form 1–A by creating new Exhibit 17 within Item 17. This exhibit will also be required in Forms 1–K and 1–SA. See discussion in Section V.H.3.c, ‘‘Offerings pursuant to Regulation A’’. 428 See Section IV, ‘‘Rule 3–16 of Regulation S– X.’’ 429 Whether a disclosure specified in proposed Rule 13–02 may be omitted or whether additional disclosure would have been 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.c.iii, ‘‘When Disclosure is Required,’’ above. VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 amounts in the registrant’s consolidated financial statements, the information could be omitted. While the disclosures specified in proposed Rule 13–02(a)(1) through (4) could have been omitted if not material to holders of the collateralized security, for clarity, proposed Rule 13–02(a)(4) would have required the registrant to include a statement that the financial disclosures have been omitted and disclose the reason(s) 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 have required 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 have been required if that information is material to an investment decision in the collateralized security. 2. Comments on the Proposed Amendments Comments on the proposals were mixed. Several commenters generally supported replacing existing Rule 3– 16’s ‘‘substantial portion’’ test with a principles-based materiality standard.430 Two commenters asserted that the existing ‘‘substantial portion’’ test could lead to registrants disclosing information that is not essential to making an informed investment decision.431 One of these commenters contended that moving to a materiality standard under the proposed amendments would only require registrants to incur the cost to provide the required disclosure when doing so would be helpful to investors.432 However, a few commenters supported some type of numerical threshold for establishing whether disclosure would be deemed not material.433 One commenter suggested establishing a 50% numerical threshold as a nonexclusive safe harbor at or below which the share collateral would be deemed not material and above which the 430 See, e.g., letters from CII, Cravath, Davis Polk, Deloitte, EY, and FEI. 431 See letters from Davis Polk and Dell. 432 See letter from Davis Polk. 433 See letters from NYC Bar and SIFMA. PO 00000 Frm 00036 Fmt 4701 Sfmt 4700 registrant must evaluate materiality.434 The other commenter suggested retaining existing Rule 3–16’s 20% threshold in the form of a safe harbor, such that any collateral arrangement that does not trigger the existing rule would be deemed not material for the purposes of the new rule.435 Consistent with comments received in connection with the corresponding requirement in proposed Rule 13– 01(a)(5),436 a number of commenters opposed proposed Rule 13–02(a)(5), which would have required disclosure of any information that would be material to making an investment decision with respect to the collateralized security.437 One commenter expressed concern that this requirement possibly went beyond the Commission’s existing materiality standard.438 Some commenters asserted that the proposed requirement would cause uncertainty for issuers and auditors as they seek to apply and assess the adequacy of the disclosures.439 One commenter asserted that the proposed requirement would override all other relevant disclosure obligations; 440 another commenter questioned whether the Commission was proposing to modify the overall materiality assessment in its disclosure framework; 441 and a third commenter stated its belief that in addition to creating litigation risk, the proposed rule could extend the duty to disclose material information beyond information specific to the guarantee, such as pending merger negotiations and other potential transactions.442 However, one commenter supported this proposed requirement ‘‘because it would provide relevant information, not otherwise explicitly required by the [p]roposed [r]ule, which would likely render the disclosures taken as a whole to be more useful for investment decisions.’’ 443 Consistent with comments received in connection with the corresponding requirement in proposed Rule 13– 01(a)(4),444 some commenters opposed the requirement in proposed Rule 13– 434 See letter from SIFMA. letter from NYC Bar. 436 See Section III.C.2.c.ii, ‘‘When Disclosure is Required.’’ 437 See, e.g., letters from ABA, BDO, CAQ, Cravath, Davis Polk, Deloitte, EY, KPMG, PWC, Shearman, and Sullivan & Cromwell. 438 See letter from ABA. 439 See, e.g., letters from BDO, CAQ, EY, and PWC. 440 See letter from Cravath. 441 See letter from Deloitte. 442 See letter from Shearman. 443 See letter from CII. 444 See Section III.C.2.c.ii, ‘‘When Disclosure is Required.’’ 435 See E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations 02(a)(4) that would require issuers to disclose, if the required financial disclosures were omitted because they were not material, a statement to that effect and the reasons therefore.445 Some commenters asserted that such disclosure would not be useful to investors,446 could possibly result in an increase in liability,447 and was counter to the Commission’s objective of focusing on material disclosures and providing a principles-based framework.448 One commenter suggested that the Commission should make clear that, if the proposal were adopted, issuers would only need to make a simple statement that management does not believe the information is material.449 In contrast, one commenter specifically supported this part of proposed Rule 13–02(a)(4), asserting that the requirement would provide clarity about which disclosures were omitted and why.450 One commenter expressed concern that there could be uncertainty over the application of proposed Rule 13–02 because of possible overlap in disclosure requirements when a subsidiary is a guarantor, in which case proposed Rules 3–10 and 13–01 would apply, and also has securities pledged as collateral, in which case proposed Rule 13–02 would apply.451 This commenter suggested that the Commission clarify that proposed Rule 13–02 would apply only to the extent proposed Rules 3–10 and 13–01 would not be applicable because investors would generally consider the guarantee to be more valuable than pledged securities. jbell on DSKJLSW7X2PROD with RULES2 3. Final Amendments We are adopting the amendments largely as proposed with modifications based on comments received. As supported by several commenters,452 the final amendments replace existing Rule 3–16’s ‘‘substantial portion’’ numerical thresholds with a requirement to provide all disclosures specified in the final rule, unless such information is not material.453 Whereas proposed Rule 13–02(a) required the proposed financial and non-financial 445 See letters from Cravath, EY, KPMG, and SIFMA. 446 See letters from Debevoise and KPMG. 447 See letters from Debevoise and SIFMA. 448 See letter from Debevoise. 449 See letter from SIFMA. 450 See letter from CII. 451 See letter from NYC Bar. 452 See, e.g., letters from CII, FedEx, FEI, Nareit, and Sullivan & Cromwell. 453 Whether a disclosure specified in proposed Rule 13–02 may be omitted, as discussed below, depends on whether it would be material to a reasonable investor. See Section III.C.2.c, ‘‘When Disclosure is Required,’’ above. VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 disclosures ‘‘to the extent material to holders of the collateralized security,’’ the final rule has been revised to require the financial and non-financial disclosures ‘‘to the extent material,’’ which is discussed in further detail below. A few commenters suggested including numerical thresholds in the rule for determining whether financial information may be omitted.454 We are not adopting this suggestion, as we agree with those commenters that supported the proposal to require information the registrant believes is material to investors. In these circumstances, and consistent with our rationale for the corresponding requirement in the final amendments to Rule 13–01(a),455 we believe requiring disclosure to the extent material provides investors with information useful to an investment decision and avoids certain potential challenges associated with numerical thresholds.456 We are not adopting the suggestion by one commenter that we require compliance with Rule 13–02 only to the extent Rules 3–10 and 13–01 do not apply.457 This suggestion was based on the commenter’s belief that there could be uncertainty over the application of proposed Rule 13–02 because of what the commenter views as possible overlaps in disclosure requirements when a subsidiary is a guarantor, in which case proposed Rules 3–10 and 13–01 would apply, and also has securities pledged as collateral, in which case proposed Rule 13–02 would apply. This commenter asserted that investors would generally consider the guarantee to be more valuable than pledged securities. However, we do not agree that disclosure about only the guarantee should be required in such circumstances. Where a subsidiary is an issuer or guarantor of a guaranteed security and its securities also are pledged as collateral, each are separate credit enhancements for which different disclosure may be necessary. We believe that requiring compliance with both rules in these circumstances will help to ensure that material information is provided to investors about each credit enhancement. The proposed rule sets forth financial and non-financial disclosures that were focused on information the Commission 454 See letters from NYC Bar and SIFMA. discussion in Section III.C.2.c.iii, ‘‘When Disclosure is Required.’’ 456 For example, one commenter asserted that the existing rule’s ‘‘substantial portion’’ test could lead to registrants disclosing information that is not essential to making an informed investment decision. See letter from Dell. 457 See letter from NYC Bar. 455 See PO 00000 Frm 00037 Fmt 4701 Sfmt 4700 21975 expected were most likely to be material. It also included proposed Rule 13–02(a)(5), which would have required disclosure of ‘‘any other quantitative or qualitative information that would be material to making an investment decision with respect to the collateralized security.’’ The intent of this proposed requirement was to elicit disclosure about the affiliate(s) and the collateral arrangement(s) that would be material but was not otherwise specifically required by the proposed financial and non-financial disclosures. As described above, comments on this proposed requirement were consistent with those received on the corresponding requirement in proposed Rule 13–01(a)(5). While one commenter supported this proposed requirement, many others did not. In response to the comments received, instead of proposed Rule 13–02(a)(5), we are adopting Rules 13–02(a)(6) and (7), which are similar to the disclosures required by final Rule 13–01(a)(6) and (7) but tailored to apply to collateral arrangements. In this regard, whereas final Rule 13–01(a)(6) requires disclosure of any information that would be material for investors to evaluate the ‘‘sufficiency of the guarantee,’’ final Rule 13–02(a)(6) requires disclosure of ‘‘[a]ny financial and narrative information about each such affiliate if the information would be material for investors to evaluate the pledge of the affiliate’s securities as collateral.’’ Similarly, final Rule 13– 02(a)(7) is consistent with final Rule 13– 01(a)(7), requiring disclosure of ‘‘[s]ufficient information so as to make the financial and non-financial information presented not misleading.’’ For the same reasons cited in adopting final Rule 13–01(a)(6) and (7),458 we believe these requirements capture the disclosures the proposed rule was intended to elicit while addressing the concerns raised by commenters as discussed above. Notwithstanding these requirements in the final rule, Securities Act Rule 408(a) and Exchange Act Rule 12b–20 require a registrant to disclose, in addition to the information expressly required to be included, such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made not misleading. While some commenters indicated these requirements provide sufficient investor protections,459 we believe the 458 See discussion in Section III.C.2.c.iii, ‘‘When Disclosure is Required.’’ 459 See, e.g., letters from Deloitte and EY. E:\FR\FM\20APR2.SGM 20APR2 21976 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES2 requirements in final Rule 13–02(a)(6) and (7), in addition to these other requirements, will help to ensure that material information is provided to investors. Based on comments received on proposed Rule 13–02(a)(5), we have also revised Rule 13–02(a) for clarity, consistent with revisions to Rule 13– 01(a).460 Proposed Rule 13–02(a) would have required disclosures ‘‘to the extent material to holders of the collateralized security’’ and was not intended to introduce a nuanced or different materiality analysis specific to these disclosure requirements. A registrant’s responsibility to determine whether the disclosures specified in Rule 13–02 are material is not different from how it assesses materiality in connection with other information it files with the Commission. Accordingly, final Rule 13–02 has been revised to require the financial and non-financial disclosures ‘‘to the extent material.’’ Proposed Rule 13–02(a)(4) would have required, if the financial disclosures specified in proposed Rule 13–02(a)(4) were omitted because they are not material, disclosure of a statement to that effect and the reasons therefore. Most of the commenters that discussed this proposed requirement did not support it.461 In response to these comments, and for the same reasons cited in adopting final amendments to the corresponding requirement in final Rule 13–01,462 we are not adopting this requirement as proposed. Instead, we are adopting an approach that should help address concerns 463 about the need for greater certainty as to the circumstances when omission of financial disclosures may be appropriate, while continuing to provide investors with the basic reasons as to why the financial information was omitted. As adopted, Rule 13– 02(a)(4)(vi) identifies two scenarios, which we believe are the most common situations under which the financial information would not be material. If the scenario is applicable and disclosed, the registrant could then omit the financial disclosures. The two scenarios are: (1) The assets, liabilities and results of operations of the combined affiliates whose securities are pledged as collateral are not materially different than the corresponding amounts 460 See discussion in Section III.C.2.c.iii, ‘‘When Disclosure is Required.’’ 461 See, e.g., letters from Cravath, EY, KPMG, and SIFMA. 462 See discussion in Section III.C.2.c.iii, ‘‘When Disclosure is Required.’’ 463 See, e.g., letter from Shearman. VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 presented in the consolidated financial statements of the registrant; 464 and (2) The combined affiliates whose securities are pledged as collateral have no material assets, liabilities or results of operations.465 Similar to the corresponding amendments to Rule 13–01,466 while we believe these scenarios encompass most of the situations under which the required financial information would not be material, these scenarios are not intended to be exclusive. As discussed below, there may be other circumstances in which it would be appropriate to omit the required financial information on the basis that it is not material. In the first scenario, we believe financial information of the combined affiliates would not be material to an investor as it is not materially different than that of the consolidated registrant.467 If the related scenario was disclosed, investors would not need supplemental financial information as it would largely duplicate the corresponding information in the registrant’s consolidated financial statements. In the second scenario, we believe disclosure that the combined group of affiliates has no material assets, liabilities or results of operations obviates the need for supplemental disclosures as an investor would know such information would not be material. While we believe these scenarios generally capture the situations under which the financial information would not be material and may be omitted, there may be other scenarios under which the registrant may conclude Summarized Financial Information is not necessary. These scenarios would be evaluated under the general materiality provision of Rule 13–02(a). Based on this analysis, if a registrant determines that not all of the required financial information is material, the information that is not material may be omitted without additional disclosure or explanation. Thus, under the final rule, the registrant could either rely on one of the identified scenarios, if applicable, to omit information that is not material, or make its own assessment based upon a consideration of other relevant facts and 464 This scenario is contained in Rule 13– 02(a)(4)(vi)(A). 465 This scenario is contained in Rule 13– 02(a)(4)(vi)(B). 466 See discussion in Section III.C.2.c.iii, ‘‘When Disclosure is Required.’’ 467 Rule 13–02(a)(4)(vi) clarifies that this scenario does not apply where separate disclosure of the Summarized Financial Information of one or more, but not all affiliates, is required by Rule 13– 02(a)(4)(iv). PO 00000 Frm 00038 Fmt 4701 Sfmt 4700 circumstances.468 We believe this approach will preserve the principlesbased nature of Rule 13–02 while providing greater certainty for issuers, and appropriate transparency for investors, regarding the information required to be disclosed. F. Location of Disclosures and Audit Requirement 1. Proposed Amendments Similar to the proposed disclosures for issuers and guarantors of guaranteed securities discussed above,469 the proposed amendments would give registrants 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. Accordingly, the note to proposed Rule 13–02(a) would have allowed the registrant to provide the disclosures required by this section in a footnote to its consolidated financial statements or, alternatively, in MD&A in the 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.470 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 468 To provide clarity to an issuer that its ability to omit the Summarized Financial Information required by final Rule 13–02(a)(4) is not limited to the four scenarios discussed herein, final Rule 13– 02(a)(4)(vi) states: ‘‘Notwithstanding that a registrant may omit this summarized financial information if not material . . . ’’ 469 See Section III.C.2.d.i, ‘‘Location of Revised Alternative Disclosures and Audit Requirement.’’ 470 As described above, subsequent to the issuance of the Proposing Release, the Commission amended and relocated the requirements previously contained in Item 503(c) of Regulation S–K to new Item 105 of Regulation S–K. E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations the subject securities is completed. If the registrant provides 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.471 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.472 jbell on DSKJLSW7X2PROD with RULES2 2. Comments on the Proposed Amendments Comments on the proposed amendments were mixed, and several commenters expressed views on these proposed amendments that were similar to their views on the corresponding proposed location and audit requirement for disclosures about issuers and guarantors of guaranteed securities discussed above.473 Some commenters stated that the proposed disclosures should be permitted to be presented outside the registrant’s consolidated financial statements in all cases, not just in the registration statement and Forms 10–K and 10–Q required to be filed during the fiscal year in which the first bona fide sale of the subject securities is completed.474 A few commenters asserted that not requiring the proposed disclosures to be audited would reduce costs 475 and possibly allow issuers to more quickly register these securities and access capital markets.476 A few commenters stated that requiring an audit of the proposed disclosures would provide little marginal benefit to investors,477 and one of these commenters argued that this proposed requirement would discourage issuers from pursuing registration of the original offering of the securities.478 Other commenters, however, asserted that the flexibility to determine the location of the proposed disclosures under the proposed amendments could lead to investor confusion about the location of the disclosures,479 and uncertainty as to the level of audit assurance that applied to the 471 See Section III.C.2.d, ‘‘Location of Revised Disclosures and Audit Requirement.’’ 472 See Section V.H, ‘‘Application of Amendments to Certain Types of Issuers,’’ below. 473 See Section III.C.2.d.ii, ‘‘Location of Revised Alternative Disclosures and Audit Requirement.’’ 474 See, e.g., letters from Cravath, Davis Polk, SIFMA, and Sullivan & Cromwell. 475 See letters from Davis Polk and Sullivan & Cromwell. 476 See letters BDO and Davis Polk. 477 See letters from Davis Polk, and Sullivan & Cromwell. 478 See letter from Sullivan & Cromwell. 479 See letter from PWC. VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 disclosures.480 One commenter contended that the proposed disclosures should be required to be presented in a single location to avoid inconsistencies in the location and varied reliance by investors.481 Another commenter stated that companies should not have the option to choose where their disclosures will appear, and that reported disclosures should be consistently reported in the same location.482 One commenter did not support locating the proposed disclosures outside the financial statements.483 This commenter argued that many investors place significant value on having required disclosures subject to annual audit and/or interim review, internal control over financial reporting, and XBRL tagging requirements, and not subject to the forward-looking statements safe harbor. Other commenters, however, recommended the disclosures be located outside the financial statements in all cases.484 One of these commenters recommended the disclosures be required in the liquidity and capital resources section of the MD&A or in a separate section following ‘‘Risk Factors’’ as is currently done in the Rule 144A market and has been accepted by the investor community.485 This commenter also observed that if disclosure outside the financial statements is sufficient at the time of the initial investment decision, it should be sufficient for future periods. The other commenter observed the Proposed Alternative Disclosures would be better presented in a discussion about a parent’s liquidity in the MD&A as opposed to in the financial statements given the objective of the disclosures to provide an investor in a debt security with information about the related guarantee.486 Some commenters emphasized that, even if the proposed disclosures are allowed to be located outside of the financial statements, these disclosures would be derived from the same internal accounting records used to prepare the registrant’s audited consolidated financial statements 487 and would be subject to the registrant’s disclosure controls and procedures.488 Some commenters asserted that underwriters will likely request independent auditors to provide 480 See letter from KPMG. 481 See letter from KPMG. 482 See letter from XBRL US, Inc. 483 See letter from CII. 484 See letters from NYC Bar and PWC. 485 See letter from NYC Bar. 486 See letter from PWC. 487 See letter from Davis Polk. 488 See letters from Cravath and EY. PO 00000 Frm 00039 Fmt 4701 Sfmt 4700 21977 comfort on financial information provided outside the consolidated financial statements in connection with registered offerings.489 Two of these commenters indicated this would involve performing limited procedures on such information under PCAOB Auditing Standard 6101, Letters for Underwriters and Certain Other Requesting Parties.490 One commenter suggested that such procedures may not result in a decrease in effort or cost for either auditors or registrants,491 while the other commenter stated that while the scope and time required to perform such procedures is less than an audit, the auditor involvement may delay the time to market for underwritten offerings.492 Another commenter noted that the proposed rules would cause issuers to incur costs related to the incremental procedures necessary for such comfort procedures but investors would lose the benefit arising out of the audit of the disclosures.493 A few commenters suggested that because the proposed disclosures would be relevant only to the investors of the subject security, if these disclosures were required to be audited, this information should be included in an audited supplemental schedule that could be filed as an exhibit to the filing, similar to the supplemental schedules required under Article 12 of Regulation S–X.494 3. Final Amendments After considering comments received, we are adopting the amendments largely as proposed, with modifications. As discussed above, while one commenter did not support locating the disclosures outside the financial statements, others recommended the disclosures be located outside the financial statements in all cases. We continue to believe, however, and for the same reasons cited in adopting the corresponding final amendments to Rule 3–10,495 that it is appropriate to provide registrants the flexibility to select the location of the disclosures, including locating them outside the registrant’s consolidated financial statements. In this regard, and consistent with the views of several commenters, we expect not requiring the disclosures to be audited will reduce costs and allow issuers to register the 489 See, e.g., letters from BDO, EY, Grant Thornton, and KPMG. 490 See letters from BDO and KPMG. 491 See letter from KPMG. 492 See letter from BDO. 493 See letter from Grant Thornton. 494 See letters from EY and PWC. 495 See discussion in Section III.C.2.d.iii, ‘‘Location of Revised Alternative Disclosures and Audit Requirement.’’ E:\FR\FM\20APR2.SGM 20APR2 21978 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations subject securities and access capital markets faster, which may encourage more such registered offerings.496 Accordingly, and consistent with the proposed rule, final Rule 13–02(b) 497 permits the registrant to provide the disclosures required by final Rule 13– 02(a) in a footnote to its consolidated financial statements or alternatively, in MD&A. If the disclosures are not otherwise included in the consolidated financial statements or in MD&A, the final rule requires the registrant to include the disclosures in its prospectus immediately following ‘‘Risk Factors,’’ if any, or otherwise, immediately following pricing information described in Item 105 of Regulation S–K.498 As discussed above, some commenters asserted that the flexibility to determine the location of the proposed disclosures under the proposed amendments could lead to investor confusion about the location of the disclosures and uncertainty as to the level of assurance applied. While the proposed rule provided flexibility on where to locate the disclosures, we believe the locations where disclosures may be provided are clearly specified, and that investors generally understand the levels of assurance applied to disclosures included inside or outside the registrant’s consolidated financial statements. If provided in the registrant’s consolidated financial statements, the disclosures must be included in a footnote. If provided outside the registrant’s consolidated financial statements, they must be included in MD&A, or in other specified locations if the registrant’s consolidated financial statements and MD&A are not otherwise included in the filing.499 Consistent with the proposed rule, if the registrant elects to provide the amended disclosures in a footnote to its audited consolidated financial statements, the disclosures must be audited. Conversely, the disclosures need not be audited if the registrant provides them outside the audited consolidated financial statements. Also consistent with the proposed rule, the final rule 496 See supra note 269. this requirement was included in a note to proposed Rule 13–02(a), the final rule includes it in a separate paragraph, Rule 13–02(b). 498 17 CFR 229.105. As described above, subsequent to the issuance of the Proposing Release, the Commission amended and relocated the requirements previously contained in Item 503(c) of Regulation S–K to new Item 105 of Regulation S–K. The final amendments have been revised to reflect this change. 499 These circumstances include when the consolidated financial statements and MD&A are included in previously filed reports that are incorporated by reference. In such instances, the disclosures are required to be provided in specified prominent locations. jbell on DSKJLSW7X2PROD with RULES2 497 Whereas VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 specifies the locations where disclosures must be provided. Similar to the proposed amendments to Rule 3–10, a few commenters recommended that, if audited, the information be included in a supplemental schedule similar to the ones required by Article 12 of Regulation S–X. We are not adopting this suggestion for the same reasons cited in connection with final amendments to Rule 3–10.500 Under the proposed rule, although the registrant would initially have the flexibility to locate the disclosures outside of its consolidated financial statements in the subject registration statement and certain periodic reports filed thereafter, the registrant would have been required to provide the disclosures in a footnote to its consolidated financial statements starting with its annual report filed on Form 10–K for the fiscal year during which the first bona fide sale of the subject securities is completed. Comments on this proposed requirement were consistent with the corresponding proposed change to Rule 3–10, albeit from fewer commenters. Consistent with our rationale for the corresponding final amendments to Rule 3–10,501 and as recommended by several commenters, we are not adopting this requirement. Under the final rule, the registrant will have flexibility to locate the disclosures in a footnote to its consolidated financial statements or in the locations specified in Rule 13–02(b) in all of its filings. G. Recently Acquired Affiliates Whose Securities Are Pledged as Collateral 1. Proposed Amendments Existing Rule 3–16 does not contain a specific requirement to provide preacquisition financial information of recently acquired affiliates whose securities are pledged as collateral. However, if a recently acquired affiliate meets the substantial portion threshold in the existing rule, financial statements for periods prior to the date of acquisition by the registrant are required to be filed. In connection with the proposed amendments to the pre-acquisition financial statement requirement for recently acquired subsidiary issuers and guarantors, while the proposed rule would contain no specific requirement, the Commission stated in the Proposing Release that information about recently acquired subsidiaries would be required 500 See discussion in Section III.C.2.d.iii, ‘‘Location of Revised Alternative Disclosures and Audit Requirement.’’ 501 See Section III.C.2.d.iii, ‘‘Location of Revised Alternative Disclosures and Audit Requirement.’’ PO 00000 Frm 00040 Fmt 4701 Sfmt 4700 if material to an investment decision in the guaranteed security pursuant to proposed Rule 13–01(a)(5).502 Similarly, no specific requirement was included in proposed Rule 13–02, but information about recently acquired affiliates would have been required if material to an investment decision in the collateralized security pursuant to proposed Rule 13–02(a)(5). 2. Comments on the Proposed Amendments We received no public comments specific to pre-acquisition financial information of recently acquired affiliates. However, we considered comments received in connection with the proposed amendments to Rule 3– 10(g).503 As it related to the proposed amendments to Rules 3–10 and 13–01, one commenter encouraged the Commission ‘‘not to perpetuate separate disclosure rules in this context for recently acquired subsidiaries.’’ 504 One commenter recommended that the Commission should consider requiring Summarized Financial Information of a recently acquired guarantor in registration statements if the guarantor is not already included in the Summarized Financial Information of the obligated group (i.e., it is acquired after the most recent balance sheet date) and if the guarantor had a material effect on the financial capacity of the obligated group.505 Another commenter indicated that the existing disclosure requirements under ASC 805–10–50 would continue to provide sufficient information related to material subsidiaries acquired and their impact on the consolidated entity.506 3. Final Amendments Under the proposed rule, information about such recently acquired affiliates would have been required if material to an investment decision in the collateralized security pursuant to proposed Rule 13–02(a)(5).507 The disclosures required by Rule 13–01 and 13–02 are similar in many respects, and we believe such similarities should 502 See Section III.C.2.e of the Proposing Release. Section III.C.2.e.ii, ‘‘Recently Acquired Subsidiary Issuers and Guarantors.’’ 504 See letter from Cravath. 505 See letter from EY. 506 See letter from T-Mobile. 507 The requirements applicable to recently acquired affiliates whose securities are pledged as collateral have been included in final Rule 13– 02(a)(5). Proposed Rule 13–02(a)(5) would have required disclosure of ‘‘any other quantitative or qualitative information that would be material to making an investment decision with respect to the collateralized security.’’ Instead of this proposed requirement, the final amendments include Rules 13–02(a)(6) and (7). See discussion within Section V.E.3, ‘‘When Disclosure is Required.’’ 503 See E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES2 extend to pre-acquisition financial information of recently acquired affiliates. After considering the comments received, we are adopting amendments requiring disclosure similar to what is required for recently acquired subsidiary issuers and guarantors by new Rule 13–01(a)(5). Our rationale for these amendments is consistent with our rationale for adopting the amendments to new Rule 13–01(a)(5).508 To that end, in certain circumstances (discussed below), preacquisition Summarized Financial Information for recently acquired affiliates will be required to be provided in a Securities Act registration statement 509 filed in connection with the offer and sale of the subject collateralized security. Similar to the amendments to final Rule 13–01(a)(5), the pre-acquisition Summarized Financial Information will be required when a registrant has acquired a significant ‘‘business’’ after the date of its most recent balance sheet included in its consolidated financial statements, and that acquired business and/or one or more of its subsidiaries are affiliates whose securities are pledged as collateral. Whether a ‘‘business’’ has been acquired will be determined in accordance with the guidance set forth in § 210.11–01(d), and the registrant would also need to treat acquisitions of related businesses as a single business acquisition in a manner consistent with § 210.3–05(a)(3). An acquired business will be deemed significant if it meets any of the conditions specified in the definition of significant subsidiary in § 210.1–02(w), substituting 20 percent for 10 percent each place it appears therein, based on a comparison of the most recent annual financial statements of the acquired business and the registrant’s most recent annual consolidated financial statements filed at or prior to the date of acquisition. To simplify compliance and provide certainty as to when disclosure is required, these significance tests are the same tests used to determine whether pre-acquisition financial statements are required for an acquired business pursuant to Rule 3–05 of Regulation S– X. Generally, under the final rule, a registrant will be required to provide pre-acquisition Summarized Financial 508 See Section III.C.2.e.iii, ‘‘Recently Acquired Subsidiary Issuers and Guarantors.’’ 509 This requirement is only applicable to Securities Act registration statements. In subsequent Exchange Act reports, financial information of a recently acquired affiliate whose securities are pledged as collateral will be included in the financial information of affiliates required by final Rule 13–02(a)(4). VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 Information of a recently acquired affiliate for those acquisitions where it will be required to provide preacquisition financial statements of the acquired business pursuant to Rule 3–05 of Regulation S–X.510 We recognize that not all of the entities that comprise an acquired business may be affiliates whose securities are pledged. Accordingly, the required Summarized Financial Information will only be for those entities acquired that are affiliates whose securities are pledged, and follows the form and content prescribed in new Rule 13–02(a)(4). We also recognize that the pre-acquisition Summarized Financial Information may be required in advance of when preacquisition financial statements are required pursuant to Rule 3–05 of Regulation S–X.511 However, we believe investors in a registered debt offering should be provided with information about affiliates whose securities are pledged in advance of an investment decision, and we note that the level of detail required is far less than preacquisition financial statements required by Rule 3–05. H. Application of 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. 1. Foreign Private Issuers a. Proposed Amendments Foreign private issuers are required to comply with existing Rule 3–16. Under the proposal, Rule 3–16 would be eliminated and foreign private issuers would be required to comply with the disclosures specified in proposed Rule 13–02. Accordingly, Instruction 1 to Item 8 of Form 20–F would be amended 510 See discussion in Section III.C.2.e.iii, ‘‘Recently Acquired Subsidiary Issuers and Guarantors.’’ 511 For example, Rule 3–05(b)(4) of Regulation S– X in part permits, in certain circumstances, preacquisition financial statements of an acquired business to be omitted from a registration statement if the significance of the acquisition does not exceed 50% and the registration statement is declared effective no more than 74 calendar days after consummation of the acquisition. Note that filing requirements in Items 2.01 and 9.01 of Form 8–K may differ. PO 00000 Frm 00041 Fmt 4701 Sfmt 4700 21979 to specifically require compliance with proposed Rule 13–02. b. Comments on Proposed Amendments We received one comment on this aspect of the proposed amendments. The commenter recommended that the Commission confirm that the periods covered under the Summarized Financial Information would be required to track only those covered by a foreign private issuer’s consolidated financial statements.512 c. Final Amendments After considering public comments, we are adopting the proposed amendments with modifications. For clarity, as the final amendments do not delete existing Rule 3–16, Instruction 1 to Item 8 of Form 20–F will be amended to make reference to required compliance with Rule 3–16.513 Consistent with the proposal, that instruction also will be modified to require compliance with proposed Rule 13–02. One commenter requested the Commission confirm the periods of Summarized Financial Information that foreign private issuers would be required to present.514 Consistent with our response to a similar comment on proposed Rule 13–01, as specified in Rule 13–02(a)(4)(v), a registrant is required to disclose the Summarized Financial Information as of and for the most recently ended fiscal year and, if applicable, year-to-date interim period, included in the registrant’s consolidated financial statements. Lastly, for the same reasons described above,515 we have created new Exhibit 17 within Item 19 of Form 20–F, which will require the identification of each affiliate whose security is pledged as collateral, as well as the identification of the security or securities pledged as collateral. 2. Smaller Reporting Companies a. Proposed Amendments 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 512 See letter from Sullivan & Cromwell. instruction cites rules under which a foreign private issuer may be required to provide financial statements or financial information for entities other than the issuer. This instruction, however, does not currently make reference to Rule 3–16. As the proposed and final amendments make reference to new Rule 13–02, for clarity, the instruction has been revised to also make reference to Rule 3–16. 514 See letter from Sullivan & Cromwell. 515 See discussion in Section V.D.3, ‘‘NonFinancial Disclosures.’’ 513 This E:\FR\FM\20APR2.SGM 20APR2 21980 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations collateral for securities registered or being registered, except that the periods presented are those required by Rule 8– 02 of Regulation S–X. As the proposed amendments would have eliminated Rule 3–16 and required 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 was therefore 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 to the periods required by Rule 8–02 of Regulation S– X in Note 4 to Rule 8–01 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, the Commission proposed adding Rule 8– 03(b)(8) to require compliance with proposed Rule 13–02. b. Comments on Proposed Amendments We did not receive any comments that addressed this aspect of the proposed amendments. jbell on DSKJLSW7X2PROD with RULES2 c. Final Amendments We are adopting the proposed amendments with modifications. We believe that investors in smaller reporting companies will benefit from the simplified disclosures that will result from the amendments and that the cost of providing the disclosures will be reduced for smaller reporting companies. As the final amendments do not delete existing Rule 3–16, we are not adopting the proposed amendment that would have eliminated the reference to that requirement in Note 4 to Rule 8–01, nor are we eliminating the reference to the periods required in such financial statements. We are, however, adopting the proposed change that requires compliance with Rule 13–02, but with slightly different wording than proposed. The final amendments to Note 4 to Rule 8–01 establish that the requirements of final Rules 3–16 and 13–02 are applicable if a smaller reporting company’s securities registered or being registered are collateralized by the securities of the smaller reporting company’s affiliates,516 and that the periods 516 Because the final amendments do not eliminate existing Rule 3–16, which will continue to be applicable to registered collateralized securities with collateral release provisions issued and outstanding as of the effective date of the final amendments, amended Note 4 to Rule 8–01 states, for clarity, that final Rule 13–02 must be followed unless amended Rule 3–16 applies. See Section VI.B ‘‘Rule 3–16 Collateral Release Provisions.’’ VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 presented for purposes of compliance with final Rule 3–16 are those required by Rule 8–02. Finally, as proposed, 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 have added Rule 8–03(b)(7) to require compliance with Rule 13–02.517 3. Offerings Pursuant to Regulation A a. Proposed Amendments 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, the proposed rule would have replaced the existing requirement in those 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.518 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. b. Comments on Proposed Amendments We did not receive any comments that addressed this aspect of the proposed amendments. c. Final Amendments We are adopting the proposed amendments with modifications. We believe that investors in Regulation A offerings will benefit from the simplified disclosures that will result from the amendments and that the cost of providing the disclosures will be reduced for Regulation A Issuers. As the final amendments do not delete existing Rule 3–16, we are not adopting the proposed amendment that would have 517 Proposed Rule 8–03(b)(8) would have sequentially followed existing Rule 8–03(b)(6) of Regulation S–X [17 CFR 210.8–03(b)(6)] and proposed Rule 8–03(b)(7). As described within Section III.D.2 ‘‘Smaller Reporting Companies,’’ subsequent to the issuance of the Proposing Release, the Commission eliminated Rule 8– 03(b)(6). The final amendments have been revised to reflect this change. The requirements in proposed Rule 8–03(b)(8) have been included in new Rule 8– 03(b)(7), which follows new Rule 8–03(b)(6). 518 If a Regulation A Issuer elects to provide the proposed disclosures in its audited financial statements, such disclosures would be required to be audited. PO 00000 Frm 00042 Fmt 4701 Sfmt 4700 eliminated the existing requirement in Forms 1–A and 1–K that Regulation A Issuers comply with Rule 3–16. We are, however, adopting the proposed change to those forms that requires compliance with Rule 13–02, but with slightly different wording than proposed. The final amendments to Forms 1–A and 1– K establish that the requirements of final Rules 3–16 and 13–02 are applicable if a Regulation A Issuer’s securities qualified or being qualified pursuant to Regulation A are collateralized by the securities of the issuer’s affiliates.519 We are also adopting the proposed requirement specifying the location of the disclosures, similar to Rule 13–02(b) but consistent with the requirements of Regulation A. Consistent with the discussion above about requiring registrants to comply with Rule 13–02 in filings made on Form 10–Q, a requirement to comply with Rule 13–02 has been added to Form 1–SA. Lastly, for the same reasons described above,520 we have created new exhibit 17 within Item 17 of Form 1–A, which will require the identification of each affiliate whose security is pledged as collateral, as well as the identification of the security or securities pledged as collateral. This exhibit will also be required in Form 1– K by Item 8(b) of Part II of that form, and in Form 1–SA by Item 4(b) of that form. VI. Transition to Final Amendments and Rule 3–16 Collateral Release Provisions A. Transition to Final Amendments A number of commenters recommended that the Commission provide transition guidance or a phasein period for proposed Rules 13–01 and 13–02.521 In response to these concerns, we are providing the following transition period for compliance to mitigate any potential burdens that issuers may experience in transitioning to the final amendments: For Securities Act registration statements: 522 519 Because the final amendments do not eliminate existing Rule 3–16, which will continue to be applicable to registered collateralized securities with collateral release provisions issued and outstanding as of the effective date of the final amendments, amended Forms 1–A and 1–K state, for clarity, that final Rule 13–02 must be followed unless amended Rule 3–16 applies. See Section VI.B ‘‘Rule 3–16 Collateral Release Provisions.’’ 520 See discussion in Section V.D.3, ‘‘NonFinancial Disclosures.’’ 521 See letters from BDO, CAQ, Cravath, Deloitte, EY, FedEx, Grant Thornton, KPMG, NYC Bar, PWC, and Shearman. 522 This transition period is also applicable to filings made in connection with offerings of securities pursuant to Regulation A, including Form 1–A and post-qualification amendments thereto. E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations • Any registration statement that is first filed on or after January 4, 2021, must comply with the final amendments; and • Any post-effective amendment filed on or after January 4, 2021, to include either the registrant’s latest audited financial statements in the registration statement or to update the prospectus under Section 10(a)(3) must comply with the final amendments. For Exchange Act registration statements: • Any registration statement that is first filed on or after January 4, 2021, must comply with the final amendments. For Exchange Act periodic reports: 523 • If the reporting company was required to comply with the final amendments in a registration statement, all Exchange Act periodic reports for periods ending after that registration statement became effective must comply with the final amendments; and • For all other Exchange Act reporting companies, the annual report on Form 10–K or Form 20–F, as applicable, for fiscal years ending after January 4, 2021, and quarterly reports on Form 10–Q for quarterly periods ending after January 4, 2021, must comply with the final amendments.524 Voluntary compliance with the final amendments in advance of January 4, 2021, will be permitted. After voluntary compliance, subsequent Exchange Act or Regulation A periodic reports must comply with the final rules. jbell on DSKJLSW7X2PROD with RULES2 B. Rule 3–16 Collateral Release Provisions As described in the Proposing Release,525 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. Some commenters observed that in many registered debt offerings, the indenture will contain such collateral release provisions.526 Commenters 523 This transition period is also applicable to periodic reporting pursuant to Rule 257 of Regulation A, including Forms 1–K and 1–SA. 524 For example, a registrant with a fiscal year ending on January 31st would be required to comply with the final amendments in its Form 10– K for its fiscal year ended January 31, 2021, and subsequent quarterly reports on Form 10–Q starting with its Form 10–Q for the quarterly period ended April 30, 2021. As another example, a registrant with a fiscal year ending on December 31st would be required to comply with the final amendments in its Forms 10–Q for quarterly periods ended March 31, 2021, June 30, 2021, and September 30, 2021, and in its Form 10–K for its fiscal year ended December 31, 2021. 525 See Section II of the Proposing Release. 526 See letters from Cravath, NYC Bar, PWC, and Shearman. VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 expressed concern that, depending on the wording of such collateral release provisions in previously issued indentures, the proposed elimination of existing Rule 3–16 and new requirements in proposed Rule 13–02 could change the collateral available to holders of these debt securities, causing unintended credit consequences.527 In response to these comments, so as not to change the amount of collateral available to investors in previously issued debt securities that include collateral release provisions, the final amendments will not apply to existing collateralized debt securities with such provisions. To accomplish this, the final amendments do not eliminate existing Rule 3–16 as was proposed. Instead, Rule 3–16 has been amended to include a scope paragraph stating that the requirements of Rule 3–16 apply to each registered security issued and outstanding before January 4, 2021 for which the registrant has not previously been required to provide Rule 3–16 Financial Statements.528 While we recognize that these investors will not receive the disclosures required by Rule 13–02, their investment decision in such securities presumably contemplated the release of collateral were it to exceed the substantial portion threshold, and we note that these investors have historically not received supplemental information. In contrast to those indentures with collateral release provisions, the new disclosures will apply to existing collateralized debt securities that do not contain such provisions. To accomplish this, final Rule 13–02 includes a scope paragraph stating that the requirements of new Rule 13–02 apply to each registered security issued and outstanding before January 4, 2021, for which the registrant has previously been required to provide Rule 3–16 Financial Statements. Finally, any collateralized debt securities issued on or after the compliance date of the final amendments must comply with new Rule 13–02, which is clearly stated in the scope paragraph to final Rule 13– 02. VII. Other Matters If any of the provisions of these rules, or the application thereof to any person or circumstance, is held to be invalid, such invalidity shall not affect other 527 See supra note 526. registrant that has issued securities with collateral release provisions would not have been required to provide Rule 3–16 Financial Statements. Requiring continued compliance with the requirements of existing Rule 3–16 will allow such collateral release provisions to operate as intended and not change the amount of collateral available to investors. 528 A PO 00000 Frm 00043 Fmt 4701 Sfmt 4700 21981 provisions or application of such provisions to other persons or circumstances that can be given effect without the invalid provision or application. Pursuant to the Congressional Review Act,529 the Office of Information and Regulatory Affairs has designated these rules a ‘‘major rule,’’ as defined by 5 U.S.C. 804(2). VIII. Economic Analysis A. Introduction As discussed above, we are adopting 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 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 pledges of affiliate securities as collateral and may unnecessarily restrict the set of investment opportunities available to some investors. The discussion below addresses the potential economic effects of the final 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 to the 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.530 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 529 5 U.S.C. 801 et seq. U.S.C. 77b(b), 78c(f), 80a–2(c), and 80b– 530 15 2(c). E:\FR\FM\20APR2.SGM 20APR2 21982 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations adopt any rule that would impose a burden on competition that is not necessary or appropriate in furtherance of the Exchange Act.531 B. Baseline and Affected Parties The existing regulatory requirements of Rules 3–10 and 3–16 under Regulation S–X are described above 532 and have prompted registrants to adopt disclosure and business practices specifically designed to comply with or avoid these requirements. We analyze the economic effects of the final amendments by assessing their impact on affected parties as compared to the current disclosure regime, including both existing disclosure requirements and available exemptions, where applicable. The parties that are likely to be affected by these amendments include issuers and guarantors of guaranteed debt securities, issuers of debt securities collateralized by securities of those issuers’ affiliate(s), and investors in each of these types of securities.533 1. Market Participants The first main group of market participants affected by the amendments consists of issuers and guarantors of guaranteed debt securities and issuers of debt securities collateralized by securities of those issuers’ affiliate(s). These issuers will be affected because the disclosures called for by the amendments will differ from the content and format of disclosures currently required to be presented in registered debt offerings and in certain ongoing reporting. Additionally, issuers and guarantors of guaranteed debt securities may be affected by amendments to the eligibility conditions that must be met to omit the separate financial statements of subsidiary issuers and guarantors of guaranteed debt securities. The amendments may also alter the capital raising decisions of potential issuers. The second group of market participants affected by the amendments 530 15 U.S.C. 77b(b), 78c(f), 80a–2(c), and 80b– 2(c). 531 15 U.S.C. 78w(a)(2). Section II for Rule 3–10 and Section IV for Rule 3–16. 533 While the amendments would apply to registered closed end funds and business development companies (‘‘BDCs’’), and could thereby affect registered investment advisers, based on staff experience, we believe closed end funds jbell on DSKJLSW7X2PROD with RULES2 532 See VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 consists of investors in these securities. These investors can be divided into three main categories: (1) Qualified Institutional Buyers (‘‘QIBs’’); 534 (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 will also depend on whether there is a change in the number of registered debt offerings by new issuers, issuers that would have offered debt securities under Rule 144A before the amendments,535 or both, as a result of the amendments. Currently, there are four options that issuers typically consider in deciding whether and how to issue guaranteed or collateralized debt securities. First, issuers may offer and sell guaranteed and/or collateralized debt securities in a registered securities offering and provide the required disclosures and any separate financial statements under existing Rules 3–10 and 3–16. Second, issuers may opt to offer the debt securities in transactions that rely on Rule 144A’s safe harbor exemption from Securities Act registration, with guarantees or pledges of affiliate securities as collateral and registration rights. This may allow issuers to access the capital markets more quickly because they would not have to provide the disclosures required by existing Rules 3–10 and 3–16 at the time of the Rule 144A offering. Issuers do, however, have to provide the disclosures and financial statements required by existing Rules 3–10 and 3–16 when the unregistered debt securities are exchanged for debt securities issued in a registered offering. Third, issuers may opt to offer the debt securities in transactions that rely on Rule 144A’s safe harbor exemption from Securities Act registration, with guarantees or pledges of affiliate securities as collateral, but without registration rights. Under this approach, issuers do not have to provide the disclosures or financial statements required by existing Rules 3–10 and 3–16, but issuers and investors are not afforded the benefits of registration. Fourth, issuers may 534 17 CFR 230.144A(a)(1). QIBs can participate in Rule 144A offerings; retail and institutional investors other than QIBs are unable to participate in such offerings. 535 Only PO 00000 Frm 00044 Fmt 4701 Sfmt 4700 structure a registered offering without including guarantees or pledges of affiliated securities as collateral. In this case, while issuers do not have to provide disclosures or financial statements required by existing Rules 3– 10 and 3–16, they may incur a higher cost of capital than if they had structured their debt securities offerings with these credit enhancements. Issuers in this category may decide not to offer these credit enhancements because the cost of providing the required disclosures exceeds the premium that must be paid to issue the debt on an unsecured basis. Collateralized debt offerings are often structured to include collateral release provisions, which automatically reduce the amount of pledged collateral that investors might receive in the event of default if it would trigger the existing requirement for a registrant to file Rule 3–16 Financial Statements. To the extent the practice of structuring these offerings in this manner changes as a result of the final amendments, investors may experience both a change in the number of investment opportunities in collateralized debt, 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 the final amendments, Table 1 provides estimates of the number and dollar amount of all registered debt offerings and Rule 144A debt offerings per year since 2013.536 The dollar volume of registered debt and Rule 144A offerings generally appears to be higher in recent years (i.e., 2016, 2017, 2018) than in earlier years (i.e., 2013, 2014, 2015), which may be a result of improving macroeconomic conditions and a low interest rate environment.537 536 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. 537 See id. E:\FR\FM\20APR2.SGM 20APR2 21983 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations TABLE 1—REGISTERED DEBT AND RULE 144A DEBT OFFERINGS FROM 2013—2018 Registered debt Year 2013 2014 2015 2016 2017 2018 Number of offerings * ................................................................................................................. ................................................................................................................. ................................................................................................................. ................................................................................................................. ................................................................................................................. ................................................................................................................. Rule 144A $ Amount (bil) 1,509 1,597 1,560 1,639 1,853 1,671 Number of offerings * 1,052 1,113 1,206 1,329 1,298 1,132 $ Amount (bil) 969 920 808 785 995 871 512 530 575 526 657 658 Source: DERA staff analysis. * The number of registered offerings and amounts raised do not include registered exchanges of debt securities previously issued pursuant to an exemption from Securities Act registration, such as Rule 144A. Based on staff analysis of Commission filings on Forms S–4 and F–4, there was an average of 129 registered exchange offers per year between 2013 and 2018, seeking an average (median) amount of proceeds of approximately $146 billion ($140 billion) per year. These estimates are based on information disclosed at the time of initial filing; actual offering amounts may have differed upon effectiveness of the registration statement. Debt securities with registration rights are usually issued under Rule 144A and, thus, may also be included in the columns summarizing Rule 144A offerings. One study estimates that approximately 98% of highyield Rule 144A bonds and 40% of investment-grade Rule 144A bonds have registration rights. See Miles Livingston & Lei Zhou, The Impact of Rule 144A Debt Offerings Upon Bond Yields and Underwriter Fees, 31 Fin. Mgmt. 5 (2002). According to studies examining registered debt offerings and debt offerings made under Rule 144A, the two types of debt 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.538 These conditions may increase the likelihood that investors require guarantees and collateral from these issuers 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.539 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) relatively high liquidity, given the possibility to exchange the securities for registered securities.540 As discussed above,541 existing 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 existing rule: (1) Consolidating Information; and (2) a brief narrative. Consolidating Information is the most common type of Alternative Disclosure under existing Rule 3–10. Table 2 presents data on the number of unique registrants and filings that included Consolidating Information under Rule 3–10 in that filing for the period 2013–2018.542 TABLE 2—ESTIMATED NUMBER OF UNIQUE REGISTRANTS AND FILINGS INCLUDING CONSOLIDATING INFORMATION UNDER EXISTING RULE 3–10 Year 2013 2014 2015 2016 2017 2018 Number of unique registrants ................................. ................................. ................................. ................................. ................................. ................................. Number of total filings 533 530 500 469 403 349 10–K 1834 1861 1750 1641 1430 1261 431 461 437 417 369 328 10–Q 20–F 1339 1360 1288 1199 1043 922 S–1 12 10 9 8 5 6 S–4 15 9 5 1 1 0 F–4 34 21 11 16 11 4 3 0 0 0 0 0 jbell on DSKJLSW7X2PROD with RULES2 Source: DERA staff analysis of Edgar Filings. 538 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). 539 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 VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 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. 540 See, e.g., Fenn (2000), note 539 above. 541 See Section II.A, ‘‘Background.’’ 542 To identify these disclosures, we searched all Forms 10–K, 10–Q, 20–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 2013–2018. We also searched Forms S–4, S–11, 10, F–1, F–4, SF–1, SF– PO 00000 Frm 00045 Fmt 4701 Sfmt 4700 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. 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 using specific search terms. We were unable to find any filings on the remaining affected forms that included the Alternative Disclosures. Our analysis did not include Forms S–3 or F–3, because Consolidating Information included with those registration statements is typically incorporated by reference from Exchange Act reports. E:\FR\FM\20APR2.SGM 20APR2 21984 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations 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, we are unable to determine that number due to methodological and data extraction challenges.543 As discussed above,544 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.545 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 2018 ................................................................................................................. ................................................................................................................. ................................................................................................................. ................................................................................................................. ................................................................................................................. ................................................................................................................. Number of total filings 7 7 7 7 7 7 10–K 7 7 7 7 7 7 20–F 6 6 6 6 6 6 1 1 1 1 1 1 Source: DERA staff analysis of EDGAR filings. The final rules amend the disclosure requirements in Rule 3–10 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 expect the amendments to benefit issuers and investors. As a result of the overall reduced burdens associated with the amendments, investors may benefit from access to more registered offerings that are structured to include guarantees and, accordingly, the additional protections that come with a registered offering. 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 disadvantaged as compared to the direct creditors of any subsidiary not providing a guarantee. 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. In a bankruptcy proceeding, the assets of non-guarantor subsidiaries that are not issuers typically would be accessible only by the holder indirectly through the parent’s equity interest. 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 those subsidiaries. The less burdensome disclosures under the final 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 access the capital markets more quickly than under the existing Rule 3–10 requirements because it is likely to take issuers less time and cost to prepare Summarized Financial Information under the final amendments than to prepare Consolidating Information under existing Rule 3–10. By registering the initial offering, these issuers would incur the cost of only one offering, rather than two; that is, issuers would not incur any additional costs associated with exchanging the guaranteed debt securities issued in an unregistered Rule 144A offering for guaranteed debt securities issued in an offering registered under the Securities Act. Commenters generally agreed with these assessments.546 Some commenters argued that the expected reduction in registrants’ costs and burdens of providing the proposed disclosures would lead to an increase in the number of registered debt offerings with guarantees.547 One commenter suggested that this increase would result from the disclosures that would be required in proposed Rule 13–01 more closely resembling the disclosure practice in the Rule 144A and Regulation S market.548 One commenter noted that, although the proposed amendments would reduce the burdens of registering offerings of guaranteed securities, the proposed amendments may not result in a significant increase in such offerings because of the general 543 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. 544 See Section IV, ‘‘Rule 3–16 of Regulation S– X.’’ 545 There are no XBRL tags specific to Rule 3–16. To identify these disclosures, we searched all Forms 10–K, 10–Q, 20–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. We manually sifted through these false returns to identify the positive results listed in Table 3. 546 See, e.g., letters from Ball Corp., Cravath, Davis Polk, Eaton Corp., EY, FEI, and Simpson Thacher. 547 See, e.g., letters from Ball Corp., Davis Polk, EY, and FEI. C. Anticipated Economic Effects In this section we discuss the anticipated economic benefits and costs of the amendments to Rules 3–10 and 3– 16. jbell on DSKJLSW7X2PROD with RULES2 1. Amendments to Rule 3–10 and Partial Relocation to Rule 13–01 VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 PO 00000 Frm 00046 Fmt 4701 Sfmt 4700 E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations trend toward Rule 144A transactions.549 Even so, the commenter asserted that the proposed amendments could result in more uniform and better financial disclosures for investors if they are incorporated into market practice for Rule 144A offerings. Another commenter, however, was skeptical that, due to the proposed amendments, high-yield issuers using the Rule 144A market would return to the registered market ‘‘to a meaningful extent’’ because, according to that commenter, the Rule 144A market has ‘‘largely eliminated the historical pricing benefits’’ of registered offerings.550 Several commenters provided us with burden estimates regarding the disclosure requirements of Rule 3–10. One commenter noted that presentation of Consolidating Information required under existing rules comprises approximately 10% of the total pages in its Forms 10–Q and 10–K and the preparation of this information is both costly and time consuming.551 Another commenter indicated that the existing Rule 3–10 disclosure requirements add approximately one week of additional time to the preparation of its annual and quarterly reports on Forms 10–K and 10–Q, respectively, and stated that its annual report for 2017 included nine pages of Rule 3–10 disclosures even though its compliance with the terms of its credit facility and indentures is measured based on consolidated financial statement amounts and not guarantor financial information.552 One commenter stated that its 2017 annual report on Form 10–K contained 27 pages of Rule 3–10 disclosures.553 Another commenter estimated that the existing Rule 3–10 disclosure requirements add approximately three weeks of additional time annually to the preparation of its quarterly and annual reports.554 One commenter stated that the preparation and review of its Consolidating Information is time-consuming and costly, requiring approximately 280 hours per year.555 a. Eligibility Conditions To Omit Financial Statements of Subsidiary Issuer or Guarantor jbell on DSKJLSW7X2PROD with RULES2 As detailed in Section III.C.1.b, ‘‘Consolidated Subsidiary Condition,’’ the final amendments will replace one of the conditions that must be met to be eligible to omit the separate financial 548 See letter from Cravath. letter from NYC Bar. 550 See letter from Shearman. 551 See letter from T-Mobile. 552 See letter from Windstream. 553 See letter from WTW. 554 See letter from Freeport. 549 See VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 statements of a subsidiary issuer or guarantor—that the 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 change will 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 final rule will 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 change from 100%owned to consolidation, we are simplifying the other eligibility conditions. Namely, as discussed in Section III.C.1.d, ‘‘Eligible Issuer and Guarantor Structures Condition,’’ the final amendments will 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, will no longer impact the eligibility to omit separate subsidiary financial statements and instead will only impact the extent of disclosure in the Revised Alternative Disclosures. Overall, these final amendments should permit a broader scope of issuers and guarantors to be eligible to provide the Revised Alternative Disclosures in lieu of separate financial statements of each subsidiary issuer and guarantor than under existing Rule 3–10. This, in turn, will reduce the compliance costs associated with preparation of disclosures for these registered debt offerings and ongoing periodic reporting. To the extent there are more issuers and guarantors that are eligible to provide the Revised Alternative Disclosures in lieu of separate financial statements of each subsidiary issuer and guarantor under amended Rule 3–10, these entities may be more likely to register their guaranteed 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 PO 00000 Frm 00047 Fmt 4701 Sfmt 4700 21985 offerings to be lower than that of private offerings made under Rule 144A,556 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 could have reduced compliance costs to the extent they meet the revised eligibility criteria under the final Rule 3–10 and the Revised Alternative Disclosures are provided in lieu of their separate financial statements. Certain investors could also benefit from the final 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 final amendments to the eligibility conditions encourage additional registered debt offerings, more investment opportunities would be made available, and a resulting increase in market participation could improve the overall competitiveness and efficiency of the capital markets. Furthermore, registered 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 final 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 less than 100%-owned by the parent company. If these subsidiaries are consolidated in the parent company’s financial statements and all other conditions of amended 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 noncontrolling interests, as well as a description of any factors associated 555 See E:\FR\FM\20APR2.SGM letter from FedEx. 20APR2 21986 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations with non-controlling interest holders that may affect payments to holders of the guaranteed security. Where all eligibility conditions of the final rule are met, we believe the Revised Alternative Disclosures will provide the information investors need to make informed investment decisions with respect to a guaranteed security. jbell on DSKJLSW7X2PROD with RULES2 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 final rule retains the requirement to provide the Alternative Disclosures, but with modifications. We address below the amendments related to the Alternative Disclosures (the Revised Alternative Disclosures). i. Financial and Non-Financial Disclosures As described in Section III.C.2.a, ‘‘Financial Disclosures,’’ the final rules should 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 Summarized Financial Information is intended to focus on the information that we believe is most likely to be material to an investment decision. Additional line items beyond what is required in the Summarized Financial Information are required to be disclosed if they are material for investors to evaluate the sufficiency of the guarantee and/or are necessary to make the financial and non-financial information presented not misleading. Additionally, the final rules require that an issuer’s or guarantor’s receivables from, payables to, and transactions with non-obligated subsidiaries and related parties be presented in separate line items. This requirement in the final rule, which is a change from the proposal, should enhance the transparency of the Summarized Financial Information and further an investor’s evaluation of the sufficiency of the guarantee. At the same time, we do not expect this requirement to impose significant costs on issuers. The final amendments should simplify the disclosures and reduce the cost of compliance, and could engender further benefits. For example, academic VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 literature finds that simplified financial statements are associated with more efficient price discovery, and that investors on average take more time to incorporate complex financial disclosures.557 More generally, we believe the final amendments will 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 final amendments have their intended effect of reducing complexity while maintaining the material completeness of financial disclosures, we anticipate that the financial disclosures that result from the final amendments will improve price discovery, enhance the allocative efficiency of markets, and facilitate capital formation. Commenters generally agreed with such arguments, asserting that providing the Summarized Financial Information instead of the Consolidating Information would reduce an issuer’s burdens 558 while continuing to provide investors with sufficient information to make informed investment decisions.559 Under the final rules, a parent company will generally be permitted to provide financial disclosures about the Obligor Group on a combined basis rather than on a disaggregated basis. As proposed, if non-financial disclosure provided in response to Rule 13–01 were applicable to one or more, but not all, issuers and/or guarantors, such as where a subsidiary’s guarantee is limited to a particular dollar amount, separate disclosure of Summarized Financial Information for the affected issuers and/or guarantors would be required, to the extent material. In a change from the proposal, the final rules will permit, in limited circumstances (i.e., where the separate financial information of the affected issuers and guarantors can be easily explained and understood), narrative disclosure in lieu of separate disclosure of the financial information of the subsidiary issuers and guarantors affected by those factors. This change to the final rule is expected to reduce the compliance burden for registrants without loss of relevant information for investors. By 557 See Haifeng You & Xiao-jun Zhang, Financial Reporting Complexity and Investor Underreaction to 10–K Information, 14 Rev. of Acct. Stud. 559 (2009); Brian P. Miller, The Effects of Reporting Complexity on Small and Large Investor Trading, 85 Acct. Rev. 2107 (2010); Alastair Lawrence, Individual Investors and Financial Disclosure, 56 J. of Acct. & Econ. 130 (2013). 558 See, e.g., letters from Ball Corp., Eaton Corp., EY, FEI, Freeport, KPMG, NYC Bar, Sullivan & Cromwell, and T-Mobile. 559 See, e.g., letters from Ball Corp., EY, FedEx, FEI, Freeport, and Sullivan & Cromwell. PO 00000 Frm 00048 Fmt 4701 Sfmt 4700 simplifying and streamlining the disclosure of financial and non-financial information, this amendment could also facilitate investors’ information processing, leading to more efficient investment decisions.560 Whereas the existing rule required issuers and guarantors to account for their investments in non-issuer and non-guarantor subsidiaries under the equity method of accounting within the Alternative Disclosures, the final rules require the complete exclusion of nonissuer and non-guarantor subsidiary financial information from the combined financial information of the Obligor Group. In this regard, investments in non-issuer and nonguarantor subsidiaries held by issuers and guarantors will be excluded from the financial information of the issuers and guarantors. The financial information depicted will be only that of the issuers and guarantors. This requirement represents a change from the proposal, which would have permitted parent companies to determine the method of exclusion. We acknowledge that a parent company may have incurred lower costs under the proposed amendments by being able to select the method of excluding nonissuer and non-guarantor subsidiary information at its choice (e.g., the parent company would likely incur lower costs if its systems were already designed to utilize a particular method). However, under the final amendments, a parent company is not required to justify that its selected method was reasonable under the circumstances as was proposed, and we expect in most circumstances that requiring exclusion of non-issuer and non-guarantor subsidiary financial information will be a less costly presentation than methods that would have required the disclosure of such financial information under the proposed amendments or than the required used of the equity method under the existing rule. By requiring the complete exclusion of non-issuer and non-guarantor subsidiary financial information, the final rule will also avoid potential confusion among issuers and investors about the appropriate method of exclusion. 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 final amendments would not adversely impact investment decisions and could offer investors more readable, streamlined financial information. To 560 See E:\FR\FM\20APR2.SGM supra note 557. 20APR2 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES2 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 final amendments may 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.561 Some commenters argued that providing this information on a combined basis would still provide investors with material information in making an investment decision 562 while also reducing a burdensome requirement for issuers.563 The final rule also will require that Summarized Financial Information be provided for the most recently ended 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 provide information that is material to an investment decision while reducing compliance costs for registrants. Some commenters, however, recommended requiring the most recent interim period only in limited circumstances, such as when there had been a material change since the most recent annual period.564 While we acknowledge the concerns about the burden to provide interim information in all cases, we note that the final amendments already significantly reduce the burdens on parent companies by eliminating the earliest two years of required Summarized Financial Information and, in filings on Form 10–Q, by eliminating both the quarter-to-date interim period requirement in filings covering more than one fiscal quarter and comparable prior year interim period(s), as applicable. Under the final amendments, investors will continue to receive the most recent interim and annual period information, and we 561 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). 562 See, e.g., letters from Dell, FedEx, and Sullivan & Cromwell. 563 See, e.g., letters from Davis Polk, KPMG, and Sullivan & Cromwell. 564 See, e.g., letters from ABA, Ball Corp., Comcast, Dell, Deloitte, EY, FedEx, FEI, and PWC. VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 continue to believe this is the most appropriate approach to reducing burdens for parent companies while providing investors with the relevant information they need to make informed investment decisions. In addition, the final rules will require non-financial disclosures to supplement the amended financial disclosures with additional information, to the extent material. This would include information about how payments to holders of guaranteed securities may be affected by such factors as the issuer and guarantor structure, the terms and conditions of the guarantees, the impact of noncontrolling ownership interests, or other facts and circumstances specific to the offering. These final 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. Finally, as with any change to reporting format and presentation of information, the final amendments may lead companies and investors to incur costs to adjust to the new disclosures. As further discussed in Sections VIII.C.1.b.ii and iii 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 are eliminating the numerical thresholds of existing Rule 3–10 that are used to determine the form and content of disclosure.565 Instead, disclosures specified in new Rule 13–01 will be required unless such information would not be material. Additionally, the final rule will 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 and non-financial information presented not misleading. While numerical thresholds may be easier to apply than a materiality standard that requires judgment, this change will allow for a more principlesbased disclosure approach that is more 565 While we are eliminating the numerical thresholds of existing Rule 3–10 used to determine the form and content of disclosure for existing issuers and guarantors and instead requiring disclosure to the extent material, the final amendments continue to use a numerical test for determining whether pre-acquisition financial information of recently acquired subsidiary issuers and guarantors is required. See discussion in Section VIII.C.1.b.iv, ‘‘Recently Acquired Subsidiary Issuers and Guarantors.’’ PO 00000 Frm 00049 Fmt 4701 Sfmt 4700 21987 tailored to the specific circumstances and the needs of investors.566 Furthermore, registrants are already well-versed in making judgements about whether disclosure is material as part of complying with other disclosure requirements. 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 currently providing the brief narrative to incur significant costs to provide the Revised Alternative Disclosures. For example, where Alternative Disclosures under the current rule 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 amendments. Proposed Rule 13–01(a)(4) would have required, if the financial disclosures specified in proposed Rule 13–01(a)(4) were omitted because they are not material, disclosure of a statement to that effect and the reasons therefore. As discussed above, we did not adopt this proposed requirement.567 In a change from the proposal, the final rule identifies four scenarios which we believe generally capture the situations under which the financial disclosures would not be material. These scenarios are intended to help address concerns 568 about the need for greater certainty as to the circumstances when the omission of financial disclosures may be appropriate while continuing to provide investors with the basic reasons as to why the financial information was omitted in a manner similar to existing Rule 3–10’s narrative exceptions. If the scenario is applicable and disclosed, the parent company could then omit the financial disclosures. We believe the greater certainty afforded to a parent company that chooses to rely on one of the identified scenarios, if applicable, will result in lower burdens in preparing the disclosure. If one of the identified scenarios does not apply, however, the parent company has the option to make its own assessment 566 A number of academic studies have explored the use of numerical 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 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 numerical threshold for lease capitalization). 567 See discussion in Section III.C.2.c.iii, ‘‘When Disclosure is Required.’’ 568 See, e.g., letter from Shearman. E:\FR\FM\20APR2.SGM 20APR2 21988 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations based upon a consideration of other relevant facts and circumstances under the general materiality provision of Rule 13–01(a). Allowing the parent company to omit information that is not material will lower the costs of disclosure relative to existing requirements and may help focus investor attention on decisionrelevant information. This could also increase the risk that a parent company would omit, potentially inadvertently, value-relevant information, and that investors may make suboptimal investment decisions. Such risk will be mitigated, however, by the requirement to disclose any financial and narrative information about each guarantor if it would be material for investors to evaluate the sufficiency of the guarantee and sufficient information to make the financial and non-financial information presented not misleading. Also, omitting material information 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.569 However, there is also evidence of investor benefits from rules-based reporting standards.570 While the final amendments could result in reduced comparability across registrants and transactions, investors could benefit from disclosures that are more tailored to the material facts and circumstances through registrants’ application of a principles-based standard. jbell on DSKJLSW7X2PROD with RULES2 iii. Location of Alternative Disclosures and Audit Requirement The final amendments will allow the parent company the choice of whether to provide the Revised Alternative Disclosures in its consolidated financial statement footnotes or, alternatively, in MD&A. If not otherwise included in the consolidated financial statements or MD&A, the disclosures must be provided in other specified prominent 569 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 numerical thresholds can deviate from investor preferences). 570 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. VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 locations. Under the proposed amendments, this flexibility of where to locate the disclosures would only be available in the 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 required to be filed during the fiscal year in which the first bona fide sale of the subject securities is completed. Under the final amendments, consistent with the recommendation of a number of commenters,571 the parent company will have flexibility to locate the disclosures in a footnote to its consolidated financial statements or in the locations specified in Rule 13–01(b) in all of its filings. If the parent company were to provide the Revised Alternative Disclosures in its consolidated financial statements, 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. In contrast, if the parent company were to provide the Revised Alternative Disclosures outside its financial statements, lower compliance costs would likely result with respect to these filings. Consistent with this, some commenters argued that not requiring the disclosures to be audited will reduce costs.572 While we generally expect lower compliance costs for parent companies that provide the Revised Alternative Disclosures outside of their consolidated financial statements, these parent companies may incur other costs, such as due diligence activities (e.g., comfort letters).573 Additionally, this optionality may reduce the potential for delay in offerings that exists under the current rule due to the requirement to have the Alternative Disclosures audited. Parent companies using this 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. Several commenters agreed with our assessment that such an option would allow issuers to register guaranteed debt securities and access capital markets faster.574 Although these disclosures are supplemental in nature, investors may nevertheless perceive them to be less reliable if a parent company provides these disclosures outside its financial statements as they would not benefit from an audit or interim review conducted by the auditor. Some commenters asserted that the flexibility to determine the location of the Proposed Alternative Disclosures under the proposed amendments could lead to investor confusion about the location of the disclosures,575 and uncertainty as to the level of audit assurance that is applied to the disclosures.576 One commenter did not support locating the Proposed Alternative Disclosures outside the financial statements,577 and another suggested either requiring the Proposed Alternative Disclosures be audited or limiting unaudited disclosures to underwritten offerings.578 One of these commenters indicated that many investors place significant value on having required disclosures subject to annual audit and/or interim review, internal control over financial reporting, and XBRL tagging requirements, and not subject to the forward-looking statements safe harbor.579 To the extent that investors prefer the Revised Alternative 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. Additionally, the amount of information that investors receive in the registration statement and in certain Exchange Act periodic reports 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 Revised Alternative Disclosures outside its consolidated financial statements may be more likely to voluntarily supplement those required disclosures with forwardlooking information, as compared to a parent company that provides the Revised Alternative Disclosures in its 571 See, e.g., letters from ABA, Cravath, Davis Polk, Dell, SIFMA, Simpson Thacher and Sullivan & Cromwell. 572 See, e.g., letters from ABA, Ball Corp., Cravath, Davis Polk, Dell, Freeport, SIFMA, Simpson Thacher, Sullivan & Cromwell, and WTW. 573 See, e.g., letters from BDO, EY, Grant Thornton, KPMG, and Windstream. 574 See, e.g., letters from ABA, BDO, Cravath, Davis Polk, Dell, and Simpson Thacher. Cf. letter from BDO. See also note 269. 575 See letters from Deloitte, FedEx, and PWC. 576 See letters from Deloitte and KPMG. 577 See letter from CII. 578 See letter from BDO. 579 See letter from CII. PO 00000 Frm 00050 Fmt 4701 Sfmt 4700 E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES2 consolidated financial statements. Such supplemental forward-looking information, if provided, could benefit investors. The location 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.580 If a parent company provides the Revised Alternative Disclosures in its financial statements, consistent with the existing rule, such disclosures would be subject to XBRL tagging 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 additional costs to comply with these tagging requirements. In contrast, Revised 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 Revised Alternative Disclosures in XBRL, and hence the incremental cost savings of not having to tag the Revised Alternative Disclosures likely would be relatively low, as issuers already would have software or processes in place for tagging financial statement information. One commenter argued that the cost of XBRL formatting should be minimal.581 580 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). 581 See letter from XBRL. VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 iv. Recently Acquired Subsidiary Issuers and Guarantors The final rule eliminates the requirement to provide pre-acquisition audited financial statements of a recently acquired subsidiary issuer or guarantor. 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. 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 require issuers to provide audited financial statements of a recently acquired subsidiary that is small relative to its consolidated parent company, which would increase issuers’ compliance burdens. The proposed rule would have required parent companies to provide information about recently acquired subsidiary issuers and guarantors only if material to an investment decision in the guaranteed security. The final rule contains a different test for determining whether disclosures about recently acquired subsidiary issuers and guarantors must be provided. More specifically, the final rule requires, in certain circumstances,582 preacquisition Summarized Financial Information for significant recently acquired subsidiary issuers and guarantors to be provided in a Securities Act registration statement filed in connection with the offer and sale of the subject guaranteed security. Whereas separate financial statements are required for significant recently acquired subsidiary issuers and guarantors under existing Rule 3–10(g), the final rule requires Summarized Financial Information for significant recently acquired subsidiary issuers and guarantors, which is substantially less burdensome and costly for issuers to prepare and consistent with what is required for existing issuers and guarantors under the final amendments. We believe Summarized Financial Information required by the final rule for recently acquired subsidiary issuers and guarantors will provide investors with material information with which to make an informed investment decision while reducing costs for issuers. Consistent with existing Rule 3–10(g), the final amendments specify a 582 See description of the circumstances when pre-acquisition summarized financial information is required in Section III.C.2.e.iii, ‘‘Recently Acquired Subsidiary Issuers and Guarantors.’’ PO 00000 Frm 00051 Fmt 4701 Sfmt 4700 21989 numerical threshold-based significance test for determining whether preacquisition financial information for recently acquired subsidiary issuers and guarantors is required, albeit a different significance test than existing Rule 3– 10(g), and the information continues to be required only in Securities Act registration statements. The continued use of a numerical threshold for preacquisition financial information is in contrast to the amendments to existing Rule 3–10 to determine the form and content of disclosures related to existing issuers and guarantors.583 Unlike disclosure that relates to existing issuers and guarantors, which will be prepared by the parent company on an ongoing basis, and where materiality will therefore be evaluated regularly, in an acquisition context parent companies must rely on information provided by third parties to make a determination of whether the acquisition is significant and whether the related disclosure is material. In these circumstances, a numerical threshold will provide parent companies with a level of certainty that allows them to efficiently make determinations of what level of disclosure is required in an environment where delay of the debt securities offering can be costly. In addition, absent a specific numerical threshold requirement, if the parent company determines not to provide disclosure, investors would not receive information about the recently acquired subsidiary issuer’s or guarantor’s financial impact on the Obligor Group until the operating results of that acquired issuer or guarantor have been subsequently reflected in the Summarized Financial Information of the Obligor Group. As a result, the impact of the acquisition may be difficult for investors to discern from other events affecting the Obligor Group, even where the acquisition may be economically significant. Thus, we expect a numerical threshold requirement in the case of these disclosures to be less costly for parent companies and result in more consistent disclosure for investors where transactions are of economic significance. Overall, we believe replacing the existing pre-acquisition financial statement requirement with preacquisition Summarized Financial Information in certain circumstances will reduce the compliance burden for preparers without reducing material information for investors. Furthermore, investors may find the information 583 See discussion in Section VII. C.1.b.ii, ‘‘When Disclosure is Required.’’ E:\FR\FM\20APR2.SGM 20APR2 21990 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations provided under the existing preacquisition financial statement requirement redundant, as it overlaps with Rule 3–05 of Regulation S–X. Consequently, eliminating the existing requirement would streamline disclosures. Academic research suggests that individuals invest more in firms with more concise financial disclosures.584 Thus, to the extent that the final 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. jbell on DSKJLSW7X2PROD with RULES2 v. Continuous Reporting Obligation As discussed in Section III.C.2.f, ‘‘Continuous Reporting Obligation,’’ the final rules permit a parent company to cease providing the Revised Alternative Disclosures in its ongoing reporting if the corresponding subsidiary issuers’ and guarantors’ reporting obligations under Section 13 and/or Section 15(d) of the Exchange Act with respect to the guaranteed securities are terminated or suspended. This amendment will 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 Revised Alternative Disclosures beyond when the subsidiary would otherwise have to report under the Exchange Act with respect to the guaranteed securities, or otherwise deter issuers and guarantors from engaging in public debt offerings to avoid such reporting obligations, this amendment will address such issues. Many commenters supported eliminating the existing Rule 3–10 requirement to provide continuous reporting for as long as the guaranteed securities are outstanding if they use the Alternative Disclosures.585 One commenter stated that the existing rule’s continuous reporting requirement ‘‘is highly anomalous and frequently results in an expensive ongoing disclosure cost with no discernable benefit to investors following business combination transactions.’’ 586 Some commenters suggested that eliminating these requirements would reduce burdens on issuers.587 In contrast, two commenters opposed eliminating existing Rule 3– 10’s continuous reporting requirement 584 See Lawrence, note 557 above. e.g., letters from Cravath, Davis Polk, FedEx, Freeport, Nareit, PWC, and Sullivan & Cromwell. 586 See letter from Cravath. 587 See, e.g., letters from Cravath, Freeport, Nareit, and Sullivan & Cromwell. 585 See, VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 and stressed that the Commission should retain the requirement.588 These commenters asserted that the Proposed Alternative Disclosures are important to investors, and recommended the Commission require continuous reporting for as long as the securities are outstanding.589 These commenters also argued that investors accept less compensation for securities whose issuers provide financial reporting because it reduces the risks of investing in those securities, so issuers should not be able to pay less interest while being permitted to stop financial reporting. We note that any potential adverse effects from eliminating continuous reporting may be mitigated by the fact that, as one commenter indicated, it has become commonplace for issuers to tailor contractual reporting obligations to meet the perceived needs of investors.590 2. Amendments to Rule 3–16 and Partial Relocation to Rule 13–02 As discussed in detail in Section V.B, ‘‘Overview of the Amendments,’’ 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. The final rule will 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 as a supplement to the consolidated financial statements of the registrant that issues the collateralized security.591 Debt agreements are often structured to avoid the requirements of Rule 3–16 by either structuring the debt agreement to release pledges 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. 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 final amendments will reduce the burden of having to provide separate 588 See letters from CII and Credit Roundtable. letters from CII and Credit Roundtable. 590 See letter from Cravath. 591 As a transitional matter, the final amendments do not eliminate existing Rule 3–16, which will continue to be applicable to registered collateralized securities with collateral release provisions issued and outstanding as of the effective date of the final amendments. See Section VI.B ‘‘Rule 3–16 Collateral Release Provisions.’’ 589 See PO 00000 Frm 00052 Fmt 4701 Sfmt 4700 financial statements of affiliates in comparison to the requirements under the existing rule and thereby provide issuers with the flexibility to structure their debt agreements with pledges of affiliate securities. If, as a result of the final amendments, debt agreements are no longer structured to avoid disclosure requirements about affiliates whose securities are pledged as collateral, investors would obtain the benefit of the collateral as well as the related disclosures, which would be subject to Section 11 liability. This flexibility may also permit issuers 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. Commenters generally supported the amendments to Rule 3– 16. Several commenters asserted the proposed amendments to Rule 3–16 would benefit investors, who would receive information critical to making informed decisions in a simpler format, as well as registrants by reducing offering costs.592 Finally, as with any change to reporting format and presentation of information, the amendments may lead companies and investors to incur costs to adjust to the new disclosures, as further discussed in Sections VIII.C.2.a through c 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,593 and their financial information is thus already reflected in the registrant’s consolidated financial statements. The final amendments require Summarized Financial Information for each such affiliate and disclosure of additional financial information about each affiliate if material for investors to evaluate the 592 See, e.g., letters from Davis Polk, EY, and FEI. the rare circumstances where the affiliate is not a consolidated subsidiary of the registrant, Rule 13–02(a)(6) requires the registrant to provide ‘‘[a]ny financial and narrative information about each such affiliate if the information would be material for investors to evaluate the pledge of the affiliate’s securities as collateral’’ and Rule 13–02(a)(7) requires ‘‘[s]ufficient information so as to make the financial and non-financial information presented not misleading.’’ In this regard, separate financial statements of the unconsolidated affiliate may be necessary to comply with these requirements. See additional discussion in Section V.C.1, ‘‘Level of Detail.’’ 593 In E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations pledge of the affiliate’s securities as collateral and/or necessary to make the financial and non-financial information presented not misleading. For registrants, this will reduce compliance costs by reducing the amount of information they need to prepare and disclose.594 For investors, we do not anticipate significant costs since material information will still be required to be provided. The simplified disclosures will highlight material information needed to make informed investment decisions and therefore should enable investors to process information more efficiently and make more informed investment decisions. Several commenters asserted that the proposed amendment would reduce a registrant’s costs and burdens 595 while still providing investors with clear and sufficient information.596 ii. Presentation on a Combined Basis The final rules will permit a registrant to provide the Summarized Financial Information of consolidated affiliates that are pledged as collateral on a combined rather than individual basis. However, if non-financial disclosure provided in response to Rule 13–02 were applicable to one or more, but not all, affiliates, separate disclosure of Summarized Financial Information for the affected affiliates would be required, to the extent material. The final rules will permit, in limited circumstances (i.e., where the separate financial information of the affected affiliates can be easily explained and understood), narrative disclosure in lieu of separate disclosure of the financial information of the affiliates affected by those factors. Although this narrative would be allowed in limited circumstances, separate columnar financial information for affected affiliates would generally be expected. As with the effects of the final amendments to Rules 3–10 and 13–01 discussed above,597 we believe the simplified disclosures in the final amendments to Rules 3–16 and 13–02 will both lower compliance costs for issuers and provide investors with more streamlined and concise disclosures that will promote more efficient decisionmaking by investors. We do not anticipate significant costs to investors jbell on DSKJLSW7X2PROD with RULES2 594 For purposes of the PRA, we estimate that the final amendments to Rule 3–16 will result in an overall reduction of 30 burden hours for each form (other than Form 10–Q) affected by the final amendments. See Section VIII.B.2, ‘‘Rule 3–16,’’ below. 595 See, e.g., letters from Davis Polk EY, FEI, and PWC. 596 See letters from EY and FEI. 597 See discussion in Section VII.C.1.b.i, ‘‘Financial and Non-Financial Disclosures.’’ VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 since material information will still be required to be provided. iii. Periods to Present Under the existing rule, the periods required in Rule 3–16 Financial Statements are those required by Rules 3–01 and 3–02 of Regulation S–X, or, for smaller reporting companies, the periods required by Rule 8–02 of Regulation S–X. The final amendments will 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, consistent with the proposed amendments to Rule 3–10 above. Rule 3–16 financial statements are not currently required in quarterly reports, and as such, registrants will incur costs to provide this additional interim disclosure.598 While we acknowledge the concerns about the burden to provide interim information in all cases, consistent with our analysis of the economic effect of the corresponding requirement in the final amendments to Rules 3–10 and 13–01 above, we believe the adopted approach will significantly reduce burdens on issuers while providing investors with the relevant information they need to make informed investment decisions.599 b. Non-Financial Disclosures The final rules will require nonfinancial information about affiliates whose securities are pledged as collateral and the collateral arrangements. We do not believe this amendment will impose undue costs for issuers, as the majority of the information required to be disclosed under the final amendments should be readily available or attainable.600 We believe the amendments will benefit investors by supplementing the required financial disclosures with additional, material information, thereby rendering the combined financial and nonfinancial disclosures more informative for investment decisions. Commenters generally supported the proposed rules’ requirement to provide certain non-financial disclosures, to the extent material, about the securities 598 For purposes of the PRA, we estimate that the amendments to Rule 3–16 will result in an increase of 70 burden hours per Form 10–Q filing. See Section VIII.B.2, ‘‘Rule 3–16,’’ below. 599 See discussion in Section VII.C.1.b.i, ‘‘Financial and Non-Financial Disclosures.’’ 600 The content of the amended 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, will impose a significant burden on a registrant to prepare. PO 00000 Frm 00053 Fmt 4701 Sfmt 4700 21991 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.601 Consistent with our analysis of the potential impact on investors, one commenter explicitly stated that such disclosure would be helpful to investors.602 c. When Disclosure Is Required Rather than utilizing existing numerical thresholds, disclosure of the specified financial and non-financial disclosures will be required unless the information is not material. Additionally, the final rule will require disclosure of any financial and narrative information about each affiliate if it would be material for investors to evaluate the pledge of the affiliate’s securities as collateral, and disclosure of sufficient information to make the financial and non-financial information presented not misleading. A number of commenters stated explicitly that they supported replacing existing Rule 3– 16’s numerical threshold requirement with a principles-based materiality standard.603 One commenter noted that, by focusing on materiality, proposed Rule 13–02 would require registrants to undertake the expense of providing the required disclosures only when doing so would be helpful to investors.604 Another commenter contended that the existing substantial portion numerical threshold requirement could cause registrants to provide information that is not material or possibly not require financial statements even if such affiliates are material to the registrant’s business.605 To the extent the numerical thresholds under the existing rule result in disclosure of information that is not material, investors may benefit from reduced search costs and the facilitation of more efficient information processing.606 Further, we believe that, compared to the existing rule, final Rule 13–02 will reduce compliance costs for issuers and increase the likelihood that offerings will be registered because 601 See, e.g., letters from Davis Polk, FEI, and NYC Bar. 602 See letter from Davis Polk. e.g., letters from CII, Cravath, Davis Polk, Deloitte, EY, and FEI. 604 See letter from Davis Polk. 605 See letter from Dell. 606 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. 603 See, E:\FR\FM\20APR2.SGM 20APR2 21992 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES2 issuers will only be required to provide disclosure to the extent material. At the same time, compared to numerical thresholds, having a principles-based disclosure approach may create more uncertainty for issuers as it requires more judgement. However, we expect any additional uncertainty would be justified by the ability to provide disclosures more tailored to the specific circumstances and the needs of investors, and we note that registrants are already well-versed in making judgements about whether disclosure is material as part of complying with other disclosure requirements. Proposed Rule 13–02(a)(4) would have required, if the financial disclosures specified in proposed Rule 13–02(a)(4) were omitted because they were not material, disclosure of a statement to that effect and the reasons therefor. As discussed above, we did not adopt this proposed requirement.607 Similar to the final amendments to Rules 3–10 and 13–01, in a change from the proposal, the final rule identifies two scenarios which we believe generally capture the situations under which the financial disclosures would not be material. These scenarios were intended to help address concerns 608 about the need for greater certainty as to the circumstances when the omission of financial disclosures may be appropriate while continuing to provide investors with the basic reasons as to why the financial information was omitted. If the scenario is applicable and disclosed, the parent company could then omit the financial disclosures. We believe the greater certainty afforded to a registrant that chooses to rely on one of the identified scenarios, if applicable, will result in lower burdens in preparing the disclosure. If one of the identified scenarios does not apply, however, the registrant has the option to make its own assessment based upon a consideration of other relevant facts and circumstances under the general materiality provision of Rule 13–02(a). d. Location of Disclosures and Audit Requirement As discussed above for the final amendments to Rule 3–10, new Rule 13–02 will allow registrants the choice of whether to provide the amended disclosures in its consolidated financial statement footnotes or, alternatively, in MD&A. If not otherwise included in the consolidated financial statements or MD&A, the disclosures must be provided in other specified prominent 607 See discussion in Section V.E.3, ‘‘When Disclosure is Required.’’ 608 See, e.g., letter from Shearman. VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 locations. Under the proposed amendments, this flexibility of where to locate the disclosures would only be available in the 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 required to be filed during the fiscal year in which the first bona fide sale of the subject securities is completed. Under the final amendments, registrants will have flexibility to locate the disclosures in a footnote to the consolidated financial statements or in the locations specified in Rule 13–02(b) in all of its filings. Our analysis of this amendment is generally consistent with our analysis of the economic effect of the corresponding requirement in the final amendments to Rule 13–01 above. If a registrant provides the amended disclosures in its consolidated financial statements, the disclosures will be subject to annual audit, interim review, internal control over financial reporting, and XBRL tagging requirements. Investors may perceive this choice of placement to indicate that the disclosures are more reliable. 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 disclosures in their financial statements. In contrast, if a registrant provides the disclosures outside its financial statements, lower compliance costs would likely result with respect to these filings, and the registrant may be able to register guaranteed debt offerings more quickly than under the existing rule and thereby more promptly access favorable market conditions. However, registrants may incur other costs, such as due diligence activities. Although these disclosures are supplemental in nature, investors may nevertheless perceive them to be less reliable if a registrant provides these disclosures outside its financial statements as they would not benefit from an audit or interim review conducted by the auditor. To the extent that investors prefer the disclosures to be included in the registrant’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. PO 00000 Frm 00054 Fmt 4701 Sfmt 4700 e. Recently Acquired Affiliates Whose Securities Are Pledged as Collateral The proposed rule would have required registrants to provide information about recently acquired subsidiary affiliates only if material to an investment decision in the collateralized security. The final rule contains a different test for determining whether disclosures about recently acquired affiliates must be provided. More specifically, the final rule requires, in certain circumstances,609 pre-acquisition Summarized Financial Information for recently acquired affiliates to be provided in a Securities Act registration statement filed in connection with the offer and sale of the subject collateralized security. Existing Rule 3–16 does not contain a specific requirement to provide pre-acquisition financial information of recently acquired affiliates whose securities are pledged as collateral. However, if a recently acquired affiliate meets the substantial portion threshold in the existing rule, financial statements for periods prior to the date of acquisition by the registrant are required to be filed. Generally consistent with the effects of the corresponding final amendments to Rule 3–10 discussed above, we believe requiring pre-acquisition Summarized Financial Information of affiliates whose securities are pledged as collateral in certain circumstances will provide material information for investors without imposing significant burdens on issuers.610 D. Anticipated Effects on Efficiency, Competition, and Capital Formation As discussed above, and as a general matter, we believe the final amendments will 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 final 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. To the extent that the final amendments ease registration burdens for issuers, there could be an increase in the number of registered offerings. If such issuers would not have otherwise 609 See description of the circumstances when pre-acquisition summarized financial information is required in Section V.G.3, ‘‘Recently Acquired Affiliates Whose Securities are Pledged as Collateral.’’ 610 See discussion in Section VII.C.1.b.iv, ‘‘Recently Acquired Subsidiary Issuers and Guarantors.’’ E:\FR\FM\20APR2.SGM 20APR2 jbell on DSKJLSW7X2PROD with RULES2 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations issued debt securities, 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. Since the final rule amendments may increase the number of registered debt offerings as discussed above, the investment opportunities available for different types of investors may be broadened and may allow for more efficient matching of investors with assets that meet their investment objectives and preferences. To the extent that the final amendments to the eligibility conditions that must be met to omit the separate financial statements of subsidiary issuers and guarantors of guaranteed debt securities encourage additional registered guaranteed debt offerings, more investment opportunities would be made available, and a resulting increase in market participation could improve the overall competitiveness and efficiency of the capital markets. 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 final amendments provide investors with streamlined and easier to understand financial information while maintaining the material completeness of the financial disclosures, we expect that the financial disclosures that result from the final amendments would improve price discovery, enhance the allocative efficiency of markets, and facilitate capital formation. Rather than only 100%-owned subsidiaries of the parent company, the final amendments permit subsidiary issuers or guarantors that are consolidated in the parent company’s financial statements to omit separate subsidiary issuer and guarantor financial statements, if the other criteria in amended Rule 3–10 are satisfied. To the extent that the final amendments expand the scope of subsidiary issuers and guarantors that meet Rule 3–10 eligibility requirements, the final 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. VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 As describe above,611 many outstanding registered debt securities have a collateral release provision, which automatically reduces the pledged collateral if it would trigger existing Rule 3–16’s requirement for a registrant to file 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 proposed amendments could possibly have affected senior lenders and unsecured lenders indirectly as these collateral release provisions may no longer be operable and the collateral available to lenders may be modified, potentially causing unintended credit consequences. As a transitional matter, the final amendments do not eliminate existing Rule 3–16, which will continue to be applicable to registered collateralized securities with collateral release provisions issued and outstanding as of the effective date of the final amendments.612 Subsequent to the transition period, new issuances of registered securities collateralized by affiliate securities must comply with new Rule 13–02, and provide certain financial and non-financial disclosures of that affiliate in all cases, to the extent material. If, as a result of the final amendments, issuers no longer include collateral release provisions in their indentures, the pledged collateral would be maintained, which would lead to improved investment options for investors and thus increased market efficiency. E. Consideration of Reasonable Alternatives We discuss below potential alternatives to the final amendments to existing Rules 3–10 and 3–16. 1. Alternative to Final Amendments to Existing Rule 3–10 An alternative to the final amendments to Rule 3–10 would have been to permit the Revised Alternative Disclosures to 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.613 Using ‘‘wholly owned’’ as the parent company ownership threshold, rather than the 611 See Section VI.B ‘‘Rule 3–16 Collateral Release Provisions.’’ 612 See id. 613 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.)). PO 00000 Frm 00055 Fmt 4701 Sfmt 4700 21993 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 final amendments, as detailed above. As a result, we believe the final amendments better serve to enhance efficiency, competition and capital formation, while still maintaining appropriate investor protections. Many commenters supported the revision to existing Rule 3–10’s condition that a subsidiary issuer or guarantor be 100% owned by the parent company to one in which the subsidiary issuer or guarantor be consolidated in the parent company’s financial statements.614 2. Alternatives Common to Final Amendments to Existing Rule 3–10 and Existing Rule 3–16 One alternative to each set of final amendments would have been to require that the Revised Alternative Disclosures, or the disclosures specified in final 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 disclosures outside its consolidated financial statements. 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 permitted to be 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 final 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 costs associated with including the 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 forwardlooking information under PSLRA is not 614 See, e.g., letters from Comcast, Cravath, Davis Polk, EEI/AGA, FedEx, FEI, Nareit, NYC Bar, and Sullivan & Cromwell. E:\FR\FM\20APR2.SGM 20APR2 jbell on DSKJLSW7X2PROD with RULES2 21994 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations available for disclosures provided in the financial statements. As discussed above,615 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 statement footnotes of the parent company, or registrant, as applicable. While providing additional flexibility to the parent company or registrant in the location of the disclosures will likely further reduce the compliance burdens associated with registered offerings with guarantees or collateral, we acknowledge that investors may demand a higher expected return if they perceive reduced reliability of the Revised Alternative Disclosure. The potential for higher borrowing costs may encourage issuers to voluntarily include the Revised Alternative Disclosures in the financial statements of the parent company, or registrant, as applicable. Finally, another alternative relevant to each set of final amendments would have been to require the Summarized Financial Information specified in final Rules 13–01 and 13–02 to be provided for the same periods as the parent company or registrant, as applicable, instead of the most recent annual and interim period. While this alternative would increase the amount of information available to investors in the specific filing, the additional information may not be material in making informed investment decisions. As discussed above,616 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. Related to the above alternative, some commenters recommended not requiring the most recent interim period disclosures or requiring them only in limited circumstances, such as when there had been a material change since 615 See Section VII.C.1, ‘‘Amendments to Rule 3– 10 and Partial Relocation to Rule 13–01.’’ 616 See note 557 and accompanying text. VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 the most recent annual period.617 As discussed in Section VIII.C.1.b.i. with respect to new Rule 13–01, we acknowledge that parent companies will continue to incur compliance costs to include the most recent interim period disclosure under the final amendments. However, we believe that the most recent interim period disclosures provide timely and relevant information for investors to make informed investment decisions. Moreover, in comparison to the existing rules, the final amendments already significantly reduce the burdens on parent companies by eliminating, in filings on Form 10–Q, both the quarter-to-date interim period requirement in filings covering more than one fiscal quarter and the comparable prior year interim period(s), as applicable. These observations related to new Rule 13–01 also extend to new Rule 13–02. Overall, we believe that the benefit of providing the most recent interim period disclosures under the final amendments justifies the compliance costs to registrants. IX. Paperwork Reduction Act A. Background Certain provisions of our rules, schedules, and forms that would be affected by the rule amendments contain ‘‘collection of information’’ requirements within the meaning of the Paperwork Reduction Act of 1995 (‘‘PRA’’).618 We published a notice requesting comment on revisions to these collections of information requirements in the Proposing Release and have submitted these requirements to the Office of Management and Budget (‘‘OMB’’) for review in accordance with the PRA.619 The hours and costs associated with preparing, filing, and sending the schedules and forms 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 comply with, a collection of information 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 collections of information are: • Regulation S–X (OMB Control No. 3235–0009); 617 See note 564 and accompanying text. U.S.C. 3501 et seq. 619 44 U.S.C. 3507(d) and 5 CFR 1320.11. 618 44 PO 00000 Frm 00056 Fmt 4701 Sfmt 4700 • Regulation S–K (OMB Control No. 3235–0071); 620 • Form S–1 (OMB Control No. 3235– 0065); • Form S–4 (OMB Control No. 3235– 0324); • Form S–3 (OMB Control No. 3235– 0073); • Form S–11 (OBM Control No. 3235– 0067); • Form F–1 (OMB Control No. 3235– 0258); • Form F–3 (OMB Control No. 3235– 0256); • Form F–4 (OMB Control No. 3235– 0325); • Form 20–F (OMB Control No. 3235– 0288); • Form 10–K (OMB Control No. 3235–0063); • Form 10–Q (OMB Control No. 3235–0070); • Form SF–1 (OMB Control No. 3235–0707); • Form SF–3 (OMB Control No. 3235–0690); • Form 1–A (OMB Control No. 3235– 0286); • Form 1–K (OMB Control No. 3235– 0720); and • Form 1–SA (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. As described in more detail above, we are amending 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 amending both rules and relocating parts of the disclosure requirements of Rule 3–10 and Rule 3– 16 to new Rules 13–01 and 13–02. We also are making conforming amendments to Items 504, 1100, 1112, 1114, and 1115 of Regulation S–K; Forms F–1, F–3, 1–A, 1–K, 1–SA, and Rule 257(b) 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 material given the specific facts and circumstances, 620 The paperwork burdens for Regulation S–K and Regulation S–X are imposed through the forms, schedules and reports that are subject to the requirements in these regulations and are reflected in the analysis of those documents. E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations make the disclosures easier to understand, and reduce the costs and burdens to registrants. C. Summary of the Impact on Collections of Information B. Summary of Comment Letters In the Proposing Release, the Commission requested comment on the PRA burden hour and cost estimates and the analysis used to derive such estimates. We did not receive any comments that directly addressed the PRA analysis of the proposed amendments. Several commenters, however, did provide responses to certain requests for comment that have informed some of our PRA estimates. In this regard, several commenters indicated that the costs and burdens of providing the disclosures under the proposed amendments would be lower than the compliance burdens under the current disclosure requirements and could potentially result in an increase in the number of registered debt offerings.621 As discussed in more detail in the Proposing Release,622 we derived the burden hour estimates by estimating change in paperwork burden as a result of the amendments, both in terms of the change to the paperwork burden for current responses as well as the change in the number of responses. For purposes of the PRA, we estimate that the current disclosure burdens under Rules 3–10 and 3–16 require an average of 100 burden hours to prepare and process, and that the amendments would reduce these burdens by 30 hours. Correspondingly, we estimate that the disclosure burdens under the amendments will require 70 hours to prepare and process. We estimated the number of responses by conducting separate database searches of filings containing XBRL tags most commonly associated with Consolidating 21995 Information and terms associated with the Alternative Disclosures during the calendar years of 2016 through 2018. As discussed in Sections III through V, we have made some changes to the proposed amendments as a result of comments received. While certain of these changes could further reduce burdens on registrants, others may incrementally increase those burdens relative to the proposals. Considered together, we do not expect these changes to appreciably impact our assessment of the compliance burdens of the final rule amendments for purposes of the PRA. Accordingly, we have not revised the estimates from the Proposing Release of the impact on the per hour burden for the affected forms. PRA Table 1 summarizes the estimated impact of the final amendments on the paperwork burdens associated with the affected forms listed above. PRA TABLE 1—ESTIMATED PAPERWORK BURDEN EFFECTS OF THE FINAL AMENDMENTS Final amendments and effects Affected forms Estimated net effect Rule 3–10 and New Rule 13–01 of Regulation S–X: • Replaces the Consolidating Information required by current Rule 3–10 with Summarized Financial Information for each issuer and guarantor and in certain circumstances additional summarized disclosure of intercompany and related-party transactions. • Forms S–1, S–3, S–4, S–11, F– 1, F–3, F–4, SF–1, SF–3, 20–F, 10–K, 10–Q, 1–A, 1–K, and 1– SA. • 30 hour net decrease in compliance burden per each existing filing containing current Rule 3– 10 disclosures. • Small increase in the number of Form S–1, Form S– 3, Form S–4, Form S–11, Form F–1, Form F–4, and Form 20–F filings. • Forms S–1, S–3, S–4, S–11, F– 1, F–3, F–4, SF–1, SF–3, 20–F, 10–K, 10–Q, 1–A, 1–K, and 1– SA. • 30 hour net decrease in compliance burden per each existing filing containing current Rule 3– 16 disclosures. • Small increase in the number of Form S–1, Form S– 3, Form S–4, Form S–11, Form F–1, Form F–4, Form 20–F, Form 10–K, Form 10–Q, and Form 1–A filings. • Allows supplemental financial and non-financial disclosure about subsidiary issuers and/or guarantors to be disclosed outside of the parent company’s financial statements;. • Eliminates current requirement to provide pre-acquisition financial statements of recently acquired subsidiary issuers and guarantors, but requires, in certain instances, pre-acquisition Summarized Financial Information about significant recently acquired subsidiary issuers and guarantors. Rule 3–16 and New Rule 13–02 of Regulation S–X: • Replaces current Rule 3–16’s requirement to provide separate financial statements for each affiliate whose securities are pledged as collateral with a requirement that the registrant provide Summarized Financial Information and non-financial disclosures about the affiliate(s) and the collateral arrangement as a supplement to the registrant’s consolidated financial statements, including disclosure of intercompany and related-party transactions. jbell on DSKJLSW7X2PROD with RULES2 • Permits the Summarized Financial Information and non-financial disclosures to be presented outside of the registrant’s financial statements;. • Requires, in certain instances, pre-acquisition Summarized Financial Information about significant recently acquired affiliates. 621 See letters from Ball Corp., Davis Polk, EY, and FEI. Cf. letter from NYC Bar (indicating that the proposed amendments would reduce the burdens VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 for registering offerings but may not result in a significant increase in such offerings because of the general trend toward private offerings). PO 00000 Frm 00057 Fmt 4701 Sfmt 4700 622 See E:\FR\FM\20APR2.SGM Section VIII of the Proposing Release. 20APR2 21996 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations D. Burden and Cost Estimates to the Amendments Below we estimate the incremental change in paperwork burdens as a result of the final amendments. 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 size and 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 the disclosures required under the proposed amendments. For purposes of the PRA, the burden is allocated between internal burden hours and outside professional costs. The table below sets forth the percentage estimates the Commission typically uses for the burden allocation for each affected form. We also estimate that the average cost of retaining an outside professional is $400 per hour.623 PRA TABLE 2—STANDARD ESTIMATED BURDEN ALLOCATION FOR SPECIFIED FORMS AND SCHEDULES Forms S–1, S–3, S–4, S–11, F–1, F–3, F–4, 20–F, SF–1, and SF–3 ................................................................... Forms 10–K, 10–Q, 1–A, and ................................................................................................................................. 1–K ........................................................................................................................................................................... Form 1–SA ............................................................................................................................................................... PRA Table 3 illustrates the estimated incremental reduction to the annual compliance burdens for the affected Outside professionals (%) Internal (%) Form/Schedule type 25 75 75 85 25 15 forms, in hours and in costs, as a result of the final amendments. PRA TABLE 3—CALCULATION OF THE REDUCTION IN BURDEN ESTIMATES TO EXISTING AFFECTED RESPONSES THAT INCLUDE DISCLOSURES UNDER CURRENT RULES 3–10 AND 3–16 Form Estimated number of affected responses Estimated incremental burden hours/ form Total incremental burden hours Estimated internal burden hours Estimated outside professional hours Estimated outside professional costs/affected responses (A) * (B) (C) = (A) × (B) (D) = (C) × (allocation %) (E) = (C) × (allocation %) (F) = (E) × $400 10–K ..................................................... 10–Q .................................................... S–1 ....................................................... 20–F ..................................................... S–4 ....................................................... S–11 ..................................................... F–1 ....................................................... F–4 ....................................................... 1–A ....................................................... 1–K ....................................................... 1–SA .................................................... SF–1 ..................................................... SF–3 ..................................................... 481 1,252 10 15 100 5 5 7 0 0 0 0 0 (30) (30) (30) (30) (30) (30) (30) (30) (14,430) (37,560) (300) (450) (3,000) (150) (150) (210) (10,822.5) (28,170) (75) (112.5) (750) (37.5) (37.5) (52.5) (3,607.5) (9,390) (225) (337.5) (2,250) (112.5) (112.5) (157.5) ($1,443,000) (3,756,000) (90,000) (135,000) (900,000) (45,000) (45,000) (63,000) Totals ............................................ ........................ ........................ ........................ (40,057.5) ........................ (6,346,845) jbell on DSKJLSW7X2PROD with RULES2 * The number of estimated affected responses is an estimate of the average number of filings that included Consolidating Information under Rule 3–10, Alternative Disclosures or Rule 3–16 financial statements over the 2016–2018 calendar years. PRA Table 4 below illustrates the estimated increase in the number of filings and the related total annual compliance burdens of the affected forms, in hours and in costs, as a result of the final amendments. 623 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 entities that regularly assist registrants in preparing and filing documents with the Commission. VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 PO 00000 Frm 00058 Fmt 4701 Sfmt 4700 E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations 21997 PRA TABLE 4—CALCULATION OF THE INCREMENTAL CHANGE IN BURDEN ESTIMATES FROM THE INCREASE IN THE NUMBER OF AFFECTED RESPONSES FILED AS A RESULT OF THE FINAL AMENDMENTS Form Estimated increase in affected responses Estimated incremental burden hours/ form Total incremental burden hours Estimated internal burden hours Estimated outside professional hours Estimated outside professional costs/affected responses (A) (B) (C) = (A) × (B) (D) = (C) × (allocation %) (E) = (C) × (allocation %) (F) = (E) × $400 10–K ..................................................... 10–Q .................................................... S–1 ....................................................... S–3 ....................................................... 20–F ..................................................... S–4 ....................................................... S–11 ..................................................... F–1 ....................................................... F–3 ....................................................... F–4 ....................................................... 1–A ....................................................... 1–K ....................................................... 1–SA .................................................... SF–1 ..................................................... SF–3 ..................................................... 6 18 4 4 4 37 3 3 1 3 1 0 0 0 0 70 70 70 70 70 70 70 70 70 70 70 420 1,260 280 280 280 2,590 210 210 70 210 70 315 945 70 70 70 647.5 52.5 52.5 17.5 52.5 52.5 105 315 210 210 210 1,942.5 157.5 157.5 52.5 157.5 17.5 $42,000 126,000 84,000 84,000 84,000 777,000 63,000 63,000 21,000 63,000 7,000 Totals ............................................ ........................ ........................ ........................ 2,345 ........................ 1,414,000 PRA Table 5 illustrates the estimated net incremental change to the total annual compliance burdens for the affected forms, in hours and in costs, as a result of the final amendments. PRA TABLE 5—CALCULATION OF THE NET INCREMENTAL CHANGE IN BURDEN ESTIMATES OF AFFECTED RESPONSES RESULTING FROM THE FINAL AMENDMENTS Form Estimated change in burden hours/ affected response Estimated internal burden hours Outside professional hours Estimated outside professional costs/affected response (A) (B) (C) (D) (E) 10–K ..................................................................................... 10–Q .................................................................................... S–1 ....................................................................................... 20–F ..................................................................................... S–4 ....................................................................................... S–11 ..................................................................................... F–1 ....................................................................................... F–4 ....................................................................................... 1–A ....................................................................................... 1–K ....................................................................................... 1–SA .................................................................................... SF–1 ..................................................................................... SF–3 ..................................................................................... 487 1,270 14 19 137 8 8 10 1 0 0 0 0 (14,610) (36,300) (20) (170) (410) 60 60 0 70 (10,958) (27,225) (5) (42.5) (102.5) 15 15 0 52.5 (3,652) (9,075) (15) (127.5) (307.5) 45 45 0 17.5 ($1,460,800) (3,630,000) (6,000) (51,000) (123,000) 18,000 18,000 0 7,000 Total .............................................................................. ........................ ........................ (38,235.5) ........................ (5,227,800) PRA Table 6 summarizes the current OMB collections of information jbell on DSKJLSW7X2PROD with RULES2 Estimated number of affected responses inventory for the affected forms and the requested change in the total reporting burdens and costs as a result of the final amendments.624 624 For convenience, figures in the table have been rounded to the nearest whole number. VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 PO 00000 Frm 00059 Fmt 4701 Sfmt 4700 E:\FR\FM\20APR2.SGM 20APR2 21998 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations PRA TABLE 6—REQUESTED PAPERWORK BURDEN UNDER THE FINAL AMENDMENTS Form Current annual responses S–1 ........ S–3 ........ S–4 ........ S–11 ...... F–1 ........ F–3 ........ F–4 ........ SF–1 ...... SF–3 ...... 10–K ...... 10–Q ...... 1–A ........ 20–F ...... 1–K ........ 1–SA ...... 901 1,657 551 64 63 112 39 6 71 8,137 22,907 179 725 36 55 Current burden Program change Current burden hours Increase or reduction in company hours 148,556 193,730 563,216 12,290 26,815 4,448 14,076 2,076 24,548 14,220,652 3,253,411 98,396 479,304 16,200 8,791 Current cost burden $182,048,700 236,322,036 678,291,204 15,016,968 32,445,300 5,712,000 17,106,000 2,491,200 29,457,900 1,898,891,869 432,290,354 13,111,912 576,875,025 2,160,000 618,420 X. Final Regulatory Flexibility Act Analysis This Final Regulatory Flexibility Analysis (‘‘FRFA’’) has been prepared in accordance with the Regulatory Flexibility Act (‘‘RFA’’).625 It relates to amendments to Rules 3–10 and 3–16 of Regulation S–X, and corresponding amendments to certain other rules and forms to improve the disclosures of guarantors and issuers of guaranteed securities and issuers’ affiliates whose securities collateralize securities. jbell on DSKJLSW7X2PROD with RULES2 A. Need for, and Objectives of, the Amendments The purpose of the amendments is to modernize and simplify Rules 3–10 and 3–16 of Regulation S–X to better align the requirements of these rules with the needs of investors and reduce disclosure burdens on registrants. Specifically, the amendments modernize and simplify these rules by clarifying, consolidating, relocating and eliminating elements of these rules. These changes are intended to provide investors with information that is material to an investment decision, make the disclosures easier to understand, and reduce costs and burdens of these requirements on registrants. The amendments are discussed in more detail in Sections III through V, above. We discuss the economic impact and potential alternatives to the amendments in Section VIII (Economic Analysis), and the estimated compliance costs and burdens, of the amendments Section IX (Paperwork Reduction Act) above. B. Significant Issues Raised by Public Comments In the Proposing Release, the Commission requested comment on any 625 5 U.S.C. 601 et seq. VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 Number of affected responses 14 4 137 8 8 1 10 0 0 487 1,270 1 19 0 0 Requested change in burden Increase or reduction in professional costs 905 1,661 588 67 66 113 42 6 148,551 193,800 563,113 12,305 26,830 4,466 14,076 2,076 $182,042,700 236,406,036 678,168,204 15,034,968 32,463,300 5,733,000 17,106,000 2,491,200 (10,958) (27,225) 53 (43) (1,460,800) (3,630,000) 7,000 (51,000) 8,143 22,925 180 729 36 55 14,209,694 3,226,186 98,449 479,262 16,200 8,791 1,897,431,069 428,660,354 13,118,912 576,824,025 2,160,000 618,420 626 See letter from Freeport. Under Commission rules, most small entities would qualify as smaller reporting companies. 627 See letter from Sullivan & Cromwell. 628 5 U.S.C. 601(6). Fmt 4701 Cost burden ($6,000) 84,000 (123,000) 18,000 18,000 21,000 0 C. Small Entities Subject to the Amendments The amendments will apply to some registrants that are small entities. The RFA defines ‘‘small entity’’ to mean ‘‘small business,’’ ‘‘small organization,’’ or ‘‘small governmental jurisdiction.’’ 628 For purposes of the RFA, under our rules, a registrant, other than an investment company or an investment adviser, is a ‘‘small Frm 00060 Burden hours (5) 70 (103) 15 15 18 0 aspect of the Initial Regulatory Flexibility Analysis (‘‘IRFA’’), including how the proposed amendments could achieve their objective while lowering the burden on small entities, the number of small entities that would be affected by the proposed rule and form amendments, the existence or nature of the potential effects of the proposed amendments on small entities discussed in the analysis, and how to quantify the effects of the proposed amendments. We did not receive any comments that specifically addressed the IRFA. However, some commenters addressed aspects of the proposed rules that could potentially affect small entities. One commenter indicated that the costs and challenges of preparing condensed consolidating information currently required by Rule 3–10 is likely far greater for smaller reporting companies in comparison to larger companies, and that the proposed summarized financial information would be easier for issuers and guarantors to prepare and disclose.626 Another commenter agreed that the proposed amendments should apply to smaller reporting companies.627 PO 00000 Annual responses Sfmt 4700 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.629 An investment company, including a business development company,630 is considered to be a ‘‘small business’’ if it, together with other investment companies in the same group of related investment companies, has net assets of $50 million or less as of the end of its most recent fiscal year.631 Commission staff estimates that there are 1,171 registrants that file with the Commission, other than investment companies, that may be considered small entities.632 In addition, our staff estimates that, as of June 2019, there were 99 investment companies that may be considered small entities.633 D. Projected Reporting, Recordkeeping, and Other Compliance Requirements As described in greater detail above, the amendments will simplify and update disclosure requirements of Rules 3–10 and 3–16 of Regulation S–X. For example, the amendments replace existing requirements that registrants must provide consolidating information 629 See 17 CFR 230.157 [Securities Act Rule 157] and 17 CFR 240.0–10(a) [Exchange Act Rule 0– 10(a)]. 630 Business development companies are a category of closed-end investment company that are not registered under the Investment Company Act [15 U.S.C. 80a–2(a)(48) and 80a–53–64]. 631 See 17 CFR 270.0–10(a) [Investment Company Act Rule 0–10(a)]. 632 This estimate is based on staff analysis of EDGAR filings and related XBRL submissions made during the 2018 calendar year, and data from Compustat, and Audit Analytics. 633 This estimate is derived from an analysis of data obtained from Morningstar Direct as well as data reported to the Commission for the period ending June 2019. E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations 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. As discussed above, the amendments are expected to reduce compliance burdens for all registrants, including small entities.635 We do not believe that the amendments will impose any significant new compliance obligations. Moreover, we do not believe it is necessary to establish different compliance and reporting requirements or timetables or to exempt small entities from all or part of the amendments. Nevertheless, to minimize the initial compliance burden on all registrants we are adopting a transition period for compliance to mitigate any potential compliance E. Agency Action To Minimize Effect on burdens that registrants may experience in transitioning to the final rule Small Entities amendments.636 The RFA directs us to consider Finally, with respect to using alternatives that would accomplish our stated objectives, while minimizing any performance rather than design standards, the amendments use a significant adverse impact on small combination of design and performance entities. In connection with the amendments, we considered the standards in order to promote uniform following alternatives: filing requirements for all registrants. • Establishing different compliance or We believe the final rules will be more reporting requirements that take into beneficial to investors and registrants if account the resources available to small there are specific uniform disclosure entities; requirements that apply to all • Clarifying, consolidating, or registrants. In addition, the amendments simplifying compliance and reporting introduce more principles-based requirements under the rules for small disclosure requirements that will entities; provide registrants with increased • Using performance rather than flexibility to determine what design standards; and • Exempting small entities from all or information to disclose. part of the requirements. XI. Statutory Authority The amendments clarify, consolidate and simplify compliance and reporting The amendments contained in this requirements for small entities and release are being adopted under the other registrants. For example, the authority set forth in Sections 3, 6, 7, 8, amendments streamline the five 10, 19(a), and 28 of the Securities Act, exceptions in existing Rules 3–10(b) as amended, and Sections 3(b), 12, 13, through (f) by consolidating these 15(d), 23(a), and 36 of the Exchange Act. elements into a single set of eligibility List of Subjects in 17 CFR Parts 210, criteria that applies to all issuer and guarantor structures. The amendments 229, 230, 239, 240, and 249 also consolidate the requirements for Reporting and recordkeeping the Revised Alternative Disclosures by requirements, Securities. including them in a single location in new Rule 13–01, as opposed to the Text of the Amendments existing requirements under Rule 3–10 which are dispersed among multiple For the reasons set out in the provisions in the rule. Similarly, the preamble, the Commission amends title amendments simplify the requirements 17, chapter II of the Code of Federal of existing Rule 3–16 by replacing the Regulations as follows: current requirement to provide separate financial statements for each affiliate whose securities are pledged as 635 See supra Sections VIII (Economic Analysis) collateral with a requirement to provide and IX (Paperwork Reduction Act). jbell on DSKJLSW7X2PROD with RULES2 or separate financial statements with Summarized Financial Information, and allows registrants to present supplemental financial and nonfinancial disclosure outside of the registrant’s financial statements. We anticipate that the amendments will reduce reporting, recordkeeping, and other compliance burdens for all registrants, including small entities. As noted above, one commenter indicated that currently required disclosures are disproportionately burdensome for smaller reporting companies to produce.634 As a result, these companies may particularly benefit from any resulting decrease in compliance burdens. The professional skills necessary to comply with the amendments may include legal, accounting, and information technology skills. 634 See 636 See supra Section VI (Transition to Final Amendments). letter from Freeport. VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 PO 00000 Frm 00061 Fmt 4701 Sfmt 4700 21999 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: ■ § 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 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; and (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: E:\FR\FM\20APR2.SGM 20APR2 22000 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations (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. ■ 3. Amend § 210.3–16 by adding introductory text to read as follows: § 210.3–16 Financial statements of affiliates whose securities collateralize an issue registered or being registered. The requirements of this section shall apply to each registered security issued and outstanding before January 4, 2021, unless the requirements of § 210.13–02 apply. * * * * * ■ 4. Amend § 210.8–01 by revising Note 3 and Note 4 to read as follows: § 210.8–01 Preliminary Notes to Article 8. jbell on DSKJLSW7X2PROD with RULES2 * * * * * 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: The requirements of § 210.3–16 or § 210.13–02 are applicable if a smaller reporting company’s securities registered or being registered are collateralized by the securities of the smaller reporting company’s affiliates. Section 210.13–02 must be followed unless § 210.3–16 applies. The periods VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 presented for purposes of compliance with § 210.3–16 are those required by § 210.8–02. * * * * * 5. Amend § 210.8–03 by adding paragraphs (b)(6) and (7) before Instruction 1 to read as follows: ■ § 210.8–03 Interim financial statements. * * * * * (b) * * * (6) 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. (7) 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 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: ■ PO 00000 Frm 00062 Fmt 4701 Sfmt 4700 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 guaranteed security subject to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and for each guaranteed security the offer and sale of which is being registered under the Securities Act of 1933, for which the registrant is the parent company (as that term is defined in § 210.3–10(b)(1)) of one or more subsidiaries that issue or guarantee the guaranteed security, provide the following disclosures to the extent material: (1) A description 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 as follows, with an accompanying note that briefly describes the basis of presentation: (i) 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; (ii) Intercompany balances and transactions between issuers and guarantors whose summarized financial information is presented on a combined basis shall be eliminated; (iii) The summarized financial information shall exclude subsidiaries that are not issuers or guarantors. An issuer’s or guarantor’s investment in a subsidiary that is not an issuer or guarantor shall not be presented. An issuer’s or guarantor’s amounts due from, amounts due to, and transactions with any of the following shall be presented in separate line items: (A) Subsidiaries that are not issuers or guarantors; and (B) Related parties; (iv) If the information provided in response to the requirements of this E:\FR\FM\20APR2.SGM 20APR2 jbell on DSKJLSW7X2PROD with RULES2 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations section (e.g., factors that may affect payments to holders of the guaranteed security) 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. In limited circumstances (i.e., where the separate financial information applicable to those issuers and/or guarantors can be easily explained and understood), narrative disclosure may be provided in lieu of the separate summarized financial information otherwise required by this paragraph (a)(4)(iv); (v) Disclose this summarized financial information as of and for the most recently ended fiscal year and year-todate interim period included in the parent company’s consolidated financial statements; and (vi) Notwithstanding that a parent company may omit this summarized financial information if not material, it may also be omitted if one of the following in paragraphs (a)(4)(vi)(A) through (D) of this section is true and disclosed. However, paragraph (a)(4)(vi)(A) does not apply if separate disclosure of summarized financial information applicable to one or more, but not all, issuers and/or guarantors is required by paragraph (a)(4)(iv) of this section. For the purposes of this section, a finance subsidiary is a subsidiary that has no assets or operations other than those related to the issuance, administration and repayment of the security being registered and any other securities guaranteed by its parent company: (A) The assets, liabilities and results of operations of the combined issuers and guarantors of the guaranteed security are not materially different than corresponding amounts presented in the consolidated financial statements of the parent company; (B) The combined issuers and guarantors, excluding investments in subsidiaries that are not issuers or guarantors, have no material assets, liabilities or results of operations; (C) The issuer is a finance subsidiary of the parent company, the parent company has fully and unconditionally guaranteed the security, and no other subsidiary of the parent company guarantees the security; or (D) The issuer is a finance subsidiary that co-issued the security, jointly and severally, with the parent company, and no other subsidiary of the parent company guarantees the security; (5) In a Securities Act registration statement filed in connection with the offer and sale of the guaranteed security, if the parent company acquired a VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 significant business after the date of the parent company’s most recent balance sheet included in its consolidated financial statements and the acquired business, one or more of the acquired business’s subsidiaries, or the acquired business and one or more of its subsidiaries are issuers or guarantors of the guaranteed securities, disclose preacquisition summarized financial information as specified in paragraph (a)(4) of this section for each such issuer or guarantor. The acquired business is significant if it meets any of the conditions specified in the definition of significant subsidiary in § 210.1–02(w), substituting 20 percent for 10 percent each place it appears therein, based on a comparison of the most recent annual financial statements of the acquired business and the parent company’s most recent annual consolidated financial statements filed at or prior to the date of acquisition. The determination of whether a business has been acquired shall be made in accordance with the guidance set forth in § 210.11–01(d). Acquisitions of a group of related businesses shall be treated as if they are a single business acquisition for purposes of this comparison. The determination of whether a group of businesses are related shall be made in a manner consistent with § 210.3– 05(a)(3); (6) Any financial and narrative information about each guarantor if the information would be material for investors to evaluate the sufficiency of the guarantee; and (7) Sufficient information so as to make the financial and non-financial information presented not misleading. (b) 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. 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 § 229.105 (Item 105 of Regulation S– K) of this chapter. § 210.13–02 Affiliates whose securities collateralize securities registered or being registered. The requirements of this section shall apply to each security registered or being registered that is issued on or after PO 00000 Frm 00063 Fmt 4701 Sfmt 4700 22001 January 4, 2021, and to each registered security issued and outstanding before January 4, 2021, for which the registrant had prior to that date provided the financial statements specified in § 210.3–16. (a) For each security subject to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and for each security the offer and sale of which is being registered under the Securities Act of 1933, that is collateralized by a security of the registrant’s affiliate or affiliates, provide the following disclosures to the extent material: (1) A description of the securities pledged as collateral and the affiliates whose securities are 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 as follows, with an accompanying note that briefly describes the basis of presentation: (i) The summarized financial information of each such affiliate consolidated in the registrant’s financial statements may be presented on a combined basis; (ii) Intercompany balances and transactions between affiliates whose summarized financial information is presented on a combined basis shall be eliminated; (iii) An affiliate’s amounts due from, amounts due to, and transactions with any of the following shall be presented in separate line items: (A) The registrant; (B) Any of the registrant’s subsidiaries not included in the summarized financial information of the affiliate(s); and (C) Related parties; (iv) If the information provided in response to the requirements of this section (e.g., the trading market for the affiliate’s security pledged as collateral or a statement that there is no market) is applicable to one or more, but not all, affiliates, separately disclose the summarized financial information applicable to those affiliates. In limited circumstances (i.e., where the separate financial information applicable to those affiliates can be easily explained and understood), narrative disclosure may be provided in lieu of the separate summarized financial information E:\FR\FM\20APR2.SGM 20APR2 22002 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations otherwise required by this paragraph (a)(4)(iv); (v) Disclose this summarized financial information as of and for the most recently ended fiscal year and year-todate interim period included in the registrant’s consolidated financial statements; and (vi) Notwithstanding that a registrant may omit this summarized financial information if not material, it may also be omitted if one of the following in paragraph (a)(4)(vi)(A) or (B) of this section is true and disclosed. However, paragraph (a)(4)(vi)(A) does not apply if separate disclosure of summarized financial information applicable to one or more, but not all, affiliates is required by paragraph (a)(4)(iv) of this section: (A) The assets, liabilities and results of operations of the combined affiliates whose securities are pledged as collateral are not materially different than the corresponding amounts presented in the consolidated financial statements of the registrant; or (B) The combined affiliates whose securities are pledged as collateral have no material assets, liabilities or results of operations; (5) In a Securities Act registration statement filed in connection with the offer and sale of the collateralized security, if the registrant acquired a significant business after the date of the registrant’s most recent balance sheet included in its consolidated financial statements and the acquired business, one or more of the acquired business’s subsidiaries, or the acquired business and one or more of its subsidiaries are affiliates whose securities collateralize the registrant’s collateralized security, disclose pre-acquisition summarized financial information as specified in paragraph (a)(4) of this section for each such affiliate. The acquired business is significant if it meets any of the conditions specified in the definition of significant subsidiary in § 210.1–02(w), substituting 20 percent for 10 percent each place it appears therein, based on a comparison of the most recent annual financial statements of the acquired business and the registrant’s most recent 78n, 78n–1, 78o, 78u–5, 78w, 78ll, 78mm, 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). annual consolidated financial statements filed at or prior to the date of acquisition. The determination of whether a business has been acquired shall be made in accordance with the guidance set forth in § 210.11–01(d). Acquisitions of a group of related businesses shall be treated as if they are a single business acquisition for purposes of this comparison. The determination of whether a group of businesses are related shall be made in a manner consistent with § 210.3– 05(a)(3); (6) Any financial and narrative information about each such affiliate if the information would be material for investors to evaluate the pledge of the affiliate’s securities as collateral; and (7) Sufficient information so as to make the financial and non-financial information presented not misleading. (b) 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. 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 § 229.105 (Item 105 of Regulation S– K) of this chapter. 9. Amend § 229.504 by revising Instruction 6 to read as follows: ■ § 229.504 (Item 504) Use of proceeds. * * * * * Instructions to Item 504: * * * 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 Regulation S–X, 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. * * * * * ■ 10. Amend § 229.601 by: ■ a. In the exhibit table in paragraph (a), adding entry 22; and ■ b. Adding paragraph (b)(22). The revisions read as follows: 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, § 229.601 (Item 601) Exhibits. (a) * * * EXHIBIT TABLE Securities Act forms jbell on DSKJLSW7X2PROD with RULES2 S–1 * * (22) Subsidiary guarantors and issuers of guaranteed securities and affiliates whose securities collateralize securities of the registrant ........................................... * S–3 SF–1 SF–3 S–4 1 * X * X S–8 Exchange Act forms S–11 * X X X * F–1 F–3 * .......... * X 10 * X * F–4 1 X X 8–K 2 10–D 10–Q 10–K ABS– EE .......... X X .......... * X * .......... * 1 An exhibit need not be provided about a company if: (1) With respect to such company an election has been made under Form S–4 or F–4 to provide information about such company at a level prescribed by Form S–3 or F–3; and (2) the form, the level of which has been elected under Form S–4 or F–4, would not require such company to provide such exhibit if it were registering a primary offering. VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 PO 00000 Frm 00064 Fmt 4701 Sfmt 4700 E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations 22003 2 A Form 8–K exhibit is required only if relevant to the subject matter reported on the Form 8–K report. For example, if the Form 8–K pertains to the departure of a director, only the exhibit described in paragraph (b)(17) of this section need be filed. A required exhibit may be incorporated by reference from a previous filing. * * * * * (b) * * * (22) Subsidiary guarantors and issuers of guaranteed securities and affiliates whose securities collateralize securities of the registrant. List each of the entities in paragraphs (b)(22)(i) and (ii) of this section under an appropriately captioned heading that identifies the associated securities. An entity need not be listed more than once so long as its role as issuer, co-issuer, or guarantor of a guaranteed security and/or as affiliate whose security is pledged as collateral for a registrant’s security is clearly indicated with respect to each applicable security: (i) For a registrant that is the parent company (as that term is defined in § 210.3–10(b)(1) of this chapter) and subject to § 210.13–01 of this chapter, each of the registrant’s subsidiaries that is a guarantor, issuer, or co-issuer of the guaranteed security subject to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, or the offer and sale of which is being registered under the Securities Act of 1933; and (ii) For a registrant that is subject to § 210.13–02 of this chapter, each of the registrant’s affiliates whose security is pledged as collateral for the registrant’s security subject to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, or the offer and sale of which is being registered under the Securities Act of 1933. For each affiliate, also identify the security or securities pledged as collateral. * * * * * ■ 11. Amend § 229.1100 by revising paragraphs (c)(2)(ii)(C), (D), and (F) to read as follows: § 229.1100 (Item 1100) General. jbell on DSKJLSW7X2PROD with RULES2 * * * * * (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 VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 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 this part (Regulation S–K). * * * * * 12. Amend § 229.1112 by revising paragraph (b)(2) to read as follows: ■ § 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 §§ 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 § 240.14a– 3(b) of this chapter) shall be filed under this item. * * * * * 13. Amend § 229.1114 by revising paragraph (b)(2)(ii) to read as follows: ■ PO 00000 Frm 00065 Fmt 4701 Sfmt 4700 § 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. * * * * * 14. 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 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 section. * * * * * PART 230—GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933 15. The general authority citation for part 230 continues to read as follows: ■ Authority: 15 U.S.C. 77b, 77b note, 77c, 77d, 77f, 77g, 77h, 77j, 77r, 77s, 77z–3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o–7 note, 78t, 78w, 78ll(d), 78mm, 80a–8, 80a–24, 80a– 28, 80a–29, 80a–30, and 80a–37, and Pub. L. E:\FR\FM\20APR2.SGM 20APR2 22004 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations 112–106, sec. 201(a), sec. 401, 126 Stat. 313 (2012), unless otherwise noted. * * * * * 16. Amend § 230.257 by adding paragraph (b)(7) to read as follows: ■ § 230.257 Periodic and current reporting; exit report. * * * * * (b) * * * (7) 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 Item (b)(7)(i) of Part F/S of Form 1– A (referenced in § 239.90), Item 7(g)(1) of Part II of Form 1–K (referenced in § 239.91), and Item 3(e) of Form 1–SA (referenced in § 239.92), is exempt from the requirements of this paragraph (b). * * * * * PART 239—FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933 17. The general authority citation for part 239 continues 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 note, 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. * * * * * 18. 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. jbell on DSKJLSW7X2PROD with RULES2 * * * * * (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 VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 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. 19. 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. 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. * * * * * 20. Amend § 239.33 by designating the Note to paragraph (a)(5) as Note 1 to paragraph (a)(5) and revising newly designated Note 1 to paragraph (a)(5) to read as follows: ■ PO 00000 Frm 00066 Fmt 4701 Sfmt 4700 § 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 1 to paragraph (a)(5): In the situations described in paragraphs (a)(5)(iii) through (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 § 249.220f (Form 20–F) or § 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 § 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. * * * * * 21. Amend Form F–3 (referenced in § 239.33) by designating the Note to Instruction I.A.5. under ‘‘General Instructions’’ as Note 1 and revising newly designated Note 1 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 E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations subsidiary, security offerings may be registered on this Form if: * * * * * Note 1: In the situation described in paragraphs I.A.5(iii) through (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. * * * * * 22. Amend Form 1–A (referenced in § 239.90) by: ■ a. Revising paragraph (b)(7) of Part F/ S; and ■ b. Revising Item 17 of Part III. The revisions 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 jbell on DSKJLSW7X2PROD with RULES2 * * * * * (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 VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 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 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 definition of ‘‘parent company’’ is the same as in Rule 3–10(b)(1) of Regulation S–X, except that Rule 3–10(b)(1)(ii) instead reads as follows: ‘‘Is, or as a result of the subject offering statement will be, required to file reports with the Commission pursuant to Rule 257(b) of Regulation A (§§ 230.251–230.263), or is an Exchange Act reporting company.’’ 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 offering statement on Form 1– A filed in connection with the offer and sale of the subject securities. (ii) Financial Statements of and Disclosures About Affiliates Whose Securities Collateralize an Issuance. The requirements of Rules 3–16 or 13–02 of Regulation S–X are applicable if an issuer’s securities that are qualified or being qualified pursuant to Regulation A are collateralized by the securities of the issuer’s affiliates. Rule 13–02 of Regulation S–X must be followed unless Rule 3–16 of Regulation S–X applies. The issuer may elect to provide the disclosures specified in Rule 13–02 of Regulation S–X 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. * * * * * PO 00000 Frm 00067 Fmt 4701 Sfmt 4700 22005 Item 17. Description of Exhibits As appropriate, the following documents must be filed as exhibits to the offering statement. * * * * * 17. Subsidiary guarantors and issuers of guaranteed securities and affiliates whose securities collateralize securities of the issuer. List each of the entities in paragraphs (a) and (b) below under an appropriately captioned heading that identifies the associated securities. An entity need not be listed more than once so long as its role as issuer, co-issuer, or guarantor of a guaranteed security and/ or as affiliate whose security is pledged as collateral for an issuer’s security is clearly indicated with respect to each applicable security: (a) For an issuer that is the parent company (as that term is defined in paragraph (b)(7(i) of Part F/S) and subject to § 210.13–01 as described in paragraph (b)(7)(i) of Part F/S, each of the issuer’s subsidiaries that is a guarantor, issuer, or co-issuer of the guaranteed security for which the issuer is required to file reports with the Commission pursuant to Rule 257(b) of Regulation A, or is an Exchange Act reporting company subject to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, or the offer and sale of which is qualified or being qualified pursuant to Regulation A; and (b) For an issuer that is subject to § 210.13–02 as described in paragraph (b)(7)(i) of Part F/S, each of the issuer’s affiliates whose security is pledged as collateral for the issuer’s security for which the issuer is required to file reports with the Commission pursuant to Rule 257(b) of Regulation A, or is an Exchange Act reporting company subject to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, or the offer and sale of which is qualified or being qualified pursuant to Regulation A. For each affiliate, also identify the security or securities pledged as collateral. * * * * * ■ 23. 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 * * * * * * * * PART II * E:\FR\FM\20APR2.SGM * 20APR2 22006 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations Item 7. Financial Statements jbell on DSKJLSW7X2PROD with RULES2 * * * * * (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 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 definition of ‘‘parent company’’ is the same as in Rule 3–10(b)(1) of Regulation S–X, except that Rule 3–10(b)(1)(ii) instead reads as follows: ‘‘Is, or as a result of the subject offering statement will be, required to file reports with the Commission pursuant to Rule 257(b) of Regulation A (§§ 230.251–230.263), or is an Exchange Act reporting company.’’ 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 2 of Part II of Form 1–K. (2) Financial Statements of and Disclosures About Affiliates Whose Securities Collateralize an Issuance. The requirements of Rules 3–16 or 13–02 of Regulation S–X are applicable if an issuer’s securities that are qualified or being qualified pursuant to Regulation A are collateralized by the securities of the issuer’s affiliates. Rule 13–02 of Regulation S–X must be followed unless Rule 3–16 of Regulation S–X applies. The issuer may elect to provide the disclosures specified in Rule 13–02 of VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 Regulation S–X 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 2 of Part II of Form 1– K. * * * * * ■ 24. 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 * * * * * INFORMATION TO BE INCLUDED IN REPORT * * * * PART 240—GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934 * 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 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 definition of ‘‘parent company’’ is the same as in Rule 3–10(b)(1) of Regulation S–X, except that Rule 3–10(b)(1)(ii) instead reads as follows: ‘‘Is, or as a result of the subject offering statement will be, required to file reports with the Commission pursuant to Rule 257(b) of Regulation A (§§ 230.251–230.263), or is an Exchange Act reporting company.’’ The parent company must also provide PO 00000 Frm 00068 Fmt 4701 Sfmt 4700 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 1 of Form 1–SA. (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 1 of Form 1–SA. 25. The general authority citation for part 240 continues 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, 78dd, 78ll, 78mm, 80a–20, 80a–23, 80a–29, 80a–37, 80b– 3, 80b–4, 80b–11, and 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; Pub. L. 111–203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112–106, secs. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted. * * * * * 26. Revise § 240.12h–5 to read as follows: ■ § 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 § 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 27. 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, E:\FR\FM\20APR2.SGM 20APR2 Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules and Regulations 129 Stat. 1312 (2015), unless otherwise noted. * * * * * 28. Amend Form 20–F (referenced in § 249.220f) by: ■ a. Revising Instruction 1 to Item 8; ■ b. Revising Instruction 17 to the ‘‘Instructions as to Exhibits’’; and ■ c. Reserving Instructions 18 through 100 under ‘‘Instructions as to Exhibits’’. The revisions 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 * * * * * Item 8. Financial Information * * * * * jbell on DSKJLSW7X2PROD with RULES2 Instructions to Item 8: 1. This item refers to the company, but note that under Rules 3–05, 3–09, 3– 10, 3–14, 3–16, 13–01, and 13–02 of Regulation S–X, you also may have to VerDate Sep<11>2014 19:36 Apr 17, 2020 Jkt 250001 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. * * * * * Item 19. Exhibits. * * * * * INSTRUCTIONS AS TO EXHIBITS * * * * * 17. Subsidiary guarantors and issuers of guaranteed securities and affiliates whose securities collateralize securities of the registrant. List each of the entities in paragraphs (a) and (b) below under an appropriately captioned heading that identifies the associated securities. An entity need not be listed more than once so long as its role as issuer, co-issuer, or guarantor of a guaranteed security and/or as affiliate whose security is pledged as collateral for a registrant’s security is clearly indicated with respect to each applicable security: (a) For a registrant that is the parent company (as that term is defined in PO 00000 Frm 00069 Fmt 4701 Sfmt 9990 22007 § 210.3–10(b)(1)) and subject to § 210.13–01, each of the registrant’s subsidiaries that is a guarantor, issuer, or co-issuer of the guaranteed security subject to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, or the offer and sale of which is being registered under the Securities Act of 1933; and (b) For a registrant that is subject to § 210.13–02, each of the registrant’s affiliates whose security is pledged as collateral for the registrant’s security subject to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, or the offer and sale of which is being registered under the Securities Act of 1933. For each affiliate, also identify the security or securities pledged as collateral. 18 through 100 [Reserved] * * * * * By the Commission. Dated: March 2, 2020. Vanessa A. Countryman, Secretary. [FR Doc. 2020–04776 Filed 4–17–20; 8:45 am] BILLING CODE 8011–01–P E:\FR\FM\20APR2.SGM 20APR2

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 85, Number 76 (Monday, April 20, 2020)]
[Rules and Regulations]
[Pages 21940-22007]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-04776]



[[Page 21939]]

Vol. 85

Monday,

No. 76

April 20, 2020

Part II





Securities and Exchange Commission





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17 CFR Parts 210, 229, 230, et al.





Financial Disclosures About Guarantors and Issuers of Guaranteed 
Securities and Affiliates Whose Securities Collateralize a Registrant's 
Securities; Final Rule

Federal Register / Vol. 85, No. 76 / Monday, April 20, 2020 / Rules 
and Regulations

[[Page 21940]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210, 229, 230, 239, 240, and 249

[Release No. 33-10762; 34-88307; 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: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
adopting 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 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 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: 
    Effective date: The final rules are effective on January 4, 2021.
    Compliance dates: See Section VI for further information on 
transitioning to the final rules.

FOR FURTHER INFORMATION CONTACT: Jarrett Torno, Assistant Chief 
Accountant, at (202) 551-3400, John Fieldsend, Special Counsel, or Sean 
Harrison, Special Counsel, at (202) 551-3430, in the Division of 
Corporation Finance, 100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The Commission is amending

------------------------------------------------------------------------
                                                           CFR citation
                  Commission reference                       (17 CFR)
------------------------------------------------------------------------
Regulation S-X [17 CFR 210.1-01 through 210.13-02]:
  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
  Rule 13-02............................................       210.13-02
Regulation S-K [17 CFR 229.10 through 229.1305]:
  Item 504..............................................         229.504
  Item 601..............................................         229.601
  Item 1100.............................................        229.1100
  Item 1112.............................................        229.1112
  Item 1114.............................................        229.1114
  Item 1115.............................................        229.1115
Securities Act of 1933 (Securities Act) [15 U.S.C. 77a
 et seq.]:
  Rule 257..............................................         230.257
  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) [15
 U.S.C. 78a et seq.]:
  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
III. Amendments to Rule 3-10 and Partial Relocation to Rule 13-01
    A. Overarching Principle
    B. Overview of the Proposed and Final 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
    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 Revised Alternative Disclosures and Audit 
Requirement
    e. Recently Acquired Subsidiary Issuers and Guarantors
    f. Continuous Reporting Obligation
    D. Application of Amendments to Certain Types of Issuers
    1. Foreign Private Issuers
    2. Smaller Reporting Companies
    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. Amendments to Rule 3-16 and Partial Relocation to Rule 13-02
    A. Overarching Principle
    B. Overview of the Proposed and Final Amendments
    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. Location of Disclosures and Audit Requirement
    G. Recently Acquired Affiliates Whose Securities Are Pledged as 
Collateral
    H. Application of Amendments to Certain Types of Issuers
    1. Foreign Private Issuers
    2. Smaller Reporting Companies
    3. Offerings Pursuant to Regulation A
VI. Transition to Final Amendments and Rule 3-16 Collateral Release 
Provisions
    A. Transition to Final Amendments
    B. Rule 3-16 Collateral Release Provisions
VII. Other Matters
VIII. Economic Analysis
    A. Introduction
    B. Baseline and Affected Parties
    1. Market Participants
    2. Market Conditions
    C. Anticipated Economic Effects
    1. 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 Alternative Disclosures and Audit Requirement
    iv. Recently Acquired Subsidiary Issuers and Guarantors
    v. Continuous Reporting Obligation
    2. Amendments to Rule 3-16 and Partial 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. Location of Disclosures and Audit Requirement
    e. Recently Acquired Affiliates Whose Securities Are Pledged as 
Collateral
    D. Anticipated Effects on Efficiency, Competition, and Capital 
Formation
    E. Consideration of Reasonable Alternatives
    1. Alternative to Final Amendments to Existing Rule 3-10
    2. Alternatives Common to Final Amendments to Existing Rule 3-10 
and Existing Rule 3-16
IX. Paperwork Reduction Act
    A. Background
    B. Summary of Comment Letters
    C. Summary of the Impact on Collections of Information
    D. Burden and Cost Estimates to the Amendments
X. Final Regulatory Flexibility Act Analysis

[[Page 21941]]

    A. Need for, and Objectives of, the Amendments
    B. Significant Issues Raised by Public Comments
    C. Small Entities Subject to the Amendments
    D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements
    E. Agency Action To Minimize Effect on Small Entities
XI. Statutory Authority

I. Introduction

A. Background

    On July 24, 2018, the Commission proposed 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.\1\ 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 
\2\ when the consolidated financial statements of that parent company 
are filed and certain conditions are met. 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 the Commission proposed included 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.\3\ These 
proposed changes were 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. The proposal resulted from an 
ongoing, comprehensive evaluation of the Commission's disclosure 
requirements.\4\
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    \1\ See Financial Disclosures About Guarantors and Issuers of 
Guaranteed Securities and Affiliates Whose Securities Collateralize 
a Registrant's Securities, Release No. 33-10526 (July 24, 2018) [83 
FR 49630 (Oct. 2, 2018)] (``Proposing Release'').
    \2\ The identity of the parent company depends on the particular 
corporate structure. See Section II.C of the Proposing Release.
    \3\ 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 in certain circumstances. See Sections 
III.C.2.c, ``When Disclosure is Required'' and V.E, ``When 
Disclosure is Required,'' below.
    \4\ 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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    We received over 30 comment letters in response to the proposed 
amendments.\5\ In general, commenters supported the proposed 
amendments. In certain instances, commenters opposed the proposed 
revisions and suggested modifications to the proposals.
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    \5\ See, e.g., letters from American Bar Association, Federal 
Regulation of Securities Committee and the Law Accounting Committee 
of the Business Law Section (``ABA''); Association of the Bar of the 
City of New York, Securities Regulation Committee (``NYC Bar''); 
Ball Corporation (``Ball Corp.''); BDO USA, LLP (``BDO''); Center 
for Audit Quality (``CAQ''); Comcast Corporation (``Comcast''); 
Council of Institutional Investors (``CII''); Cravath, Swaine & 
Moore LLP (``Cravath''); The Credit Roundtable (``Credit 
Roundtable''); Davis Polk & Wardwell LLP (``Davis Polk''); Debevoise 
& Plimpton LLP (``Debevoise''); Dell Technologies, Inc. (``Dell''); 
Deloitte & Touche LLP (``Deloitte''); Eaton Corporation plc (``Eaton 
Corp.''); Edison Electric Institute and American Gas Association 
(``EEI/AGA''); Ernst & Young LLP (``EY''); FedEx Corporation 
(``FedEx''); Financial Executives International (``FEI''); Freeport-
McMoRan Inc. (``Freeport''); Grant Thornton LLP (``Grant 
Thornton''); KPMG LLP (``KPMG''); Medtronic plc (``Medtronic''); 
Nareit (``Nareit''); PricewaterhouseCoopers LLP (``PWC''); 
Securities Industry and Financial Markets Association (``SIFMA''); 
Shearman & Sterling LLP (``Shearman''); Simpson Thacher & Bartlett 
LLP (``Simpson Thacher''); Sullivan & Cromwell LLP (``Sullivan & 
Cromwell''); T-Mobile US, Inc. (``T-Mobile''); Willis Towers Watson 
plc (``WTW''); Windstream Holdings, Inc. (``Windstream''); and XBRL 
US, Inc. The public comments we received are available on our 
website at https://www.sec.gov/comments/s7-19-18/s71918.htm.
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    We have reviewed and considered all of the comments that we 
received on the proposed amendments. The final rules reflect changes 
made in response to many of these comments. We discuss our revisions 
with respect to each proposed rule and amendment in more detail 
throughout this release.

B. Scope of Proposals

    The Commission proposed 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. Both 
rules affect disclosures made in connection with registered debt 
offerings \6\ and subsequent periodic reporting.\7\ In the Proposing 
Release, the Commission stated its belief 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.\8\ The proposed amendments were 
intended to benefit investors by simplifying and streamlining the 
disclosure provided to them about registered transactions and improving 
transparency in the market to the extent more offerings are 
registered.\9\ In addition, the Commission noted that, if the proposed 
changes reduce the burden associated with providing guarantees or 
pledges of affiliate securities as collateral,\10\ investors could 
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.\11\
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    \6\ 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.
    \7\ The proposed amendments would not have affected the 
presentation of registrants' consolidated financial statements 
prepared in accordance with U.S. Generally Accepted Accounting 
Principles (``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 were focused on 
the supplemental information about subsidiary issuers and guarantors 
as well as affiliates whose securities are pledged as collateral.
    \8\ See Section I of the Proposing Release.
    \9\ Based on analysis performed by staff from the Commission's 
Division of Economic and Risk Analysis, the registered debt market 
was approximately $1.1 trillion in 2018. In 2018, debt offerings 
under Securities Act Rule in 17 CFR 230.144A (``Rule 144A'') raised 
approximately $658 billion, based on staff analysis of data from the 
Mergent database. The dollar volume of registered debt and Rule 144A 
offerings generally appears to be higher in recent years (i.e., 
2016, 2017, 2018) than in earlier years (i.e., 2013, 2014, 2015). 
See Section VIII.B.2, ``Market Conditions.''
    \10\ 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 
in Section VI.B ``Rule 3-16 Collateral Release Provisions'' below. 
In the Proposing Release, the Commission observed that registrants 
may cease structuring offerings to release such collateral if 
disclosure burdens would be reduced by the proposed amendments, 
which would benefit investors. See Section I.B of the Proposing 
Release.
    \11\ 15 U.S.C. 77k.
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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'') 
\12\ is a separate

[[Page 21942]]

security under the Securities Act \13\ and, as a result, offers and 
sales of these guarantees \14\ must be either registered or exempt from 
registration. If the offer and sale is registered, the issuer of the 
debt security and the guarantor \15\ must each file its own audited 
annual and unaudited interim \16\ 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.\17\ Reporting under Section 15(d), among other things, 
requires filing periodic reports that must include audited annual and 
unaudited interim financial statements, for at least the fiscal year in 
which the related Securities Act registration statement became 
effective.\18\
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    \12\ Rule 3-10 exceptions are available to issuers and 
guarantors of guaranteed securities that are ``debt or debt-like.'' 
In connection with amendments to Rule 3-10 in 2000 the Commission 
stated ``[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.'' 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'') at Section 
III.A.4.b.i; see also Section II.H of the Proposing Release.
    \13\ See Section 2(a)(1) of the Securities Act.
    \14\ 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.
    \15\ 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.
    \16\ A foreign private issuer need only provide interim period 
disclosure in certain registration statements.
    \17\ See 15 U.S.C. 78o(d).
    \18\ 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.'' \19\ 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.\20\ 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; \21\ (2) the parent company 
controls each subsidiary issuer and guarantor, including having the 
ability to direct all debt-paying activities; \22\ and (3) the 
financial information of each subsidiary issuer and guarantor is 
included as part of the consolidated financial statements of the parent 
company.\23\ In these circumstances, we believe full Securities Act and 
Exchange Act financial 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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    \19\ See Section I of the 2000 Release.
    \20\ Parent company consolidated financial statements must be 
filed in all instances where the omission of financial statements of 
subsidiary issuers and guarantors is permitted under existing Rule 
3-10. See paragraph (4) in each of Rules 3-10(b) through (f).
    \21\ 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 a debt security issued by a parent company 
are disadvantaged as compared to the direct creditors of any 
subsidiary not providing a guarantee because the holders can only 
make claims for payment directly against the issuer and any 
guarantors. In addition, in a bankruptcy proceeding, the assets of 
non-guarantor subsidiaries that are not issuers typically would be 
accessible only by the holder indirectly through the parent's equity 
interest. 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 those subsidiaries.
    \22\ 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.
    \23\ A parent company that prepares its financial statements in 
accordance with 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.\24\ Each exception specifies conditions that must 
be met, including, in each case, that the parent company provide 
certain disclosures (``Alternative Disclosures'').\25\ If the 
conditions are met, separate financial statements of each qualifying 
subsidiary issuer and guarantor may be omitted from the Securities Act 
registration statement and subsequent Exchange Act reports. Only one of 
the five exceptions can apply to any particular offering and the 
subsequent Exchange Act reporting.
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    \24\ See Rules 3-10(b) through (f) of Regulation S-X. See also 
Section II.F of the Proposing Release.
    \25\ The Alternative Disclosures must be provided in the 
footnotes to the parent company's consolidated financial statements.
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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; \26\ and
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    \26\ See Section II.D of the Proposing Release.
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     Each guarantee must be ``full and unconditional.'' \27\
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    \27\ See Section II.E of the Proposing Release.
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    The form and content of the Alternative Disclosures are determined 
based on the facts and circumstances and can range from a brief 
narrative \28\ to highly detailed condensed consolidating financial 
information (``Consolidating Information'').\29\ 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.\30\
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    \28\ See additional discussion of the brief narrative form of 
Alternative Disclosures in Section II.F of the Proposing Release.
    \29\ See additional discussion of Consolidating Information in 
Section II.G of the Proposing Release.
    \30\ See Section III.C.1 of the 2000 Release and additional 
discussion in Section II.J of the Proposing Release.
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    Recently acquired subsidiary issuers and guarantors are addressed 
separately within Rule 3-10. Rule 3-10(g) \31\ 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

[[Page 21943]]

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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    \31\ Rule 3-10(g) of Regulation S-X. See additional discussion 
in Section II.I of the Proposing Release.
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    The requirements of existing Rule 3-10 are discussed in further 
detail in Section II of the Proposing Release.

III. Amendments to Rule 3-10 and Partial Relocation to Rule 13-01

A. Overarching Principle

    The Commission proposed amendments to address the challenges posed 
by the current rules while 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.\32\ A number of commenters agreed with 
this overarching principle.\33\ Of these commenters, one asserted that 
this principle is particularly true when the parent company is fully 
obligated as either issuer or full and unconditional guarantor of the 
security; the parent company controls each subsidiary issuer and 
guarantor, including having the ability to direct all debt paying 
activities; and the financial information of each subsidiary issuer and 
guarantor is included as part of the consolidated financial statements 
of the parent company.\34\ Another of these commenters asserted 
investors in guaranteed securities rely primarily on the consolidated 
financial statements of the parent company when making investment 
decisions, and that these investors need only supplemental details 
about subsidiary issuers and guarantors.\35\ Other commenters noted 
that in addition to relying on the consolidated financial statements of 
the parent company, the key disclosure for investors in guaranteed 
securities is disclosure that enables them to evaluate the extent of 
their structural subordination risk.\36\ According to these commenters, 
the principal value of subsidiary guarantees to investors is that the 
guarantees improve the investor's claim on the assets of the 
subsidiaries in the event of a default and therefore supplemental 
financial information for subsidiary guarantees should focus on factors 
impacting structural subordination, not the financial ability of any 
individual subsidiary guarantor to make payment under the 
guarantee.\37\
---------------------------------------------------------------------------

    \32\ See discussion in Section II.A, ``Background.''
    \33\ See, e.g., letters from Ball Corp., Cravath, Davis Polk, 
Eaton Corp., EY, FEI, Freeport, Nareit, Shearman, and T-Mobile.
    \34\ See letter from Freeport.
    \35\ See letter from Eaton Corp.
    \36\ See letters from Cravath, Davis Polk and Shearman.
    \37\ See id.
---------------------------------------------------------------------------

B. Overview of the Proposed and Final 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''). 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.\38\ The proposed amendments would:
---------------------------------------------------------------------------

    \38\ The disclosures specified in proposed Rule 13-01(a) would 
be required ``[f]or 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)). . .'' As a technical 
modification, final Rule 13-01(a) has been revised to require the 
disclosures specified therein ``[f]or each guaranteed security 
subject to Section 13(a) or 15(d) of the Securities Exchange Act of 
1934, and for each guaranteed security the offer and sale of which 
is being registered under the Securities Act of 1933, for which the 
registrant is the parent company (as that term is defined in Sec.  
210.3-10(b)(1)) of one or more subsidiaries that issue or guarantee 
the guaranteed security . . .''
---------------------------------------------------------------------------

     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, as defined in 17 CFR 210.1-02(bb)(1) \39\ 
(``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;
---------------------------------------------------------------------------

    \39\ Rule 1-02(bb)(1) of Regulation S-X.
---------------------------------------------------------------------------

     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 
making an investment decision with respect to 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 
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 were intended to simplify and streamline 
the rule structure in several ways. Most significantly, under the 
proposed amendments there would be only a single set of eligibility 
criteria that would apply to all issuer and guarantor structures 
instead of 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. In the Proposing Release, the 
Commission expressed its belief that these changes would simplify the 
rule structure and facilitate compliance.\40\
---------------------------------------------------------------------------

    \40\ See Section III of the Proposing Release.
---------------------------------------------------------------------------

    After considering public comments, we are adopting these amendments 
substantially as proposed with certain modifications. Specifically, the 
final rule:
     Modifies the proposed requirement to disclose additional 
information that would be material to holders of the guaranteed 
security to be more specific by requiring disclosure of additional 
information about each guarantor that would be material for investors 
to evaluate the sufficiency of the guarantee, consistent with existing 
Rule 3-10;
     Permits the amended supplemental financial and non-
financial disclosure about the subsidiary issuers and/or guarantors and 
the guarantees (``Revised Alternative Disclosures'') to be provided 
outside the footnotes to the parent company's audited annual and 
unaudited interim consolidated financial statements in all cases rather

[[Page 21944]]

than only in the proposed circumstances;
     Eliminates the requirement to provide pre-acquisition 
financial statements of recently acquired subsidiary issuers and 
guarantors as proposed, but requires, in certain instances, pre-
acquisition Summarized Financial Information about significant recently 
acquired subsidiary issuers and guarantors; and
     Reflects other modifications from the proposed amendments 
as described below.
    The proposed and final amendments, along with our consideration of 
public comments, are discussed in detail below.

C. Conditions To Omit the Financial Statements of a Subsidiary Issuer 
or Guarantor

    Under the proposed amendments, 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 debt or debt-like; 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.
    The proposed amendments, comments received, and final amendments to 
the eligibility conditions are described below.
1. Eligibility Conditions
a. Parent Company Financial Statements Condition
i. Proposed Amendments
    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 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 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.\41\ Instead, the 
third condition would be that the entity consolidates each subsidiary 
issuer and guarantor in its consolidated financial statements.\42\ 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.
---------------------------------------------------------------------------

    \41\ See Section III.A.6. of the 2000 Release.
    \42\ See discussion in Section III.C.1.b, ``Consolidated 
Subsidiary.''
---------------------------------------------------------------------------

    The note to existing Rule 3-10(a)(2) states that ``the financial 
statements of an entity that is not an issuer or guarantor of the 
registered security cannot be substituted for those of the parent 
company.'' Because the definition of parent company was included in 
proposed Rule 3-10(b)(1), which states that the parent company must be 
an issuer or guarantor of the guaranteed security, the note to existing 
Rule 3-10(a)(2) was deemed unnecessary and excluded from the proposed 
rule.
ii. Comments on the Proposed Amendments
    We received one comment on this aspect of the proposed amendments, 
which was supportive. The commenter specifically supported the proposed 
conforming revision to the definition of ``parent company,'' 
stipulating that the entity must consolidate each subsidiary issuer and 
guarantor in its consolidated financial statements.\43\
---------------------------------------------------------------------------

    \43\ See letter from FEI.
---------------------------------------------------------------------------

iii. Final Amendments
    We are adopting the amendments as proposed. The parent company's 
financial statements will continue to be required to be filed pursuant 
to amended Rule 3-10(a). Previously, a definition of ``parent company'' 
was set forth in the 2000 Release but was not included in existing Rule 
3-10 itself. For clarity, and given the importance of appropriately 
identifying the issuer or guarantor that is the ``parent company,'' the 
revised definition has been included in amended Rule 3-10(b)(1). Due to 
the inclusion of this definition, as proposed, we have eliminated the 
note to existing Rule 3-10(a)(2).
b. Consolidated Subsidiary Condition
i. Proposed Amendments
    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.\44\ 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 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.
---------------------------------------------------------------------------

    \44\ See supra note 23.
---------------------------------------------------------------------------

    Specifically, proposed Rule 13-01(a)(3) would require 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.\45\ 
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.\46\ For example, if, through 
its ability to exercise significant influence \47\ 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

[[Page 21945]]

the Summarized Financial Information attributable to that subsidiary 
guarantor.
---------------------------------------------------------------------------

    \45\ See discussion in Section III.C.2.b, ``Non-Financial 
Disclosures.''
    \46\ See discussion in Section III.C.2.a.ii, ``Presentation on a 
Combined Basis.''
    \47\ 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.
---------------------------------------------------------------------------

ii. Comments on the Proposed Amendments
    Comments were supportive of these proposals. Many commenters 
supported the proposed revisions to Rule 3-10 to require the subsidiary 
issuer or guarantor to be a consolidated subsidiary of the parent 
company pursuant to the relevant accounting standards already in 
use.\48\ One commenter indicated that the proposed requirement to 
describe any factors that may affect payments to holders of the 
guaranteed security would elicit the necessary material disclosures for 
a consolidated subsidiary issuer or guarantor that is less than 100%-
owned.\49\
---------------------------------------------------------------------------

    \48\ See, e.g., letters from Comcast, Cravath, Davis Polk, EEI/
AGA, FedEx, FEI, Nareit, NYC Bar, and Sullivan & Cromwell.
    \49\ See letter from NYC Bar.
---------------------------------------------------------------------------

    Several commenters asserted that the existing rule's 100%-owned 
requirement was overly restrictive \50\ or burdensome.\51\ One 
commenter indicated that the proposed condition that each issuer and 
guarantor be a consolidated subsidiary of the parent company would 
provide more flexibility to issuers.\52\ Several commenters asserted 
that there is no practical difference between whether a subsidiary is 
100%-owned or is consolidated when making an evaluation of the 
subsidiary's creditworthiness \53\ and noted that, in either case, the 
minority equity interests are subordinated to the subsidiary's debt 
obligation.\54\
---------------------------------------------------------------------------

    \50\ See letters from Comcast, Cravath, and Davis Polk.
    \51\ See letter from Nareit.
    \52\ See letter from NYC Bar.
    \53\ See letters from Comcast, Cravath, Davis Polk, and FEI.
    \54\ See letters from Cravath, Davis Polk, and Nareit.
---------------------------------------------------------------------------

iii. Final Amendments
    We are adopting the amendments as proposed. Amended Rule 3-10(a) 
requires the subsidiary issuer or guarantor to be a consolidated 
subsidiary of the parent company as one condition of eligibility that 
must be met to omit the subsidiary issuer's or guarantor's financial 
statements. Additionally, 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, is required by Rule 13-01(a)(3),\55\ 
and separate disclosure of Summarized Financial Information for the 
issuers and guarantors to which those factors apply is required by Rule 
13-01(a)(4)(iv).\56\
---------------------------------------------------------------------------

    \55\ See discussion in Section III.C.2.b, ``Non-Financial 
Disclosures.''
    \56\ See discussion in Section III.C.2.a.ii, ``Presentation on a 
Combined Basis.'' As described therein, in limited circumstances, a 
brief narrative is permitted in lieu of separate Summarized 
Financial Information of the affected issuers and guarantors.
---------------------------------------------------------------------------

    Under the existing rule, we understand that a parent company with a 
consolidated but less than 100%-owned subsidiary generally would avoid 
designating that subsidiary as a guarantor of the debt in a registered 
offering, would issue registered debt without subsidiary guarantees, or 
would avoid registering the offering altogether due to the requirement 
to provide that subsidiary's separate financial statements. These 
choices may lead to a higher cost of capital and less protection for 
investors than if the subsidiary were designated as a guarantor.\57\
---------------------------------------------------------------------------

    \57\ For example, if an offering of guaranteed debt securities 
was conducted on a registered basis but the subsidiary was not added 
as a guarantor, the claims of a holder against the non-guarantor 
subsidiary may be structurally subordinate to the claims of other 
creditors. See supra note 21.
---------------------------------------------------------------------------

    Consistent with the view expressed in the Proposing Release, 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.\58\ Specifically, we believe that where a parent company is 
obligated as an issuer or a 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 Revised Alternative Disclosures would enable investors to evaluate 
and sufficiently assess the risks associated with an investment in such 
guaranteed debt security. We expect this change will cause more 
subsidiary issuers and guarantors to be eligible to omit their 
financial statements, while continuing to provide the information about 
subsidiary issuers and guarantors that investors need to make informed 
investment decisions. This change may also result in parent companies 
no longer omitting consolidated but less than 100%-owned subsidiaries 
as guarantors in registered offerings, possibly reducing the cost of 
capital.
---------------------------------------------------------------------------

    \58\ See Section III.C.1.b of the Proposing Release.
---------------------------------------------------------------------------

    We also note that the final amendments will require specific 
disclosure about any material factors that may affect payments to 
holders, including the rights of a non-controlling interest holder. 
This disclosure should more directly provide insight into any competing 
common equity interest in the assets or revenues of a subsidiary, in 
contrast to the indirect disclosure in the form of separate financial 
statements of the consolidated subsidiary issuer or guarantor that an 
investor receives under the existing rule. We also expect this change 
will reduce costs and burdens for consolidated but less than 100%-owned 
subsidiary issuers and guarantors, which are currently required to 
provide separate financial statements.
c. Debt or Debt-Like Securities Condition
i. Proposed Amendments
    The exceptions in existing Rules 3-10(b) through (f) are available 
only to issuers and guarantors of debt securities.\59\ Similarly, the 
proposed rule would be available only for issuers and guarantors of 
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.''
---------------------------------------------------------------------------

    \59\ See Section II.H of the Proposing Release.
---------------------------------------------------------------------------

    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,\60\ a 
guaranteed security would be considered ``debt or debt-like'' under the 
proposed rule if:
---------------------------------------------------------------------------

    \60\ 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 would 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,\61\ 
that:
---------------------------------------------------------------------------

    \61\ 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

[[Page 21946]]

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.
ii. Comments on the Proposed Amendments
    We received one comment supporting this aspect of the proposed 
amendments. The commenter supported the ``debt or debt-like'' condition 
in proposed Rule 3-10, stating that the proposed revision would be a 
useful modification to Rule 3-10.\62\
---------------------------------------------------------------------------

    \62\ See letter from Sullivan & Cromwell.
---------------------------------------------------------------------------

iii. Final Amendments
    We are adopting the amendments as proposed. Amended Rule 3-10(a)(1) 
requires that the guaranteed security must be ``debt or debt-like,'' 
and amended Rule 3-10(b)(2) specifies when a guaranteed security would 
be considered ``debt or debt-like'' as proposed.
d. Eligible Issuer and Guarantor Structures Condition
i. Proposed Amendments
    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; \63\ or
---------------------------------------------------------------------------

    \63\ 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.\64\
---------------------------------------------------------------------------

    \64\ Proposed Rule 3-10(a)(1)(ii).
---------------------------------------------------------------------------

    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 full and unconditional. Accordingly, under the 
proposed rule, the parent company's role as issuer,\65\ co-issuer,\66\ 
or full and unconditional guarantor with respect to the guaranteed 
security \67\ would determine whether the issuer and guarantor 
structure is eligible.\68\ 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,\69\ 
and subsidiary guarantees would no longer be required to be full and 
unconditional as a condition of eligibility.\70\ Although one or more 
other subsidiaries of the parent company may, and the Commission 
expected often would, guarantee the security, in the Proposing Release, 
the Commission stated its belief that the eligibility of an issuer and 
guarantor structure should depend on the role of the parent 
company.\71\ Accordingly, under the proposed amendments separate 
financial statements of consolidated subsidiary guarantors may be 
omitted for each eligible issuer and guarantor structure if the other 
conditions of proposed Rule 3-10 are met.
---------------------------------------------------------------------------

    \65\ 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.
    \66\ When acting as a co-issuer with one or more of its 
consolidated subsidiaries, all co-issuers would be required to be 
jointly and severally liable under the 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 security in full when they come due. 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 security.
    \67\ 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 section III.A.1.b of the 2000 Release, 
and would be included in proposed Rule 3-10(b)(3). The 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.
    \68\ 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. 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.''
    \69\ While not specified in the proposed eligible categories of 
issuer and guarantor structures, the role of subsidiary guarantors 
and their guarantees would, however, 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 factors exist that may affect payments to holders, 
such as factors affecting guarantee enforceability, disclosure of 
the factors would be required by proposed Rule 13-01(a)(3), to the 
extent material. Furthermore, proposed Rule 13-01(a)(4) would 
require separate disclosure of Summarized Financial Information 
applicable to subsidiary guarantors to which such factors apply, to 
the extent material.
    \70\ 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. 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) and separate disclosure of Summarized 
Financial Information applicable to that subsidiary guarantor would 
be required by proposed Rule 13-01(a)(4).
    \71\ See Section III.C.1.d of the Proposing Release.
---------------------------------------------------------------------------

ii. Comments on the Proposed Amendments
    Comments on the proposals were generally supportive. Commenters 
generally supported the simplified and streamlined approach of the 
proposed amendments that replaced 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 of eligible 
issuer and guarantor structures.\72\ One commenter suggested that an 
exemption to the required financial disclosures about guarantors should 
be permitted if the issuer of the debt is the parent company.\73\ This 
commenter stated that, for registrants that issue securities only from 
the parent entity, the relevant financial information could be derived 
from the parent's consolidated financial statements.
---------------------------------------------------------------------------

    \72\ See, e.g., letters from FEI and NYC Bar.
    \73\ See letter from Ball Corp.
---------------------------------------------------------------------------

    Two commenters supported the proposed requirement that only the 
parent company's guarantee need be full and unconditional,\74\ of which 
one stated that ``disclosure of the limitations on the scope of the 
guarantee is more important to investors than providing separate 
financial statements of the issuer of a limited guarantee.'' \75\ This 
same commenter indicated that local law requirements in many foreign 
jurisdictions preclude the issuance of a guarantee that satisfies the 
Commission's definition of ``full and unconditional,'' and that 
historically, it

[[Page 21947]]

was rare for foreign subsidiaries to guarantee debt of domestic 
registrants due to potentially adverse tax consequences.\76\ Another 
commenter asserted that the proposed amendments contemplate changing 
the definition of ``full and unconditional'' and recommended that, if 
such changes were adopted, the Commission provide guidance around the 
definition akin to what was provided in the 2000 Release.\77\
---------------------------------------------------------------------------

    \74\ See letters from Cravath and FEI.
    \75\ See letter from Cravath.
    \76\ See letter from Cravath.
    \77\ See letter from Debevoise. The Proposing Release requested 
comment on the definition of ``full and unconditional,'' but the 
proposed rules would not change the definition. The Proposing 
Release states, ``[f]or 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.''
---------------------------------------------------------------------------

iii. Final Amendments
    We are adopting the amendments substantially as proposed. 
Consistent with the proposal, the specific issuer and guarantor 
structures permitted under the five exceptions in existing Rules 3-
10(b) through (f) will be replaced with the proposed two-category 
framework.
    As shown in the table below, issuer and guarantor structures that 
currently fall under existing Rules 3-10(b), (c), or (d) align with the 
eligible categories in amended 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, align with the first category in amended Rule 3-10(a)(1)(i).

------------------------------------------------------------------------
             Existing rule                         Amended 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).
------------------------------------------------------------------------

    Under the amended rules, the ability to provide the Revised 
Alternative Disclosures in lieu of separate subsidiary issuer and 
guarantor financial statements is only available when the parent 
company's obligation is full and unconditional.
    We are not adopting one commenter's suggestion to permit the 
omission of the required financial disclosures about guarantors if the 
issuer of the debt is the parent company.\78\ Consistent with the 
rationale cited in our discussion of the overarching principle and 
overview of the amendments above,\79\ we believe the financial 
information about the Obligor Group included in the Revised Alternative 
Disclosures is an important supplement to the consolidated financial 
statements of the parent company for investors when making investment 
decisions about guaranteed debt securities. Therefore, providing the 
Revised Alternative Disclosures is a condition that must be met to 
permit the omission of a subsidiary issuer's or guarantor's financial 
statements.
---------------------------------------------------------------------------

    \78\ See letter from Ball.
    \79\ See discussion in Sections III.A ``Overarching Principle'' 
and ``III.B, ``Overview of the Proposed and Final Amendments.''
---------------------------------------------------------------------------

    Consistent with the proposed rule, the status of subsidiary 
guarantors is not specified in the categories of eligible issuer and 
guarantor structures in the final rule. Although one or more other 
subsidiaries of the parent company may, and we expect often would, 
guarantee the security, the eligibility of an issuer and guarantor 
structure depends on the role of the parent company as issuer, co-
issuer, or full and unconditional guarantor with respect to the 
guaranteed security. Separate financial statements of consolidated 
subsidiary guarantors may be omitted for each issuer and guarantor 
structure that is eligible if the other conditions of amended Rule 3-10 
are met. Despite not affecting whether that issuer and guarantor 
structure is eligible, the role of subsidiary guarantors in an issuer 
and guarantor structure and their guarantees do affect what disclosure 
is required. In this regard, the subsidiary guarantors are required to 
be identified pursuant to Rule 13-01(a)(1), and disclosure of the terms 
and conditions of the guarantees is required by Rule 13-01(a)(2),\80\ 
which includes but is not limited to any limitations and conditions of 
a subsidiary's guarantee, whether the guarantee is joint and several 
with other guarantees, and any guarantee release provisions. Further, 
separate disclosure of Summarized Financial Information applicable to 
subsidiary guarantors to which such disclosures apply is required by 
Rule 13-01(a)(4)(iv).\81\
---------------------------------------------------------------------------

    \80\ See discussion in Section III.C.2.b, ``Non-Financial 
Disclosures.''
    \81\ See discussion in Section III.C.2.ii, ``Presentation on a 
Combined Basis.'' In limited circumstances, a brief narrative is 
permitted in lieu of separate Summarized Financial Information of 
the affected guarantors.
---------------------------------------------------------------------------

    As was proposed, an issuer and guarantor structure involving a 
finance subsidiary \82\ used to issue a debt security guaranteed by the 
parent company \83\ will be addressed by amended Rule 3-10(a)(1)(ii) 
or, if the security were to be co-issued, jointly and severally, with 
its parent, amended Rule 3-10(a)(1)(i) will apply. Also as proposed, 
the final rule will no longer require a subsidiary issuer or guarantor 
to be designated as a ``finance subsidiary'' for purposes of 
determining whether the issuer and guarantor structure is eligible.\84\ 
Consistent with the proposed amendments, the final rule also eliminates 
the ``operating subsidiary'' definition in existing Rule 3-10(h)(8).
---------------------------------------------------------------------------

    \82\ Under existing 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.''
    \83\ This issuer and guarantor structure is included in the 
exception in existing Rule 3-10(b) of Regulation S-X. See Section 
II.F of the Proposing Release.
    \84\ As proposed, the ``finance subsidiary'' definition at 
existing Rule 3-10(h)(7) would have been eliminated. However, as 
described below, the final rule specifies certain circumstances 
involving a ``finance subsidiary'' when we believe the required 
supplemental financial information is not material to an investment 
decision and may be omitted. As part of this change, an amended 
definition of ``finance subsidiary'' has been incorporated in the 
note to new Rule 13-01(a)(4)(vi)(C) and (D). See Section III.C.2.c, 
``When Disclosure is Required.''
---------------------------------------------------------------------------

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. The Commission proposed to 
retain the requirement to provide Alternative Disclosures, with

[[Page 21948]]

modifications, as it believed the disclosures are an important 
supplement to the consolidated parent company disclosures. If the 
eligibility conditions in proposed Rule 3-10(a) introductory text and 
(a)(1) are satisfied, a parent company would be required to 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.\85\ 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. The proposed 
amendments, comments received, and final amendments to the disclosure 
requirements are described below.
---------------------------------------------------------------------------

    \85\ This requirement would be specified in proposed Rule 3-
10(a)(2).
---------------------------------------------------------------------------

a. Financial Disclosures
    As discussed below,\86\ the financial disclosure requirements in 
proposed Rule 13-01 were tailored to the type of material information, 
in addition to the parent company's consolidated financial statements, 
that the Commission believed investors in registered offerings need to 
make informed investment decisions about guaranteed debt securities. 
Under the proposed revisions, registrants would:
---------------------------------------------------------------------------

    \86\ See discussion in 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 generally 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.\87\
---------------------------------------------------------------------------

    \87\ As a result of the adoption of the proposed financial 
disclosures as described below, which replace Consolidating 
Information, the final rule eliminates the instructions in existing 
Rule 3-10(i).
---------------------------------------------------------------------------

i. Level of Detail
(A) Proposed Amendments
    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 (Rule 10-01) of Regulation S-X \88\ requires to be shown separately 
in interim financial statements. The proposed amendments were based on 
requiring supplemental financial information about issuers and 
guarantors that would be focused on the information that the Commission 
believed is most likely to be material to an investment decision. 
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 
have been required by proposed Rule 13-01(a)(5), to the extent they are 
material to an investment decision.
---------------------------------------------------------------------------

    \88\ 17 CFR 210.10-01.
---------------------------------------------------------------------------

    While investors are provided cash flow information at the parent 
company consolidated level, supplemental cash flow information about 
subsidiary issuers and guarantors would not be a required disclosure 
under the proposed rule.
(B) Comments on the Proposed Amendments
    Comments on the proposed amendments were generally supportive. Many 
commenters supported the proposal to replace Consolidating Information 
with Summarized Financial Information, as defined in Rule 1-02(bb)(1) 
of Regulation S-X.\89\ Some commenters asserted that providing 
Summarized Financial Information rather than Consolidating Information 
would reduce disclosure burdens \90\ while continuing to provide 
investors with material information to make an informed investment 
decision.\91\
---------------------------------------------------------------------------

    \89\ See, e.g., letters from Ball Corp., Comcast, Davis Polk, 
Dell, Eaton Corp., EEI/AGA, EY, FedEx, FEI, Freeport, KPMG, 
Medtronic, Nareit, NYC Bar, Sullivan & Cromwell, T-Mobile, and WTW.
    \90\ See, e.g., letters from Ball Corp., Eaton Corp., EY, FEI, 
Freeport, KPMG, NYC Bar, Sullivan & Cromwell, and T-Mobile.
    \91\ See, e.g., letters from Ball Corp., EY, FedEx, FEI, 
Freeport, and Sullivan & Cromwell.
---------------------------------------------------------------------------

    Some commenters noted that many issuers' information systems are 
not normally designed to provide the level of detail currently required 
by Rule 3-10, which, according to these commenters, makes complying 
with the rule burdensome.\92\ Some commenters stated that investors 
have expressed little interest in the detailed disclosures required by 
existing Rule 3-10.\93\
---------------------------------------------------------------------------

    \92\ See letters from Dell, FEI, and Freeport.
    \93\ See, e.g., letters from Ball Corp., Freeport, Windstream, 
and WTW.
---------------------------------------------------------------------------

    A number of commenters stated that the proposal to require only 
Summarized Financial Information rather than Consolidating Information 
was an improvement, but recommended that the final rules should permit 
registrants to provide even less disclosure.\94\ In this regard, a few 
commenters noted that Rule 144A offerings \95\ may include less 
disclosure than what is required in Summarized Financial 
Information.\96\ Some commenters suggested that registrants should be 
allowed to provide only balance sheet information because balance sheet 
information should be sufficient disclosure for investors to make an 
informed investment decision.\97\ One commenter contended that 
guarantor revenues, guarantor operating income (or a similar metric), 
and assets and liabilities of the issuer and guarantors were the most 
useful disclosures for making an investment decision and stated that 
these disclosures are what typically is provided in Rule 144A 
offerings.\98\
---------------------------------------------------------------------------

    \94\ See, e.g., letters from Comcast, Davis Polk, Eaton Corp., 
FEI, Medtronic, and NYC Bar.
    \95\ 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 U.S. 
Sec. & Exch. Comm'n, Div. of Econ. & Risk Analysis, Access to 
Capital and Market Liquidity 96 (Aug. 2017) (``Access to Capital and 
Market Liquidity Report''), available at https://www.sec.gov/files/access-to-capital-and-market-liquidity-study-2017.pdf, 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), 
available at https://www.sec.gov/dera/staff-papers/white-papers/30oct15_white_unregistered_offering.html.
    \96\ See, e.g., letters from Davis Polk, Eaton Corp., and NYC 
Bar.
    \97\ See, e.g., letters from Comcast, Eaton Corp., FEI, and 
Medtronic.
    \98\ See letter from T-Mobile.
---------------------------------------------------------------------------

    Several commenters recommended other modifications to the proposed 
amendments. One commenter suggested that Summarized Financial 
Information may be too condensed and asserted that users of financial 
statements would be better informed if balance sheet and income 
statement information similar to the level of detail specified in Rule 
10-01 of Regulation S-X were provided.\99\ Another commenter 
recommended requiring disclosure of investments held by the Obligor 
Group in non-obligated subsidiaries; intercompany or related-party 
transactions between the obligated and non-obligated groups; and 
whether the obligated group includes variable interest entities, which 
should cross-reference the relevant disclosures in the consolidated 
financial statements.\100\ Another commenter stated that ``related 
party transactions with [other subsidiaries] is an example of 
additional information that may be material to

[[Page 21949]]

investor decisions, and thus may require disclosure.'' \101\ This 
commenter also stated that it would be even more meaningful to simply 
exclude such balances and transactions altogether. One commenter 
suggested that the Commission should consider whether requiring 
separate disclosure of the amounts in each caption of the combined 
Summarized Financial Information related to the non-obligated entities 
would enhance the usefulness of the information.\102\ This commenter 
also suggested that the Commission consider whether using different 
measures, such as operating income, instead of, or in addition to, net 
income would provide valuable information to investors.
---------------------------------------------------------------------------

    \99\ See letter from PWC.
    \100\ See letter from EY.
    \101\ See letter from FEI.
    \102\ See letter from Deloitte.
---------------------------------------------------------------------------

    A few commenters suggested requiring certain financial information 
of the non-guarantor subsidiaries,\103\ stating that such disclosures 
would be consistent with information provided in Rule 144A offerings or 
high yield Rule 144A offerings.\104\ One of these commenters suggested 
requiring disclosure of debt and other liabilities of the non-guarantor 
subsidiaries and that any profitability metrics about the obligated 
entities (or non-obligated subsidiaries) should be capital-structure 
neutral by excluding interest expense.\105\ Another commenter suggested 
only requiring disclosure of revenue, operating income, assets and 
liabilities of the non-guarantors as a group.\106\ This commenter 
suggested permitting the financial disclosures to be of the non-
guarantors as a group, rather than requiring such disclosure of the 
Obligor Group. Yet another commenter suggested that the Commission 
require disclosure of a metric of earnings of the non-guarantors, which 
the issuer should be able to choose, as well as the assets and 
liabilities of the non-guarantors as a single group.\107\ One commenter 
recommended that the Commission consider requiring registrants to 
evaluate and disclose information in their Management Discussion and 
Analysis (``MD&A'') section with respect to known trends and 
uncertainties that have had or are reasonably expected to have a 
material impact on the results and operations or capital resources of 
the Obligor Group and other issuers and guarantors whose information is 
required to be presented separately.\108\
---------------------------------------------------------------------------

    \103\ See in Section III.C.2.a.ii, ``Presentation on a Combined 
Basis'' regarding presentation of non-guarantor information.
    \104\ See letters from Davis Polk, NYC Bar, and Shearman. Two of 
these commenters stated that their recommendations for required 
disclosures were based on the information they believe allows 
investors to evaluate structural subordination. See letters from 
Davis Polk and Shearman.
    \105\ See letter from Shearman. This commenter asserted that, in 
default, the levered equity value of the obligors is irrelevant 
because the capital structure will be readjusted through a 
reorganization or liquidation, and that where profitability metrics 
are included in Rule 144A offering documents, they generally consist 
of operating income or earnings before interest, taxes, 
depreciation, and amortization (``EBITDA''), each excluding interest 
expense. This commenter further stated that in contrast with these 
measures, the proposed Summarized Financial Information would 
consist of income from continuing operations and net income, both of 
which include interest expense allocated within the corporate group 
under the pre-default capital structure.
    \106\ See letter from NYC Bar.
    \107\ See letter from Davis Polk.
    \108\ See letter from Grant Thornton.
---------------------------------------------------------------------------

    One commenter contended that holders of debt securities are 
expected to be interested in debt service and may need cash flow 
information for the Obligor Group and recommended that the Commission 
consider input from investors with respect to the need for summarized 
cash flow information.\109\ Other commenters, however, stated that 
supplemental cash flow information should not be required.\110\ Some of 
these commenters asserted such information would not be meaningful 
information as investors look primarily to the parent company's 
consolidated cash flow \111\ and that preparing this disclosure would 
be costly.\112\
---------------------------------------------------------------------------

    \109\ See letter from Grant Thornton.
    \110\ See, e.g., letters from Eaton Corp., Sullivan & Cromwell, 
T-Mobile, and Windstream.
    \111\ See letters from Sullivan & Cromwell and T-Mobile.
    \112\ See letter from Eaton Corp.
---------------------------------------------------------------------------

    One commenter advocated that the Commission consider replacing the 
parent company-only condensed financial statements required by 17 CFR 
210.5-04 (``Rule 5-04 of Regulation S-X'') and 210.12-04 (``Rule 12-04 
of Regulation S-X'') with parent-only summarized financial information 
when there is a specified level of restriction on an issuer's 
subsidiaries' ability to transfer funds to the parent.\113\
---------------------------------------------------------------------------

    \113\ See letter from BDO. This recommendation would affect 
situations beyond disclosures about issuers and guarantors of 
guaranteed securities and is beyond the scope of the amendments 
considered herein.
---------------------------------------------------------------------------

(C) Final Amendments
    We are adopting the amendments in substantially the form proposed, 
but with modifications in response to comments received. As adopted, 
Rule 13-01(a)(4) will require disclosure of Summarized Financial 
Information for each issuer and guarantor. As described above, some 
commenters suggested requiring different or more limited information 
than what is required by Summarized Financial Information, or balance 
sheet only information, whereas one commenter recommended more detailed 
information. However, many other commenters supported the use of 
Summarized Financial Information, and we believe the select balance 
sheet and income statement line items it requires are focused on the 
information that is most likely to be material to an investment 
decision. Under the final amendments, disclosure of additional line 
items of financial information beyond the line items specified in 
Summarized Financial Information is required if necessary to comply 
with Rule 13-01(a)(6) and (7).\114\ For example, if substantially all 
of the obligated entities' non-current assets consisted of goodwill, 
separate presentation of goodwill from non-current assets would be 
required if the parent company concludes such disclosure would be 
material for investors to evaluate the sufficiency of the guarantee. We 
agree with several commenters that requiring Summarized Financial 
Information 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. We recognize that some of this information may go beyond what 
some commenters assert is typically provided in Rule 144A debt 
offerings, but we believe this is appropriate in light of the broader 
range of potential investors that may participate in a registered 
offering.
---------------------------------------------------------------------------

    \114\ Proposed Rule 13-01(a)(1) through (4) set forth proposed 
requirements to disclose specific financial and non-financial 
information. Proposed Rule 13-01(a)(5), which would have required 
disclosure of ``any other quantitative or qualitative information 
that would be material to making an investment decision with respect 
to the guaranteed security,'' was included to require disclosure 
about the obligated entities and the guarantees that would be 
material but was not otherwise already required by the specified 
proposed financial and non-financial disclosures. Instead of 
proposed Rule 13-01(a)(5), the final amendments include Rules 13-
01(a)(6) and (7), which require disclosure of ``[a]ny financial and 
narrative information about each guarantor if the information would 
be material for investors to evaluate the sufficiency of the 
guarantee,'' and ``[s]ufficient information so as to make the 
financial and non-financial information presented not misleading,'' 
respectively. See discussion in Section III.C.2.c, ``When Disclosure 
is Required.''
---------------------------------------------------------------------------

    The Proposing Release included an example of when incremental 
disclosure of related party revenues would be required under the 
proposed rule.\115\ Specifically, if a material amount of reported 
revenues of the obligated entities were derived from transactions with 
related parties, such as non-issuer and non-guarantor subsidiaries of 
the

[[Page 21950]]

parent company, separate disclosure of those amounts would be 
necessary. Instead of including this as an example of when disclosure 
would be required under Rule 13-01(a)(6) and (7), we agree with those 
commenters that recommended including a requirement to separately 
disclose an issuer's or guarantor's balance sheet and income statement 
amounts related to non-obligated subsidiaries.\116\ Accordingly, as 
adopted, Rule 13-01(a)(4)(iii) requires an issuer's or guarantor's 
amounts due from, amounts due to, and transactions with non-obligated 
subsidiaries and related parties to be presented in separate line 
items, to the extent material.\117\ We believe that clearly 
establishing this expectation as a stated requirement will assist in 
the preparation of the disclosures and provide material information to 
investors, and agree with one commenter that such separate disclosure 
enhances the transparency of the Summarized Financial Information 
presented.\118\
---------------------------------------------------------------------------

    \115\ See Section III.C.2.a.i of the Proposing Release. Such 
disclosure would have been required by proposed Rule 13-01(a)(5).
    \116\ In recommending separate disclosure of these amounts, one 
commenter cited enhancement of the transparency of Summarized 
Financial Information related to the Obligor Group (See letter from 
EY), and another cited enhanced usefulness (See letter from 
Deloitte). Given that a guarantor's transactions with a related 
party may not be conducted on an arm's length basis, we agree it 
could be useful to highlight such transactions for investors by 
requiring presentation of such information in a separate line item.
    \117\ One commenter suggested flexibility to provide these 
disclosures as either explanatory notes or separate line items. See 
letter from EY. Based on the nature of these items, and to drive 
consistency in the disclosures between parent companies, Rule 13-
01(a)(4)(iii) requires the amounts to be in separate line items.
    \118\ See letter from EY.
---------------------------------------------------------------------------

    Unlike Consolidating Information, Summarized Financial Information 
does not include cash flow statement information. As described above, 
of the commenters that specifically discussed supplemental cash flow 
information, several supported not requiring such information,\119\ 
while one suggested considering input from investors.\120\ Similar to 
some commenters, we believe 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,\121\ and we heard no 
feedback from investors suggesting otherwise. As such, final Rule 13-01 
does not require supplemental cash flow information of the obligated 
entities.
---------------------------------------------------------------------------

    \119\ See, e.g., letters from Eaton, Sullivan, T-Mobile, Willis, 
and Windstream.
    \120\ See letter from Grant. No investor commenters provided 
feedback specific to supplemental cash flow information.
    \121\ See, e.g., letters from Eaton and T-Mobile.
---------------------------------------------------------------------------

    Lastly, certain of the proposed amendments would have each required 
additional disclosure regarding their basis of presentation.\122\ 
Rather than including multiple separate requirements to explain the 
basis of presentation for individual disclosure requirements, final 
Rule 13-01(a)(4) includes a requirement to briefly describe the basis 
of presentation applicable to each of the required financial 
disclosures therein. In addition to simplifying the final rule, we 
believe this requirement will better inform users about the form and 
content of the disclosures provided pursuant to final Rule 13-
01(a)(4).\123\ We believe such disclosure enhances the 
understandability of the financial information provided.
---------------------------------------------------------------------------

    \122\ For example, proposed Rule 13-01(a)(4) would have required 
disclosure of ``[t]he method selected to present investments in 
subsidiaries that are not issuers or guarantors . . .'' to inform 
investors about the basis of presentation of the financial 
information of the Obligor Group. Two commenters supported this 
disclosure requirement. See letters from CAQ and Deloitte. Instead 
of this proposed requirement, final Rule 13-01(a)(4)(iii) requires 
the financial information of non-issuer and non-guarantor 
subsidiaries to be completely excluded. See discussion in Section 
III.2.a.ii.(C), ``Presentation on a Combined Basis,'' below. Rather 
than including a separate requirement within final Rule 13-
01(a)(4)(iii) to disclose that financial information of non-issuer 
and non-guarantor subsidiaries was excluded, such disclosure will be 
required pursuant to the new requirement to describe the basis of 
presentation of the financial information presented under final Rule 
13-01(a)(4).
    \123\ Such disclosure could state, for example, that the 
financial information presented is that of the issuers and 
guarantors of the guaranteed security, and that the financial 
information of non-issuer and non-guarantor subsidiaries has been 
excluded. If applicable, the disclosure could also state, for 
example: That the financial information of issuers and guarantors is 
presented on a combined basis; intercompany balances and 
transactions between issuers and guarantors have been eliminated; 
that the issuer's or guarantor's amounts due from, amounts due to, 
and transactions with non-issuer and non-guarantor subsidiaries and 
related parties have been presented in separate line items; and that 
financial information of certain identified subsidiary issuers and 
guarantors has been presented separately due to disclosed facts and 
circumstances applicable to those subsidiaries (as required by Rule 
13-01(a)(4)(iv)).
---------------------------------------------------------------------------

ii. Presentation on a Combined Basis
(A) Proposed Amendments
    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.
    The proposed rule took into consideration 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.
    The proposed rule would no longer require separate disclosure of 
the financial information of non-guarantor subsidiaries. Because non-
guarantor subsidiaries are not obligated to make payments as either 
issuer or guarantor, the proposed rule assumed separate supplemental 
disclosure of their financial information as required under the 
existing rule is not likely to be material to an investment decision.
    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. Proposed Rule 13-01(a)(4) would continue to exclude the 
financial information of non-issuer and non-guarantor subsidiaries 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. However, the proposed rule would have 
allowed 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 was disclosed and was used for all non-
issuer and non-guarantor subsidiaries for all classes of guaranteed 
securities for which the disclosure was required, and was reasonable in 
the circumstances.\124\ For example, the

[[Page 21951]]

parent company could have excluded the assets, liabilities, and 
operations of non-issuer and non-guarantor subsidiaries by using the 
equity method of accounting for those subsidiaries.
---------------------------------------------------------------------------

    \124\ This proposed amendment might have resulted 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, 
the Commission 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. The Commission expected 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).
---------------------------------------------------------------------------

(B) Comments on the Proposed Amendments
    Comments were supportive of this aspect of the proposal. Many 
commenters generally supported permitting Summarized Financial 
Information of each issuer and guarantor that is consolidated in the 
parent company's consolidated financial statements to be presented on a 
combined basis with the parent company's Summarized Financial 
Information.\125\ Some of these commenters indicated that providing 
this information on a combined basis would continue to provide 
investors with material information for making an informed investment 
decision,\126\ while also reducing a burdensome requirement for 
issuers.\127\ One commenter supported streamlining the disclosures, but 
asserted that the proposed amendments would likely only benefit a small 
number of issuers.\128\ This commenter noted that the proposed 
amendments could lead to complexities and unintended consequences in 
presenting the Summarized Financial Information as proposed, regardless 
of the method of accounting selected.\129\ Another commenter noted 
that, although such a combined presentation might provide some useful 
information when the guarantors are single-tiered operating companies 
with no subsidiaries, the accounting presentation becomes less 
meaningful when the guarantors are holding companies.\130\
---------------------------------------------------------------------------

    \125\ See, e.g., letters from ABA, Davis Polk, Dell, Eaton 
Corp., FedEx, FEI, KPMG, Medtronic, Nareit, NYC Bar, PWC, and 
Sullivan & Cromwell.
    \126\ See letters from Dell, FedEx, and Sullivan & Cromwell.
    \127\ See letters from Davis Polk, KPMG, and Sullivan & 
Cromwell.
    \128\ See letter from KPMG.
    \129\ See letter from KPMG. This commenter stated, as an 
example, that registrants may not experience a reduction in burdens 
in preparing guarantor disclosures that exclude the non-obligor 
group either using the equity method, cost method, or excluding the 
non-obligated subsidiaries entirely, when a registrant must account 
for the non-obligor subsidiaries for consolidation purposes.
    \130\ See letter from Comcast.
---------------------------------------------------------------------------

    A few commenters recommended requiring disclosure only of the non-
guarantor subsidiaries,\131\ and another commenter recommended 
requiring certain balance sheet information about the non-guarantor 
subsidiaries and profitability metrics about the Obligor Group or the 
non-guarantor subsidiaries.\132\ These commenters stated that such 
disclosures \133\ would be consistent with the information provided in 
Rule 144A offerings \134\ or high yield Rule 144A offerings.\135\
---------------------------------------------------------------------------

    \131\ See letters from Davis Polk and NYC Bar.
    \132\ See letter from Shearman.
    \133\ Two of these commenters stated their recommendations for 
required disclosures were based on the information they believe 
allows investors to evaluate structural subordination. See letters 
from Davis Polk and Shearman.
    \134\ See letters from Davis Polk and NYC Bar.
    \135\ See letter from Shearman.
---------------------------------------------------------------------------

    In response to the Commission's request for comment on whether the 
proposed amendments should specify an accounting method (e.g., the 
equity method) that must be used to exclude the financial information 
of non-obligated subsidiaries from the Summarized Financial Information 
of the Obligor Group, some commenters recommended that the Commission 
specify acceptable accounting methods in the rule.\136\
---------------------------------------------------------------------------

    \136\ See, e.g., letters from BDO, Deloitte and PWC. One of 
these commenters stated that questions may arise from the proposed 
flexibility in the method of excluding non-issuer and non-guarantor 
information, as the proposed amendments do not address the option to 
fully exclude investments in non-issuer and non-guarantor 
subsidiaries from the summarized financial information of the 
Obligor Group, and that providing a list of acceptable methods would 
indicate whether complete exclusion is an acceptable option. See 
letter from BDO. Another commenter stated that the Commission should 
consider specifically identifying and describing the acceptable 
methods of exclusion if the final rule permits the use of methods 
other than those based on existing U.S. GAAP principles. See letter 
from Deloitte.
---------------------------------------------------------------------------

    Some commenters agreed with the proposed rule permitting the parent 
company to determine which method to use in excluding the financial 
information of non-issuer and non-guarantor subsidiaries.\137\ A few 
commenters supported the requirement to disclose and/or apply 
consistently the selected method.\138\
---------------------------------------------------------------------------

    \137\ See, e.g., letters from ABA, Dell, Eaton Corp., EY, Grant, 
and PWC.
    \138\ See letters from CAQ and Deloitte.
---------------------------------------------------------------------------

    Several commenters recommended modifications to the proposed 
amendments. A few commenters recommended that the Commission allow 
issuers to use only certain prescribed accounting methods, including 
those consistent with U.S. GAAP \139\ or IFRS,\140\ those permitted 
under the accounting framework used to prepare their financial 
statements or otherwise specified in Regulation S-X,\141\ the equity 
method,\142\ the fair value method,\143\ and the cost method (or the 
fair value practical expedient for equity securities without a readily 
determinable fair value model as contemplated in U.S. GAAP \144\).\145\ 
One commenter stated that, if the Commission decides to require the 
financial information to be audited, any acceptable method should be 
objectively auditable.\146\ One commenter contended that the proposed 
requirement that the parent company disclose its basis for the 
accounting method it applied to exclude the financial information of 
non-issuer and non-guarantor subsidiaries from the Proposed Alternative 
Disclosures added an unnecessary element of complexity.\147\ 
Alternatively, a few commenters suggested the Commission consider 
completely excluding the financial information of non-issuer and non-
guarantor subsidiaries.\148\ One of these commenters stated that the 
Summarized Financial Information is more meaningful if it excludes the 
financial information of non-issuer and non-guarantor 
subsidiaries,\149\ and another stated that excluding balances related 
to investments in non-obligated subsidiaries altogether would eliminate 
the possible confusion over including amounts attributable to the non-
obligated subsidiary investments within the Obligor Group financial 
information.
---------------------------------------------------------------------------

    \139\ See letters from CAQ, Deloitte, and EY.
    \140\ See letters from CAQ and EY.
    \141\ Letter from Grant Thornton.
    \142\ See letters from Deloitte, KPMG, and PWC.
    \143\ See letters from Deloitte and PWC.
    \144\ ASC 321-10-35-2, Investments--Equity Securities.
    \145\ See letters from Deloitte, KPMG, and PWC.
    \146\ See letter from Deloitte.
    \147\ See letter from ABA.
    \148\ See, e.g., letters from BDO, KPMG, and PWC.
    \149\ See letter from BDO.
---------------------------------------------------------------------------

    Two commenters asserted that the proposed amendments would require 
parent companies to present the Summarized Financial Information 
separately if the required qualitative disclosures differed within the 
group of subsidiary issuers or guarantors, which these commenters 
maintained was overly prescriptive.\150\ These commenters recommended 
permitting greater flexibility in such instances, such as allowing the 
parent company to present Summarized Financial Information for the 
aggregate group with supplemental qualitative or quantitative

[[Page 21952]]

disclosure regarding material differences within the group.
---------------------------------------------------------------------------

    \150\ See letter from EY and Grant Thornton.
---------------------------------------------------------------------------

(C) Final Amendments
    After considering the public comments, we are adopting the 
amendments substantially as proposed with modifications, including 
separating certain requirements within proposed Rule 13-01(a)(4) into 
distinct subparagraphs for clarity. As supported by several commenters, 
we are adopting the amendment that permits the supplemental financial 
disclosures of issuers and guarantors specified in Rule 13-01(a)(4) to 
be provided on a combined basis. Specifically, final Rule 13-
01(a)(4)(i) permits 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, and Rule 13-
01(a)(4)(ii) requires intercompany balances and transactions between 
issuers and guarantors whose information is presented on a combined 
basis to be eliminated.\151\ We agree with those commenters that said 
providing this information on a combined basis would provide investors 
with material information in making an investment decision \152\ while 
also reducing the burden on issuers.\153\
---------------------------------------------------------------------------

    \151\ Proposed Rule 13-01(a)(4) would have required, in part, 
that ``[i]ntercompany transactions between issuers and guarantors 
whose summarized financial information is presented on a combined 
basis shall be eliminated.'' While we are adopting the amendments 
substantially as proposed, final Rule 13-01(a)(4)(ii) clarifies that 
intercompany ``balances'' must also be eliminated in this regard.
    \152\ See, e.g., letters from Dell, FedEx, and Sullivan & 
Cromwell.
    \153\ See, e.g., letters from Davis Polk, KPMG, and Sullivan & 
Cromwell.
---------------------------------------------------------------------------

    The proposed rule would have permitted the parent company to 
determine the method of excluding the financial information of non-
issuer and non-guarantor subsidiaries from the Proposed Alternative 
Disclosures. Although most line items required to be disclosed under 
Summarized Financial Information would be unaffected, under the 
proposed approach, the effect on the financial information of the 
Obligor Group could have varied depending on the method used to exclude 
non-issuer and non-guarantor subsidiary financial information. For 
example, under the equity method, the investments in those subsidiaries 
would have continued to be included within the Obligor Group's non-
current assets, and earnings or losses from those subsidiaries would 
have continued to be included in income or loss of the Obligor Group. A 
similar effect would likely exist under certain other methods described 
above that were suggested by commenters, such as the fair value method 
or the cost method as previously contemplated by U.S. GAAP.
    Instead of adopting the proposed approach, or specifying certain 
methods of accounting that should be used, we agree with those 
commenters that recommended completely excluding the financial 
information of non-issuer and non-guarantor subsidiaries. In 
particular, we agree with one commenter that said excluding balances 
related to investments in non-obligated subsidiaries altogether would 
eliminate the possible confusion over including amounts attributable to 
the non-issuer and non-guarantor subsidiaries within the financial 
information of the Obligor Group.\154\ In this regard, amounts 
attributable to non-issuer and non-guarantor subsidiaries are not 
generally available for payment of debt or useful for evaluating debt-
paying ability. As such, we believe excluding non-issuer and non-
guarantor subsidiary information will enhance the Revised Alternative 
Disclosures for investors.
---------------------------------------------------------------------------

    \154\ See letter from PWC.
---------------------------------------------------------------------------

    Accordingly, under the final amendments, Rule 13-01(a)(4)(iii) 
requires subsidiaries that are not issuers or guarantors to be excluded 
from the Summarized Financial Information. Pursuant to this 
requirement, all non-issuer and non-guarantor subsidiary financial 
information must be entirely removed from the financial information of 
the Obligor Group, even if an issuer or guarantor would otherwise 
consolidate such non-issuer and non-guarantor subsidiaries. An issuer 
or guarantor would not present its investments in non-issuer and non-
guarantor subsidiaries in the Summarized Financial Information. While 
we continue to expect that most line items required by Summarized 
Financial Information would have been unaffected by the particular 
method selected by a parent company to exclude non-issuer and non-
guarantor subsidiary information under the proposed rule, after 
considering the comments received, we now believe that requiring 
complete exclusion of the financial information of such non-issuer and 
non-guarantor subsidiaries in all cases will avoid potential confusion 
on the part of both issuers and investors about the appropriate method 
of exclusion. We note that a parent company may have experienced lower 
costs under the proposed amendments by being able to select the method 
of excluding non-issuer and non-guarantor subsidiary information that 
its systems were already designed to produce. However, under the final 
amendments, a parent company is not required to justify that its 
selected method was reasonable under the circumstances as was proposed, 
and we expect in most circumstances that requiring complete exclusion 
of non-issuer and non-guarantor subsidiary financial information will 
be a less costly presentation than methods that would have required the 
disclosure of such financial information.
    We are also adopting, substantially as proposed, the requirement 
that when information provided in response to Rule 13-01 is applicable 
to one or more, but not all, issuers and guarantors, separate 
disclosure of Summarized Financial Information for the issuers and 
guarantors to which the information applies is required. This 
requirement is stated in Rule 13-01(a)(4)(iv). For clarity, the final 
rule includes an example of disclosure required by Rule 13-01 that 
would trigger separate disclosure for the affected issuers and 
guarantors.\155\ The example is disclosure that is required by Rule 13-
01(a)(3): ``factors that may affect payments to holders of the 
guaranteed security.''
---------------------------------------------------------------------------

    \155\ This example is being included to clarify one situation 
requiring separate presentation of the Summarized Financial 
Information applicable to some but not all issuers and guarantors.
---------------------------------------------------------------------------

    One commenter suggested that the Commission provide a framework for 
presenting Summarized Financial Information for the affected issuers 
and guarantors in aggregate based on the nature of disclosures.\156\ We 
believe a parent company should consider materiality \157\ and exercise 
judgement in determining the appropriate level of aggregation of 
issuers and guarantors based on the nature of the disclosure. In this 
regard, it may be useful to consider quantitative factors, such as the 
financial significance of the affected issuers and guarantors, and 
qualitative factors, such as the nature of the facts and circumstances 
applicable to the issuers and guarantors. For example, if the same 
contractual or statutory restrictions affect some but not all 
subsidiary guarantors, and such subsidiary guarantors represent a 
substantial portion of the Obligor

[[Page 21953]]

Group, aggregation of the Summarized Financial Information of such 
subsidiary guarantors may be appropriate. Conversely, it may not be 
appropriate to aggregate the Summarized Financial Information of such 
subsidiary guarantors where the contractual or statutory restrictions 
are different.
---------------------------------------------------------------------------

    \156\ See letter from Grant.
    \157\ The disclosures specified in Rule 13-01(a) are required to 
the extent material. Rules 13-01(a)(6) and (7) require disclosure of 
``[a]ny financial and narrative information about each guarantor if 
the information would be material for investors to evaluate the 
sufficiency of the guarantee,'' and ``[s]ufficient information so as 
to make the financial and non-financial information presented not 
misleading,'' respectively. See discussion within Section III.C.2.c, 
``When Disclosure is Required.''
---------------------------------------------------------------------------

    Another commenter stated its belief that requiring separate 
presentation of the Summarized Financial Information applicable to 
affected issuers and guarantors under proposed Rule 13-01(a)(4) is 
overly prescriptive.\158\ While we continue to believe that separate 
disclosure of Summarized Financial Information for the affected issuers 
and guarantors is appropriate in most cases, we also agree with this 
commenter's suggestion that it could be acceptable to present 
Summarized Financial Information for the aggregate Obligor Group with 
supplemental qualitative or quantitative disclosure to inform investors 
about the disclosures affecting one or more, but not all issuers and 
guarantors. Accordingly, final Rule 13-01(a)(4)(iv) permits, in limited 
circumstances, narrative disclosure to be provided in lieu of the 
separate Summarized Financial Information of the affected issuers and 
guarantors which the paragraph otherwise requires. The limited 
circumstances when a narrative may be provided are when such separate 
financial information applicable to the affected issuers and guarantors 
can be easily explained and understood. For example, if contractual or 
statutory restrictions are applicable to one subsidiary guarantor, and 
that subsidiary guarantor constitutes a similar percentage of the 
Obligor Group's assets, liabilities, and operations, narrative 
disclosure may be permissible depending on the facts and circumstances. 
In other circumstances, such as if the subsidiary guarantor's financial 
significance to the Obligor Group is not easily explained (e.g., the 
subsidiary guarantor constitutes varying proportions of each line item 
within the Obligor Group's Summarized Financial Information), narrative 
disclosure is unlikely to be sufficient.
---------------------------------------------------------------------------

    \158\ See letter from EY.
---------------------------------------------------------------------------

    Although a few commenters recommended that the required financial 
disclosures depict non-guarantor subsidiaries,\159\ the final 
amendments continue to focus on issuers and guarantors because those 
are the entities a holder can make claims against in the event of 
default. While the final rules do not require financial information to 
be disclosed about subsidiaries not obligated under the guarantee or 
guaranteed debt security, a parent company may separately provide 
supplemental information about non-issuer and non-guarantor 
subsidiaries.
---------------------------------------------------------------------------

    \159\ See letters from Davis Polk and Shearman.
---------------------------------------------------------------------------

iii. Periods to Present
(A) Proposed Amendments
    Instead of the periods specified in 17 CFR 210.3-01 and 210.3-02 
\160\ required by the existing rule, the proposed rule would require 
Summarized Financial Information only as of, and for, the most recently 
ended fiscal year and year-to-date interim period, if applicable.
---------------------------------------------------------------------------

    \160\ Rules 3-01 and 3-02 of Regulation S-X.
---------------------------------------------------------------------------

    In addition, because Item 1 of Part I of Form 10-Q \161\ requires a 
registrant to provide the information required by Rule 10-01 of 
Regulation S-X, the Commission proposed adding Rule 10-01(b)(9) to 
require compliance with Rules 3-10 and 13-01.
---------------------------------------------------------------------------

    \161\ 17 CFR 249.308a.
---------------------------------------------------------------------------

(B) Comments on the Proposed Amendments
    Comments on the proposed amendments were mixed. A number of 
commenters agreed with the proposed amendments, which would limit the 
periods for which Summarized Financial Information is required to the 
most recently ended fiscal year and the year-to-date interim 
period.\162\ One commenter stated that the periods in the proposed 
rules were consistent with disclosures that are typically provided in 
Rule 144A and 17 CFR 230.901 through 230.905 \163\ debt offerings.\164\ 
Some commenters suggested that only the current period of the 
Summarized Financial Information, either annual or interim, should be 
required because it is the most relevant for an investment decision, 
especially because many issuers experience legal-entity structure 
changes.\165\
---------------------------------------------------------------------------

    \162\ See, e.g., letters from Cravath, Davis Polk, EEI/AGA, FEI, 
Freeport, Grant Thornton, Nareit, NYC Bar, and Sullivan & Cromwell.
    \163\ Regulation S.
    \164\ See letter from Cravath.
    \165\ See, e.g., letters from Eaton Corp., FEI, and Medtronic.
---------------------------------------------------------------------------

    Other commenters, however, disagreed with the proposed requirement 
to include the interim period of Summarized Financial Information in 
all cases.\166\ Some commenters suggested not requiring interim 
disclosures unless there has been a material change since the most 
recent annual period,\167\ which certain commenters noted is consistent 
with Article 10 of Regulation S-X.\168\ Some of these commenters 
indicated that the costs of providing interim information when no 
material change has occurred would be overly burdensome \169\ and, 
without that disclosure, investors would still receive information 
necessary to make an informed investment decision.\170\
---------------------------------------------------------------------------

    \166\ See, e.g., letters from ABA, Ball Corp., Comcast, Dell, 
Deloitte, Eaton Corp., EY, FedEx, FEI, and PWC.
    \167\ See, e.g., letters from ABA, Ball Corp., Comcast, Dell, 
Deloitte, EY, FedEx, FEI, and PWC.
    \168\ See, e.g., letters from Deloitte, FEI, and PWC.
    \169\ See, e.g., letters from Ball Corp. and FedEx.
    \170\ See letter from FedEx.
---------------------------------------------------------------------------

(C) Final Amendments
    After considering the comments received, we are adopting the 
amendments as proposed, with one clarification. As adopted, Rule 13-
01(a)(4)(v) requires the financial disclosures to be provided as of and 
for the most recently ended fiscal year and year-to-date interim period 
included in the parent company's consolidated financial statements, 
which as described above many commenters supported. When used in 
conjunction with the parent company's consolidated financial 
statements, we continue to believe the most recent full fiscal year and 
year-to-date interim period should provide investors the additional 
information about the Obligor Group necessary for an informed 
investment decision and eliminate unnecessary compliance costs for 
registrants.
    We are not adopting the approach some commenters recommended, which 
would have required the most recent interim period in limited 
circumstances, such as when there had been a material change since the 
most recent annual period. We continue to believe, as stated in the 
Proposing Release, that the most recent interim period should be 
provided so that investors can make decisions based on the most recent 
information available.\171\ We also are not adopting an approach 
suggested by some commenters that would require only the most recent 
interim or annual period.\172\ We believe that investors should be 
provided with the most recent annual period of financial information 
about issuers and guarantors as a supplement to the parent company 
consolidated financial statements in all cases, and the most recent 
interim period, if applicable. While we acknowledge the concerns about 
the burden to provide interim information in all cases, we note that 
the final amendments already significantly reduce the burdens on parent 
companies by eliminating the earliest two years of required Summarized 
Financial Information and, in filings on

[[Page 21954]]

Form 10-Q, by eliminating both the quarter-to-date interim period 
requirement in filings covering more than one fiscal quarter and 
comparable prior year interim period(s), as applicable. Under the final 
rules, investors will continue to receive the most recent interim and 
annual period information, and we continue to believe this is the most 
appropriate approach to reducing burdens for parent companies while 
providing investors with the information they need to make informed 
investment decisions.
---------------------------------------------------------------------------

    \171\ See Section III.C.2.iii of the Proposing Release.
    \172\ See, e.g., letters from Eaton and Medtronic.
---------------------------------------------------------------------------

    Proposed Rule 13-01(a)(4) did not specify that the required interim 
period was only for the most recent year-to-date period. In certain 
filings, such as a parent company's Form 10-Q for its second and third 
fiscal quarters, both year-to-date and quarter-to-date interim 
financial statements are required to be presented for the parent 
company. To avoid any confusion, and consistent with the proposed 
rule's intent and suggestions from certain commenters,\173\ the final 
rule's interim period requirement has been revised to clarify that only 
the most recent year-to-date interim period is required.
---------------------------------------------------------------------------

    \173\ See, e.g., letters from EY and PWC.
---------------------------------------------------------------------------

    Finally, as proposed, we are adopting Rule 10-01(b)(9) to require 
compliance with Rules 3-10 and 13-01 in quarterly reports on Form 10-Q.
b. Non-Financial Disclosures
i. Proposed Amendments
    When Consolidating Information is presented, the existing rule 
requires limited non-financial disclosures about the issuers and 
guarantors and the guarantees,\174\ restricted net assets,\175\ and 
certain types of restrictions on the ability of the parent company or 
any guarantor to obtain funds from their subsidiaries.\176\ In addition 
to proposing amendments to existing Rule 3-10 for financial 
disclosures, the Commission also proposed amendments to require 
specific non-financial disclosures. These amendments were proposed to 
enhance the information provided about subsidiary issuers and 
guarantors, particularly in light of the proposal to require Summarized 
Financial Information for those subsidiaries. Proposed Rules 13-
01(a)(1) through (3) would require certain disclosures 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. Disclosure of 
additional non-financial disclosures beyond what is specified in 
proposed Rules 13-01(a)(1) through (3) would have been required by 
proposed Rule 13-01(a)(5), to the extent they are material to an 
investment decision.
---------------------------------------------------------------------------

    \174\ Existing Rules 3-10(i)(8)(i) through (iii) require 
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.
    \175\ Rule 3-10(i)(10) of Regulation S-X.
    \176\ Rule 3-10(i)(9) of Regulation S-X.
---------------------------------------------------------------------------

ii. Comments on the Proposed Amendments
    Some commenters expressed general support for the proposed 
requirements regarding non-financial disclosures.\177\ One commenter 
noted that the proposed amendments would be less burdensome on 
registrants than existing requirements under Rule 3-10.\178\ Another 
commenter did not discuss the specific proposed non-financial 
disclosures, but stated its belief that qualitative disclosures are 
important to the debt holder's understanding of the overall picture of 
credit quality and suggested that, in certain instances, qualitative 
disclosures alone may be sufficient information for investors.\179\ One 
commenter stated that, outside of the registration statement and/or the 
related prospectus that would identify the issuers and guarantors of 
the security, it was not clear why identification and disclosure of 
such entities would be meaningful to an investor in the context of 
financial disclosures.\180\ The commenter recommended that the issuer 
and guarantors of the guaranteed security should be identified in the 
registration statement, but not in other filings, such as periodic 
reports. This commenter also suggested that, if the Commission believes 
this information should be presented in connection with an annual 
report, the disclosure should be included as an exhibit to such filing.
---------------------------------------------------------------------------

    \177\ See, e.g., letters from Davis Polk, Freeport, and NYC Bar.
    \178\ See letter from Davis Polk.
    \179\ See letter from Comcast.
    \180\ See letter from PWC.
---------------------------------------------------------------------------

iii. Final Amendments
    After considering the comments received, we are adopting the 
amendments largely as proposed with certain modifications based on 
comments received. Final Rules 13-01(a)(1) through (3) will require 
certain disclosures 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. Consistent with the proposal, we believe these 
requirements will result in enhanced narrative disclosures that will 
improve investor understanding of the issuers, guarantors, and 
guarantees, and make the financial disclosures they accompany easier to 
understand. While the adopted non-financial disclosures are composed of 
the items we believe are most likely to be material to an investor, 
disclosure of additional facts and circumstances is required if 
necessary to comply with Rule 13-01(a)(6) and (7).\181\ Additionally, 
when a non-financial disclosure is applicable to one or more, but not 
all, issuers and guarantors, Rule 13-01(a)(4)(iv) requires, to the 
extent it is material, separate disclosure of Summarized Financial 
Information for the issuers and guarantors to which the non-financial 
disclosure applies.\182\
---------------------------------------------------------------------------

    \181\ Supra note 114.
    \182\ See discussion in Section III.C.2.ii, ``Presentation on a 
Combined Basis.''
---------------------------------------------------------------------------

    We are not adopting one commenter's suggestion that disclosure of 
the identity of the issuers and guarantors should be required only at 
the time of registration of the offer and sale of guaranteed 
securities.\183\ These entities are legally obligated under the 
guaranteed security along with the parent company, and we believe such 
information is material to investors in ongoing periodic reports. 
However, we are adopting the commenter's alternative suggestion that 
the disclosures be included in an exhibit to the subject filing.\184\ 
After considering this commenter's suggestion, we believe that the 
nature of this information is better suited for disclosure in an 
exhibit as it can efficiently be provided in list form, and, depending 
on the number of subsidiary issuers and guarantors, this information 
could distract investor focus from the other financial and non-
financial disclosures required by final Rule 13-01 if presented 
alongside them.

[[Page 21955]]

Furthermore, if the entities required to be disclosed do not change 
from period to period, the parent company could refer to an earlier 
filing's exhibit rather than filing the exhibit again. Because 
registrants are required to hyperlink to each exhibit filed with, or 
incorporated by reference to a filing,\185\ this information will be 
easily accessible to investors. Due to this change, we have revised 
Rule 13-01(a)(1) to require a description of the issuers and guarantors 
of the guaranteed security, instead of their identification, in 
Securities Act registration statements and Exchange Act registration 
statements and periodic reports. We believe this approach will provide 
the information to investors in a more efficient manner and make the 
accompanying financial and non-financial disclosures easier to 
understand.
---------------------------------------------------------------------------

    \183\ See letter from PWC.
    \184\ See amended Item 601(a) and new Item 601(b)(22) of 
Regulation S-K. A parent company will be required to list, under an 
appropriately captioned heading that identifies the associated 
securities, each of its subsidiaries that is a guarantor, issuer, or 
co-issuer of each guaranteed security registered or being registered 
that the parent company issues or guarantees. A subsidiary need not 
be listed more than once so long as its role as issuer, co-issuer, 
or guarantor of a guaranteed security is clearly indicated with 
respect to each applicable security. This exhibit will be required 
in Forms S-1 [17 CFR 239.11], S-3 [17 CFR 239.13], S-4 [17 CFR 
239.25], SF-1 [17 CFR 239.44], SF-3 [17 CFR 239.45], S-11 [17 CFR 
239.18], F-1 [17 CFR 239.31], F-3 [17 CFR 239.33], F-4 [17 CFR 
239.34], 10 [17 CFR 249.210], 10-Q [17 CFR 249.308a], and 10-K [17 
CFR 249.310]. In addition, we are making corresponding revisions to 
the exhibit requirements of Form 20-F by creating new Exhibit 17 
within Item 19, and Form 1-A by creating new Exhibit 17 within Item 
17. This exhibit will also be required in Forms 1-K and 1-SA. See 
discussion in Section V.H.3.c, ``Offerings pursuant to Regulation 
A''.
    \185\ See 17 CFR 232.102(d) [Rule 102(d) of Regulation S-T].
---------------------------------------------------------------------------

c. When Disclosure Is Required
i. Proposed Amendments
    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 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,'' \186\ 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.\187\ Under these thresholds, minor changes in 
circumstances can result in dramatically different disclosures being 
required. Existing Rules 3-10(i)(11)(i) and (ii) provide that Rule 3-10 
disclosure may not omit any financial and narrative information about 
each guarantor if it would be material for investors to evaluate the 
sufficiency of the guarantee, and shall include sufficient information 
so as to make the financial information presented not misleading. This 
disclosure is required when Consolidating Information is disclosed.
---------------------------------------------------------------------------

    \186\ 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 discussion in Section II.F of the 
Proposing Release.
    \187\ See discussion of existing requirements in Section II.F of 
the Proposing Release.
---------------------------------------------------------------------------

    The proposed amendments would eliminate the ``no independent assets 
or operations'' and ``minor'' 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. 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. While the 
disclosures specified in proposed Rule 13-01(a)(1) through (4) could 
have been omitted if not material to holders of the guaranteed 
security, for clarity, proposed Rule 13-01(a)(4) would have required 
the registrant to include a statement that those financial disclosures 
have been omitted and disclose the reason(s) why the disclosures are 
not considered to be material.
    While the proposed rules include 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 have required disclosure of any information that would be 
material to making an investment decision with respect to the 
guaranteed security, rather than the sufficiency of the guarantee as 
stated in the existing rule. This requirement would have applied in all 
cases, including when the proposed Summarized Financial Information is 
omitted in accordance with the proposed rule.
ii. Comments on the Proposed Amendments
    Comments were mixed on these proposals. A number of commenters 
generally supported the proposed elimination of existing Rule 3-10's 
numerical thresholds in favor of allowing issuers to provide the 
specified disclosures based on what information the issuer believes is 
material to investors.\188\ However, a few commenters supported some 
type of numerical threshold for establishing whether financial 
information of an obligor group should be deemed material.\189\ One 
commenter suggested establishing a 50% threshold as a non-exclusive 
safe harbor for guarantee significance.\190\ This commenter stated that 
if the significance is at or below 50%, the alternative disclosures 
should be deemed not material and not required to be disclosed; while 
if it is above 50%, issuers should still be able to conclude that the 
Proposed Alternative Disclosures are not required if they would not 
provide material information. Another commenter recommended that the 
Commission establish a quantitative test that would allow issuers to 
evaluate whether Summarized Financial Information of an Obligor Group 
may be omitted.\191\
---------------------------------------------------------------------------

    \188\ See, e.g., letters from CII, FedEx, FEI, Nareit, and 
Sullivan & Cromwell.
    \189\ See letters from SIFMA and T-Mobile.
    \190\ See letter from SIFMA. This commenter said that 
significance under this suggestion would be measured in a manner 
consistent with the existing rule's determination of a ``minor'' 
subsidiary specified in Rule 3-10(h)(6), except that 50% would be 
substituted for the existing rule's 3% threshold. See additional 
discussion in Section II.F of the Proposing Release.
    \191\ See letter from T-Mobile. This commenter did not provide a 
specific figure for a quantitative threshold, but noted that the 
threshold should be higher than existing Rule 3-10's thresholds for 
minor subsidiaries. The commenter asserted that using the criteria 
for being considered a ``significant subsidiary'' specified in Sec.  
210.1-02(w) would better reflect materiality to investors compared 
to the existing definition of minor subsidiaries.
---------------------------------------------------------------------------

    Some commenters opposed the requirement in proposed Rule 13-
01(a)(4) that would require a registrant to disclose, if the required 
financial disclosures were omitted because they were not material, a 
statement to that effect and the reasons therefore.\192\ Some 
commenters asserted that such disclosure would not be useful to 
investors,\193\ could possibly result in an increase in liability,\194\ 
and was counter to the Commission's objective of focusing on material 
disclosures and providing a principles-based framework.\195\ One 
commenter suggested that, if the proposal were adopted, the Commission 
should make clear that issuers would only need to make a simple 
statement that management does not believe the information is 
material.\196\ In contrast, one commenter specifically supported this 
part of proposed Rule 13-01(a)(4), asserting that the requirement would 
provide clarity about which disclosures were omitted and why.\197\
---------------------------------------------------------------------------

    \192\ See, e.g., letters from Debevoise, EY, KPMG, and SIFMA.
    \193\ See letters from Debevoise and KPMG.
    \194\ See letters from Debevoise and SIFMA.
    \195\ See letter from Debevoise.
    \196\ See letter from SIFMA.
    \197\ See letter from CII.
---------------------------------------------------------------------------

    A number of commenters opposed proposed Rule 13-01(a)(5), which 
would have required disclosure of any information that would be 
material to making an investment decision with respect to the 
guaranteed security.\198\ Several of these commenters contended that 
the proposed requirement is overly broad. Some commenters asserted that 
the proposed requirement would cause uncertainty for issuers and 
auditors as

[[Page 21956]]

they seek to apply and assess the adequacy of the disclosures.\199\ One 
commenter asserted that the proposed requirement would override all 
other relevant disclosure obligations; \200\ another commenter 
questioned whether the Commission is proposing to modify the overall 
materiality assessment in its disclosure framework; \201\ and a third 
commenter stated its belief that in addition to creating litigation 
risk, the proposed rule could extend the duty to disclose material 
information beyond information specific to the guarantee, such as 
pending merger negotiations and other potential transactions.\202\ 
However, one commenter supported this proposed requirement ``because it 
would provide relevant information, not otherwise explicitly required 
by the [p]roposed [r]ule, which would likely render the disclosures 
taken as a whole to be more useful for investment decisions.'' \203\
---------------------------------------------------------------------------

    \198\ See, e.g., letters from ABA, BDO, CAQ, Comcast, Cravath, 
Davis Polk, Deloitte, EY, Freeport, KPMG, PWC, Shearman, and 
Sullivan & Cromwell.
    \199\ See, e.g., letters from BDO, CAQ, EY, and PWC.
    \200\ See letter from Cravath.
    \201\ See letter from Deloitte.
    \202\ See letter from Shearman.
    \203\ See letter from CII.
---------------------------------------------------------------------------

    In response to the Commission's request for comment on whether the 
proposed amendments were sufficiently clear about the disclosures that 
should be provided and when, one commenter recommended that the final 
rules should provide explicit objectives related to assessing the 
guarantee, which would help issuers to prepare their disclosures.\204\ 
Some commenters suggested that it would be helpful for the final rules 
to provide additional guidance or examples of information that may be 
material to investors.\205\ One commenter recommended that the rules 
expressly provide that the Alternative Disclosures need not be included 
in a registration statement at the time of effectiveness so long as 
they are provided prior to an offering of the securities in respect of 
which the Alternative Disclosures are required.\206\ Another commenter 
asserted that a parent company could conclude that disclosure is not 
material if no investor owns (or is currently being offered) the 
specific guaranteed or collateralized security and therefore the 
disclosure could be excluded based on proposed Rule 13-01.\207\
---------------------------------------------------------------------------

    \204\ See letter from EY.
    \205\ See, e.g., letters from KPMG and Shearman.
    \206\ See letter from Cravath.
    \207\ See letter from PWC.
---------------------------------------------------------------------------

iii. Final Amendments
    We are adopting the amendments largely as proposed with 
modifications based on comments received.
    As supported by several commenters,\208\ the existing ``no 
independent assets or operations'' and ``minor'' numerical thresholds 
used to determine the form and content of disclosure have been replaced 
with a requirement to provide all disclosures specified in the final 
rule, unless such information is not material.\209\ Whereas proposed 
Rule 13-01(a) required the proposed financial and non-financial 
disclosures ``to the extent material to holders of the guaranteed 
security,'' the final rule has been revised to require the financial 
and non-financial disclosures ``to the extent material,'' which is 
discussed in further detail below.
---------------------------------------------------------------------------

    \208\ See, e.g., letters from CII, FedEx, FEI, Nareit, and 
Sullivan & Cromwell.
    \209\ This requirement is specified in new Rule 13-01(a). 
Whether a disclosure specified in new Rule 13-01 may be omitted 
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).
---------------------------------------------------------------------------

    A few commenters suggested including numerical thresholds in the 
rule for determining whether financial information may be omitted,\210\ 
while others requested that we provide additional guidance or examples 
of what information may be material.\211\ While we appreciate the 
desire for certainty about when disclosure is required, determinations 
of what information is material are highly dependent on the applicable 
facts and circumstances, and we are concerned that specifying numerical 
thresholds or providing detailed guidance could undermine the 
principles-based nature of this provision, to the detriment of both 
investors and issuers. We are therefore not adopting these suggestions. 
Instead, akin to the suggestion of one commenter,\212\ the final rule 
identifies four non-exclusive scenarios in which the required 
information could be omitted on the basis that it is not material, 
provided the applicable scenario is disclosed to investors. We discuss 
these four scenarios in further detail below.
---------------------------------------------------------------------------

    \210\ See letters from SIFMA and T-Mobile.
    \211\ See, e.g., letters from KPMG and Shearman.
    \212\ See letter from SIFMA. This commenter recommended the 
Commission establish, as a non-exclusive safe harbor, ``a numerical 
threshold of guarantee significance at or below which [the required 
disclosures] would be deemed immaterial and thus not required and 
above which registrants would still be able to conclude that [the 
required disclosures] are not required because they would not 
provide material information.'' We are not adopting the commenter's 
suggestion of a numerical threshold of significance, but we have 
identified four non-exclusive scenarios in which the required 
information could be omitted as discussed below.
---------------------------------------------------------------------------

    The proposed rule sets forth financial and non-financial 
disclosures that were focused on the information the Commission 
expected was most likely to be material. It also included proposed Rule 
13-01(a)(5), which would have required disclosure of ``any other 
quantitative or qualitative information that would be material to 
making an investment decision with respect to the guaranteed 
security.'' The intent of this proposed requirement was to elicit 
disclosure about the obligated entities and the guarantees that would 
be material but was not otherwise specifically required by the proposed 
financial and non-financial disclosures. While one commenter supported 
this proposed requirement, many others did not.
    Instead of proposed Rule 13-01(a)(5), we are adopting new Rules 13-
01(a)(6) and (7), which retain the requirements in existing Rules 3-
10(i)(11)(i) and (ii),\213\ respectively, as suggested by several 
commenters.\214\ However, we are aligning the wording of existing Rules 
3-10(i)(11)(i) and (ii) to the structure of Rule 13-01. We are also 
modifying the requirement in existing Rule 3-10(i)(11)(ii) to make 
reference to non-financial information, in addition to financial 
information, because we see no reason to limit such disclosure to 
financial information. Parent companies are already required to comply 
with existing Rule 3-10(i)(11)(i) and (ii), and we are not aware of any 
issues surrounding their application. We believe these existing 
requirements capture the disclosures the proposed rule was intended to 
elicit while addressing the concerns raised by commenters as discussed 
above. Notwithstanding these requirements in the final rule, in 17 CFR 
230.408(a) \215\ and 17 CFR 240.12b-20 \216\ require a parent company 
to disclose, in addition to the information expressly required to be 
included, such further material information, if any, as may be 
necessary to make the required statements, in the light of the 
circumstances under which they are made not misleading. While some 
commenters indicated these requirements provide sufficient investor 
protections,\217\ we believe retaining the requirements in existing 
Rule 3-10(i)(11)(i) and (ii), in addition to those

[[Page 21957]]

other requirements, will help to ensure that material information is 
provided to investors.
---------------------------------------------------------------------------

    \213\ See Section III.C.2.c.i, ``When Disclosure is Required,'' 
for a discussion of the requirements in existing Rules 3-
10(i)(11)(i) and (ii).
    \214\ See, e.g., letters from BDO, PWC, and Shearman.
    \215\ Securities Act Rule 408(a).
    \216\ Exchange Act Rule 12b-20.
    \217\ See, e.g., letters from Deloitte and EY.
---------------------------------------------------------------------------

    Based on comments received on proposed Rule 13-01(a)(5), we have 
also revised Rule 13-01(a) for clarity. Proposed Rule 13-01(a) would 
have required disclosures ``to the extent material to holders of the 
guaranteed security'' and was not intended to introduce a nuanced or 
different materiality analysis specific to these disclosure 
requirements. A parent company's responsibility to determine whether 
the disclosures specified in Rule 13-01 are material is not different 
from how it assesses materiality in connection with other information 
it files with the Commission. Accordingly, we have revised final Rule 
13-01 to require the financial and non-financial disclosures ``to the 
extent material.''
    Proposed Rule 13-01(a)(4) would have required, if the financial 
disclosures specified in proposed Rule 13-01(a)(4) were omitted because 
they are not material, disclosure of a statement to that effect and the 
reasons therefore. Most of the commenters that discussed this proposed 
requirement did not support it.\218\ The intent of the proposed rule 
was not to require a parent company to disclose the analysis supporting 
its conclusion that the financial disclosures were not material. 
Rather, it was to inform an investor that financial information about 
issuers and guarantors was not being provided and the basic reason(s) 
for the omission, similar to the narrative forms of Alternative 
Disclosures in existing Rule 3-10.\219\ In response to these comments, 
we are not adopting this requirement as proposed. Instead, we are 
adopting an approach that should help address concerns \220\ about the 
need for greater certainty as to the circumstances when the omission of 
financial disclosures may be appropriate while continuing to provide 
investors with the basic reasons as to why the financial information 
was omitted in a manner similar to existing Rule 3-10's narrative 
exceptions. As adopted, Rule 13-01(a)(4)(vi) includes four scenarios, 
which we believe are the most common situations under which the 
financial information would not be material.\221\ If the scenario is 
applicable and disclosed, the parent company could then omit the 
financial disclosures. The four scenarios are:
---------------------------------------------------------------------------

    \218\ See, e.g., letters from Debevoise, EY, KPMG, and SIFMA.
    \219\ The content of the brief narratives is specified within 
each of the exceptions of existing Rules 3-10(b) through (f) based 
on the applicable facts and circumstances. For example, if the 
conditions are met, existing 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.''
    \220\ See, e.g., letter from Shearman.
    \221\ These scenarios were discussed in the Proposing Release. 
See Section III.C.2.c of the Proposing Release.
---------------------------------------------------------------------------

    (1) The assets, liabilities and results of operations of the 
combined issuers and guarantors of the guaranteed security are not 
materially different than corresponding amounts presented in the 
consolidated financial statements of the parent company; \222\
---------------------------------------------------------------------------

    \222\ This scenario is contained in Rule 13-01(a)(4)(vi)(A).
---------------------------------------------------------------------------

    (2) The combined issuers and guarantors, excluding investments in 
subsidiaries that are not issuers or guarantors, have no material 
assets, liabilities or results of operations; \223\
---------------------------------------------------------------------------

    \223\ This scenario is contained in Rule 13-01(a)(4)(vi)(B).
---------------------------------------------------------------------------

    (3) The issuer is a finance subsidiary of the parent company, the 
parent company has fully and unconditionally guaranteed the security, 
and no other subsidiary of the parent company guarantees the security; 
\224\ and
---------------------------------------------------------------------------

    \224\ This scenario is contained in Rule 13-01(a)(4)(vi)(C).
---------------------------------------------------------------------------

    (4) The issuer is a finance subsidiary that co-issued the security, 
jointly and severally, with the parent company, and no other subsidiary 
of the parent company guarantees the security.\225\
---------------------------------------------------------------------------

    \225\ This scenario is contained in Rule 13-01(a)(4)(vi)(D).
---------------------------------------------------------------------------

    While we believe these scenarios encompass most of the situations 
under which the required financial information would not be material, 
these scenarios are not intended to be exclusive. As discussed below, 
there may be other circumstances in which it would be appropriate to 
omit the required financial information on the basis that it is not 
material.
    In the first scenario, we believe financial information of the 
combined Obligor Group would not be material to an investor as it is 
not materially different than that of the consolidated parent 
company.\226\ If the related scenario was disclosed, investors would 
not need supplemental financial information as it would largely 
duplicate the corresponding information in the parent company's 
consolidated financial statements. In the second scenario, we believe 
disclosure that the combined Obligor Group has no material assets, 
liabilities or results of operations obviates the need for supplemental 
disclosures as an investor would know such information would not be 
material. The third and fourth scenarios involve finance subsidiary 
issuers or finance subsidiaries that co-issue securities with the 
parent company. These last two scenarios, which are generally 
consistent with existing Rule 3-10(b) narrative disclosures involving 
finance subsidiaries,\227\ inform investors that the finance subsidiary 
issuer or co-issuer 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 such 
that supplemental financial disclosures are not material.
---------------------------------------------------------------------------

    \226\ Rule 13-01(a)(4)(vi) clarifies that this scenario does not 
apply where separate disclosure of the Summarized Financial 
Information of one or more, but not all issuers and/or guarantors, 
is required by Rule 13-01(a)(4)(iv).
    \227\ See discussion above in Section III.C.1.d.iii. As one of 
the conditions to omit the financial statements of the finance 
subsidiary issuer under existing Rule 3-10(b), the parent company 
must provide the narrative disclosure in paragraph (4) of existing 
Rule 3-10(b), which is that ``the issuer is a 100%-owned finance 
subsidiary of the parent company and the parent company has fully 
and unconditionally guaranteed the securities. The footnote also 
must include the narrative disclosures specified in paragraphs 
(i)(9) and (i)(10) of this section.'' The Note to existing Rule 3-
10(b) states that ``[p]aragraph (b) is available if a subsidiary 
issuer satisfies the requirements of this paragraph but for the fact 
that, instead of the parent company guaranteeing the security, the 
subsidiary issuer co-issued the security, jointly and severally, 
with the parent company. In this situation, the narrative 
information required by paragraph (b)(4) must be modified 
accordingly.''
---------------------------------------------------------------------------

    Rule 13-01(a)(4)(vi)(C) applies to a finance subsidiary issuer of a 
security that the parent company has fully and unconditionally 
guaranteed, and Rule 13-01(a)(4)(vi)(D) applies to a finance subsidiary 
that co-issues a security, jointly and severally, with the parent 
company. No other subsidiaries of the parent company may guarantee the 
security under either of these scenarios. Rule 13-01(a)(4)(vi) defines 
when a subsidiary is a ``finance subsidiary'' for the purposes of the 
rule. This definition is consistent with the definition in existing 
Rule 3-10(h)(7) except that the amended definition does not make 
reference to revenues, which we believe are subsumed by the reference 
to ``operations,'' and does not make reference to ``cash flows,'' as 
cash flow information is not a required financial disclosure under the 
amended rule.
    While we believe these scenarios generally capture the situations 
under which the financial information would not be material and may be 
omitted, there may be other scenarios under which the parent company 
may conclude Summarized Financial Information is not necessary. These 
scenarios would be evaluated under the

[[Page 21958]]

general materiality provision of Rule 13-01(a). Based on this analysis, 
if a parent company determines that not all of the required financial 
information is material, the information that is not material may be 
omitted without additional disclosure or explanation. Thus, under the 
final rule, the parent company could either rely on one of the 
identified scenarios, if applicable, to omit information that is not 
material, or make its own assessment based upon a consideration of 
other relevant facts and circumstances.\228\ We believe this approach 
will preserve the principles-based nature of Rule 13-01 while providing 
greater certainty for issuers, and appropriate transparency for 
investors, regarding the information required to be disclosed.
---------------------------------------------------------------------------

    \228\ To provide clarity to an issuer that its ability to omit 
the Summarized Financial Information required by final Rule 13-
01(a)(4) is not limited to the four scenarios discussed herein, 
final Rule 13-01(a)(4)(vi) states: ``Notwithstanding that a parent 
company may omit this summarized financial information if not 
material . . .''
---------------------------------------------------------------------------

    Two commenters encouraged the Commission to expressly provide that 
the Proposed Alternative Disclosures need not be provided at the time 
of effectiveness so long as they are provided prior to an offering of 
the guaranteed securities,\229\ with one of these commenters suggesting 
that we amend 17 CFR 230.430B(a) \230\ to cover information required by 
proposed Rule 13-01.\231\ We are not amending Rule 430B as suggested. 
Issuers meeting the definition of Well-Known Seasoned Issuer (``WKSI'') 
are currently afforded significant flexibility under Rule 430B(a), 
which would include the flexibility to omit the information specified 
in Proposed Rule 13-01 at effectiveness so long as the information is 
added when the shelf registration statement is amended to identify 
subsidiary issuers and guarantors.\232\ We acknowledge that non-WKSI 
issuers are not similarly able to omit this information but note that 
WKSIs are afforded substantially greater latitude in registering and 
marketing securities.\233\
---------------------------------------------------------------------------

    \229\ See letters from Cravath and PWC.
    \230\ Securities Act Rule 430B(a).
    \231\ See letter from Cravath.
    \232\ See Securities Act Rule 430B(a) and Securities Offering 
Reform, Release No. 33-8591 (July 19, 2005) [70 FR 44722 (Aug. 3, 
2005)] (``Securities Offering Reform'') at text accompanying note 
520.
    \233\ See Securities Offering Reform at note 220.
---------------------------------------------------------------------------

d. Location of Revised Alternative Disclosures and Audit Requirement
i. Proposed Amendments
    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.\234\ 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. The proposed rule would provide 
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 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 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.
---------------------------------------------------------------------------

    \234\ Rules 3-01 and 3-02 of Regulation S-X.
---------------------------------------------------------------------------

    Accordingly, the note to proposed Rule 13-01(a) would have allowed 
the parent company to provide the Proposed Alternative Disclosures in a 
footnote to its consolidated financial statements or, alternatively, in 
MD&A,\235\ in the 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 \236\ 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 were to elect to provide the 
disclosures in its audited financial statements, the Proposed 
Alternative Disclosures would be required to be audited.\237\ 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'').\238\ 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 
have been required to provide the Proposed Alternative Disclosures in a 
footnote to its consolidated financial statements in its annual and 
quarterly reports. 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.\239\
---------------------------------------------------------------------------

    \235\ See 17 CFR 229.303 (Item 303 of Regulation S-K).
    \236\ These proposed amendments also would 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.
    \237\ 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.
    \238\ Subsequent to the issuance of the Proposing Release, the 
Commission amended and relocated the requirements previously 
contained in Item 503(c) to 17 CFR 229.105 [new Item 105 of 
Regulation S-K]. See FAST Act Modernization and Simplification of 
Regulation S-K, Release No. 33-10618 (Mar. 20, 2019) [84 FR 12674 
(Apr. 2, 2019)].
    \239\ See Section III.D, ``Application of Amendments to Certain 
Types of Issuers,'' below.
---------------------------------------------------------------------------

ii. Comments on the Proposed Amendments
    Comments on the proposed amendments were mixed. A few commenters 
generally supported the flexibility under the proposed amendments for 
the parent company to provide the Proposed Alternative Disclosures in 
specified locations outside its consolidated financial statements in 
the subject registration statement and Forms 10-K and 10-Q required to 
be filed during the fiscal year in which the first bona fide sale of 
the debt securities is completed, but would have required the parent 
company to provide the disclosures in a footnote to its consolidated 
financial statements in its annual and quarterly reports starting with 
its annual report filed on Form 10-K for the fiscal year during which 
the first bona fide sale of the debt securities is completed.\240\
---------------------------------------------------------------------------

    \240\ See letters from Ball Corp., Nareit, and WTW. While one 
commenter expressed support for the proposed amendment that would 
allow locating the disclosures outside the footnotes of the 
financial statements in certain instances, the commenter stated its 
belief that having a requirement for the disclosures to be audited 
creates additional cost over an area of accounting and disclosure 
where there is limited focus from the investment community. See 
letter from WTW.
---------------------------------------------------------------------------

    A number of commenters stated that the Proposed Alternative 
Disclosures should be permitted to be presented outside of the parent 
company's consolidated financial statements in all cases, not just in 
the registration statement and Forms 10-K and 10-Q required to be filed 
during the fiscal year in which the first bona fide sale of

[[Page 21959]]

the subject securities is completed.\241\ One commenter suggested that 
the existing rule's requirement that the disclosures be included in the 
audited financial statements has driven would-be registered debt 
issuers to the Rule 144A debt market,\242\ an effect other commenters 
asserted would continue if the Proposed Alternative Disclosures were 
required to be included in the consolidated financial statements in 
subsequent Exchange Act reports.\243\ Several commenters asserted that 
not requiring these disclosures to be audited would reduce costs \244\ 
and possibly allow issuers to more quickly register guaranteed debt 
securities and access capital markets.\245\ A few commenters stated 
that requiring an audit of the Proposed Alternative Disclosures would 
provide little marginal benefit to investors.\246\
---------------------------------------------------------------------------

    \241\ See, e.g., letters from ABA, Cravath, Davis Polk, Dell, 
Freeport, SIFMA, Simpson Thacher and Sullivan & Cromwell.
    \242\ See letter from Cravath.
    \243\ See letters from Dell and Sullivan & Cromwell.
    \244\ See, e.g., letters from ABA, Ball Corp., Cravath, Davis 
Polk, Dell, Freeport, SIFMA, Simpson Thacher, Sullivan & Cromwell, 
and WTW.
    \245\ See, e.g., letters ABA, BDO, Cravath, Davis Polk, Dell, 
and Simpson Thacher.
    \246\ See, e.g., letters from Davis Polk, Dell, Freeport, and 
Sullivan & Cromwell.
---------------------------------------------------------------------------

    Other commenters, however, asserted that the flexibility to 
determine the location of the Proposed Alternative Disclosures under 
the proposed amendments could lead to investor confusion about the 
location of the disclosures,\247\ and uncertainty as to the level of 
audit assurance that applied to the disclosures.\248\ One commenter 
contended that the Proposed Alternative Disclosures should be required 
to be presented in a single location to avoid inconsistencies in the 
location and varied reliance by investors.\249\ Another commenter 
stated that companies should not have the option to choose where their 
disclosures will appear, and that reported disclosures should be 
consistently reported in the same location.\250\
---------------------------------------------------------------------------

    \247\ See letters from Deloitte, FedEx, and PWC.
    \248\ See letters from Deloitte and KPMG.
    \249\ See letter from KPMG.
    \250\ See letter from XBRL US, Inc.
---------------------------------------------------------------------------

    One commenter did not support locating the Proposed Alternative 
Disclosures outside the financial statements,\251\ and another 
suggested either requiring the Proposed Alternative Disclosures to be 
audited or limiting unaudited disclosures to underwritten 
offerings.\252\ One of these commenters argued that many investors 
place significant value on having required disclosures subject to 
annual audit and/or interim review, internal control over financial 
reporting, and XBRL tagging requirements, and not being subject to the 
forward-looking statements safe harbor.\253\ Another commenter did not 
express a view on where the disclosures should be located, but 
indicated that investors may benefit from having the disclosures in the 
financial statements because they would be subject to audit and interim 
review requirements.\254\
---------------------------------------------------------------------------

    \251\ See letter from CII.
    \252\ See letter from BDO.
    \253\ See letter from CII.
    \254\ See letter from CAQ.
---------------------------------------------------------------------------

    Other commenters, however, recommended the disclosures be located 
outside the financial statements in all cases.\255\ One of these 
commenters argued presentation outside the financial statements in all 
cases was appropriate as the Proposed Alternative Disclosures are 
supplementary to the financial statements.\256\ This commenter asserted 
that this change would reduce costs of preparing the disclosures by 
allowing the information to be unaudited, and noted that the 
disclosures would still be subject to the parent company's disclosure 
controls and procedures and required certifications. Another of these 
commenters recommended the disclosures be required in the liquidity and 
capital resources section of the MD&A or in a separate section 
following ``Risk Factors'' as is currently done in the Rule 144A market 
and has been accepted by the investor community.\257\ This commenter 
also observed that if disclosure outside the financial statements is 
sufficient at the time of the initial investment decision, it should be 
sufficient for future periods. Yet another of these commenters observed 
the Proposed Alternative Disclosures would be better presented in a 
discussion about a parent's liquidity in the MD&A as opposed to in the 
financial statements given the objective of the disclosures to provide 
an investor in a debt security with information about the related 
guarantee.\258\
---------------------------------------------------------------------------

    \255\ See, e.g., letters from FedEx, NYC Bar and PWC.
    \256\ See letter from FedEx.
    \257\ See letter from NYC Bar.
    \258\ See letter from PWC.
---------------------------------------------------------------------------

    Some commenters emphasized that, even if the Proposed Alternative 
Disclosures are allowed to be located outside of the financial 
statements, these disclosures would be derived from the same internal 
accounting records used to prepare the parent company's audited 
consolidated financial statements \259\ and would be subject to the 
parent company's disclosure controls and procedures \260\ and 
certification by the parent company's principal executive and principal 
financial officers.\261\
---------------------------------------------------------------------------

    \259\ See letters from Davis Polk and Freeport.
    \260\ See letters from Cravath and EY.
    \261\ See letter from FedEx.
---------------------------------------------------------------------------

    Some commenters asserted that underwriters will likely request 
independent auditors to provide comfort on financial information 
provided outside the consolidated financial statements in connection 
with registered offerings.\262\ Two of these commenters indicated this 
would involve performing limited procedures on such information under 
Public Company Accounting Oversight Board (``PCAOB'') Auditing Standard 
6101, Letters for Underwriters and Certain Other Requesting 
Parties.\263\ One commenter suggested that such procedures may not 
result in a decrease in effort or cost for either auditors or 
registrants,\264\ while the other commenter stated that while the scope 
and time required to perform such procedures is less than an audit, the 
auditor involvement may delay the time to market for underwritten 
offerings.\265\ Another commenter noted that the proposed rules would 
cause issuers to incur costs related to the incremental procedures 
necessary for such comfort procedures but investors would lose the 
benefit arising out of the audit of the disclosures.\266\ Another 
commenter recommended that, if the final rules allow issuers the 
flexibility to determine the location of the Proposed Alternative 
Disclosures, the Commission should provide examples to clarify when the 
Proposed Alternative Disclosures must be in the financial 
statements.\267\
---------------------------------------------------------------------------

    \262\ See, e.g., letters from BDO, EY, Grant Thornton, KPMG, and 
Windstream.
    \263\ See letters from BDO and KPMG.
    \264\ See letter from KPMG.
    \265\ See letter from BDO.
    \266\ See letter from Grant Thornton.
    \267\ See letter from Deloitte.
---------------------------------------------------------------------------

    Some commenters suggested that because the Proposed Alternative 
Disclosures would be relevant only to the investors of the guaranteed 
security, if these disclosures were required to be audited, this 
information should be included in an audited supplemental schedule that 
could be filed as an exhibit to the filing, similar to the supplemental 
schedules required under 17 CFR 210.12-01 through 210.12-29 (``Article 
12 of Regulation S-X'').\268\
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    \268\ See letters from CAQ, EY, and PWC.
---------------------------------------------------------------------------

iii. Final Amendments
    After considering comments received, we are adopting the amendments 
largely as proposed, with modifications. As discussed above, while a 
few

[[Page 21960]]

commenters either did not support locating the disclosures outside the 
financial statements or suggested limiting unaudited disclosures to 
underwritten offerings, others recommended the disclosures be located 
outside the financial statements in all cases. We continue to believe, 
however, that it is appropriate to provide parent companies the 
flexibility to select the location of the disclosures, including 
locating them outside the parent company's consolidated financial 
statements. In this regard, and consistent with the views of several 
commenters, we expect not requiring the disclosures to be audited will 
reduce costs and allow issuers to register guaranteed debt securities 
and access capital markets faster, which may encourage more such 
registered offerings.\269\ Although we appreciate that some investors 
may place a value on having financial information subject to annual 
audit and/or interim review and other requirements that flow from 
including disclosures in the parent company's financial statements, the 
proposed flexibility afforded to the parent company in selecting the 
location of the Proposed Alternative Disclosures, including locating 
them outside the parent company's audited financial statements, took 
into account the nature of those disclosures as a supplement to the 
parent company's consolidated financial statements. We also agree with 
those commenters who observed that, even if the Revised Alternative 
Disclosures are located outside the financial statements, they would be 
derived from the same internal accounting records and subject to the 
parent company's disclosure controls and procedures and management 
certification requirements.
---------------------------------------------------------------------------

    \269\ We acknowledge that underwriters may request independent 
auditors to provide comfort on financial information provided 
outside the financial statements for registered offerings, which 
could limit the expected cost savings and delay the time to market. 
However, providing this flexibility will enable issuers and 
underwriters the option to present this supplemental information 
outside the financial statements when it is cost- and time-effective 
to do so and therefore may reduce frictions associated with 
registered offerings of guaranteed debt securities. We also observe, 
as one commenter noted, that the scope and time required to perform 
comfort procedures is less than an audit. See letter from BDO.
---------------------------------------------------------------------------

    Accordingly, and consistent with the proposed rule, final Rule 13-
01(b) \270\ permits the parent company to provide the Revised 
Alternative Disclosures in a footnote to its consolidated financial 
statements or alternatively, in MD&A. If the disclosures are not 
otherwise included in the consolidated financial statements or in MD&A, 
the final rule requires the parent company to include the disclosures 
in its prospectus immediately following ``Risk Factors,'' if any, or 
otherwise, immediately following pricing information described in Item 
105 of Regulation S-K.\271\
---------------------------------------------------------------------------

    \270\ Whereas this requirement was included in a note to 
proposed Rule 13-01(a), the final rule includes it in a separate 
paragraph, Rule 13-01(b).
    \271\ 17 CFR 229.105. As described above, subsequent to the 
issuance of the Proposing Release, the Commission amended and 
relocated the requirements previously contained in Item 503(c) of 
Regulation S-K to new Item 105 of Regulation S-K. The final 
amendments have been revised to reflect this change.
---------------------------------------------------------------------------

    As discussed above, some commenters suggested that the proposed 
flexibility in selecting the location of the disclosure may cause 
investors confusion about the location and level of assurance applied. 
While the proposed rule provided flexibility on where to locate the 
disclosures, we believe the locations where disclosures may be provided 
are clearly specified and that investors generally understand the 
levels of assurance applied to disclosures included inside or outside 
the parent company's consolidated financial statements. If provided in 
the parent company's consolidated financial statements, consistent with 
existing Rule 3-10, the disclosures must be included in a footnote. If 
provided outside the parent company's consolidated financial 
statements, they must be included in MD&A, or in other specified 
locations if the parent company's consolidated financial statements and 
MD&A are not otherwise included in the filing.\272\ Consistent with the 
proposed rule, if the parent company elects to provide the Revised 
Alternative Disclosures in a footnote to its audited consolidated 
financial statements, the Revised Alternative Disclosures must be 
audited. Conversely, the Revised Alternative Disclosures need not be 
audited if the parent company provides them outside the audited 
consolidated financial statements. A few commenters recommended that, 
if audited, the information be included in a supplemental schedule 
similar to the ones required by Article 12 of Regulation S-X. Under the 
existing rule, a parent company must include the Alternative 
Disclosures in financial statements footnotes but has discretion over 
where to locate them. We are not aware of any practice issues 
associated with this discretion, and believe investors understand how 
to locate the disclosures and understand the level of audit assurance 
associated with the disclosures if included in the financial statement 
footnotes. We are therefore not adopting this suggestion.
---------------------------------------------------------------------------

    \272\ These circumstances include when the consolidated 
financial statements and MD&A are included in previously filed 
reports that are incorporated by reference. In such instances, the 
disclosures are required to be provided in specified prominent 
locations.
---------------------------------------------------------------------------

    Under the proposed rule, although the parent company would 
initially have the flexibility to locate the disclosures outside of its 
consolidated financial statements in the subject registration statement 
and certain periodic reports filed thereafter, the parent company would 
have been required to provide the disclosures in a footnote to its 
consolidated financial statements starting with its annual report filed 
on Form 10-K for the fiscal year during which the first bona fide sale 
of the subject securities is completed. A number of commenters did not 
support this proposed requirement, and stated that the disclosures 
should be permitted to be presented outside of the parent company's 
consolidated financial statements in all cases, as described above. 
Some commenters asserted that it was incongruous for a heightened 
compliance obligation to apply after an offering,\273\ and others 
expressed the view that if audited information is not necessary for an 
investment decision, it is not necessary thereafter.\274\ One commenter 
noted that this requirement is disproportionally burdensome on repeat 
issuers of debt securities,\275\ and another asserted that eliminating 
this proposed requirement would allow issuers to provide their 
disclosure in a consistent location and avoid unnecessarily providing 
it in different locations.\276\
---------------------------------------------------------------------------

    \273\ See, e.g., letters from Cravath, Freeport, and Simpson 
Thacher.
    \274\ See, e.g., letters from Davis Polk and PWC.
    \275\ See letter from Simpson Thacher.
    \276\ See letter from ABA.
---------------------------------------------------------------------------

    We considered responses to the Commission's request for comment on 
the potential benefits or concerns for investors and issuers with 
either permitting the parent company to provide the proposed 
disclosures outside its financial statements in the proposed 
circumstances or permitting the parent company to provide the proposed 
disclosures outside its financial statements in all circumstances. 
Having considered these comments, and in light of the benefits of the 
proposed flexibility discussed above, we are persuaded that there is no 
reason to limit this flexibility to the subject registration statement 
and certain periodic reports filed thereafter. Thus, under the final 
rule, the parent company will have flexibility to locate the 
disclosures in a footnote to its consolidated financial statements or 
in

[[Page 21961]]

the locations specified in Rule 13-01(b) in all of its filings, 
consistent with the recommendations of many commenters.
e. Recently Acquired Subsidiary Issuers and Guarantors
i. Proposed Amendments
    The proposed rule would eliminate the requirement in existing Rule 
3-10(g) to provide pre-acquisition audited financial statements of a 
recently acquired subsidiary issuer or guarantor in certain 
circumstances.\277\ Although the proposed rule would not require 
specific disclosures about recently-acquired subsidiary issuers and 
guarantors, information about these recently acquired subsidiaries 
would have been required if material to an investment decision in the 
guaranteed security pursuant to proposed Rule 13-01(a)(5).
---------------------------------------------------------------------------

    \277\ See Section II.I of the Proposing Release for a detailed 
description of the pre-acquisition financial statements requirements 
of existing Rule 3-10(g).
---------------------------------------------------------------------------

    Due to the proposed deletion of Rule 3-10(g), the Commission also 
proposed a conforming change to remove paragraph (b) of Rule 12h-
5.\278\
---------------------------------------------------------------------------

    \278\ If the proposed removal of paragraph (b) of existing Rule 
12h-5 was 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.
---------------------------------------------------------------------------

ii. Comments on the Proposed Amendments
    Many commenters expressed general support for the proposed 
elimination of Rule 3-10(g).\279\ Several of these commenters contended 
that existing Rule 3-10(g) was burdensome and that existing 17 CFR 
210.3-05 \280\ already requires disclosure of pre-acquisition financial 
statements of a significant acquired business.\281\ One commenter 
asserted that the existing Rule 3-10(g) requirements often results in 
more detailed disclosure being provided for recently acquired entities 
than for other subsidiary issuers and guarantors.\282\ Another 
commenter maintained that the requirements of existing Rule 3-10(g) 
caused it to alter guarantor structures in certain debt offerings.\283\
---------------------------------------------------------------------------

    \279\ See, e.g., letters from Cravath, Davis Polk, Dell, EY, 
FEI, Nareit, and T-Mobile.
    \280\ Rule 3-05 of Regulation S-X.
    \281\ See, e.g., letters from Cravath, Davis Polk, Dell, FEI, 
and Nareit.
    \282\ See letter from FEI.
    \283\ See letter from T-Mobile. This commenter stated that the 
resources needed to compile the information necessary to meet the 
disclosure requirements of Regulation S-X and availability of the 
information related to pre-acquisition financial statements of 
recently acquired subsidiaries have directly resulted in alterations 
to the contemplated guarantor structure in its debt offerings where 
it would have been unable to provide the required disclosures, 
resulting in the exclusion of guarantees that would have otherwise 
been made available to investors.
---------------------------------------------------------------------------

    In response to the Commission's request for comment whether some 
other type of disclosure about recently acquired subsidiary issuers and 
guarantors should be required instead of pre-acquisition financial 
statements, one commenter recommended that the Commission consider 
requiring Summarized Financial Information of a recently acquired 
guarantor in registration statements if the guarantor is not already 
included in the Summarized Financial Information of the Obligor Group 
(i.e., it is acquired after the most recent balance sheet date) and if 
the guarantor had a material effect on the financial capacity of the 
obligated group.\284\ Some commenters noted that although the proposed 
amendments would not include a requirement similar to existing Rule 3-
10(g), information about recently acquired subsidiaries would be 
required if material to an investment decision in the guaranteed 
security under proposed Rule 13-01(a)(5).\285\ One commenter encouraged 
the Commission ``not to perpetuate separate disclosure rules in this 
context for recently acquired subsidiaries.'' \286\ Another commenter 
indicated that the existing disclosure requirements under ASC 805, 
Business Combinations, would continue to provide sufficient information 
related to material subsidiaries acquired and their impact on the 
consolidated entity.\287\
---------------------------------------------------------------------------

    \284\ See letter from EY.
    \285\ See letters from Cravath and Nareit.
    \286\ See letter from Cravath.
    \287\ See letter from T-Mobile.
---------------------------------------------------------------------------

iii. Final Amendments
    After considering the public comments, we are adopting the proposed 
changes with certain modifications. We agree with those commenters that 
supported the proposed elimination of the pre-acquisition financial 
statements requirement of existing Rule 3-10(g), most of which cited 
the burdensome nature of the requirement and that existing Rule 3-05 of 
Regulation S-X already requires pre-acquisition financial statements of 
significant acquired business as reasons not to include such a 
requirement in the final rules.\288\ Accordingly, as proposed, the 
final rule will not include such a requirement.
---------------------------------------------------------------------------

    \288\ See, e.g., letters from Cravath, Davis Polk, Dell, FEI, 
and Nareit.
---------------------------------------------------------------------------

    Under the proposed rule, although the requirement to provide pre-
acquisition financial statements of recently acquired subsidiary 
issuers and guarantors in existing Rule 3-10(g) would be eliminated, 
information about such recently acquired subsidiaries would have been 
required if material to an investment decision in the guaranteed 
security pursuant to proposed Rule 13-01(a)(5).\289\ As described 
above, we received limited comments specific to this requirement, with 
one commenter opposing separate disclosure rules for recently acquired 
subsidiary issuers and guarantors in this context \290\ and another 
stating that existing disclosures required by U.S. GAAP were 
sufficient.\291\ However, we agree with another commenter \292\ that 
suggested Summarized Financial Information for recently acquired 
subsidiary guarantors should be included in registration statements if 
the guarantor is not already included in the Summarized Financial 
Information of the Obligor Group.\293\ In this regard, under the 
proposed and final amendments, a subsidiary issuer or guarantor 
acquired after the parent company's most recent balance sheet date 
would not be included in the Summarized Financial Information specified 
in Rule 13-01(a)(4).\294\ To address this potential information gap, 
and similar to the commenter's suggestion, the final rule requires, in 
certain circumstances (discussed below), pre-acquisition Summarized 
Financial Information for recently acquired subsidiary issuers and 
guarantors to be provided in a Securities Act registration statement 
\295\ filed in

[[Page 21962]]

connection with the offer and sale of the subject guaranteed security.
---------------------------------------------------------------------------

    \289\ The requirements applicable to recently acquired 
subsidiary issuers and guarantors have been included in final Rule 
13-01(a)(5). Proposed Rule 13-01(a)(5) would have required 
disclosure of ``any other quantitative or qualitative information 
that would be material to making an investment decision with respect 
to the guaranteed security.'' Instead of this proposed requirement, 
the final amendments include Rules 13-01(a)(6) and (7). See 
discussion in Section III.C.2.c, ``When Disclosure is Required.''
    \290\ See letter from Cravath.
    \291\ See letter from T-Mobile.
    \292\ See letter from EY.
    \293\ While this commenter's suggestion only referred to 
recently acquired subsidiary guarantors, we believe this information 
need similarly extends to recently acquired subsidiary issuers.
    \294\ Unless disclosure is otherwise required (e.g., the parent 
company provides disclosure pursuant to ASC 805, Business 
Combinations, or IFRS 3, Business Combinations, as applicable, or 
pre-acquisition financial statements are required due to the 
acquisition exceeding 50% significance under Rule 3-05 of Regulation 
S-X), an investor may not receive information about a subsidiary 
issuer or guarantor acquired after the balance sheet date. 
Additionally, such disclosures do not take into consideration that 
only certain entities within an acquired business may be obligated 
as issuers or guarantors.
    \295\ Consistent with existing Rule 3-10(g), this requirement is 
only applicable to Securities Act registration statements. In 
subsequent Exchange Act reports, financial information of a recently 
acquired subsidiary issuer or guarantor will be included in the 
financial information of issuers and guarantors required by final 
Rule 13-01(a)(4).
---------------------------------------------------------------------------

    When considering pre-acquisition financial information 
requirements, we believe issuers benefit from certainty as to when such 
information is required.\296\ We also believe that the pre-acquisition 
Summarized Financial Information required by the final rule should be 
consistent with what Rule 13-01(a)(4) requires for existing issuers and 
guarantors, as we do not see a basis for requiring varying levels of 
detail in this context.\297\ Accordingly, final Rule 13-01(a)(5) will 
require pre-acquisition Summarized Financial Information when a parent 
company has acquired a significant ``business'' after the date of its 
most recent balance sheet included in its consolidated financial 
statements,\298\ and that acquired business and/or one or more of its 
subsidiaries are obligated as issuers and/or guarantors.\299\ Whether a 
``business'' has been acquired will be determined in accordance with 
the guidance set forth in 17 CFR 210.11-01(d),\300\ and the parent 
company would also need to treat acquisitions of related businesses as 
a single business acquisition in a manner consistent with Rule 3-
05(a)(3). An acquired business will be deemed significant if it meets 
any of the conditions specified in the definition of significant 
subsidiary in Rule 1-02(w),\301\ substituting 20 percent for 10 percent 
each place it appears therein, based on a comparison of the most recent 
annual financial statements of the acquired business and the parent 
company's most recent annual consolidated financial statements filed at 
or prior to the date of acquisition. To simplify compliance and provide 
certainty as to when disclosure is required, these significance tests 
are the same tests used to determine whether pre-acquisition financial 
statements are required for an acquired business pursuant to Rule 3-05 
of Regulation S-X.\302\
---------------------------------------------------------------------------

    \296\ As described above, information about recently acquired 
subsidiaries would have been required under the proposed rule if 
material to an investment decision in the guaranteed security. 
Unlike disclosure that relates solely to the Obligor Group, which 
will be prepared by the parent company on an ongoing basis, and 
where materiality will therefore be evaluated regularly, in an 
acquisition context parent companies must rely on information 
provided by third parties to make a determination of whether the 
acquisition is significant and whether the related disclosure is 
material. A numerical threshold-based significance test provides 
parent companies with a level of certainty that allows them to 
efficiently make determinations of what level of disclosure is 
required in an environment where delay is costly. Also, where a 
parent company determines not to provide disclosure, investors would 
not receive information about the recently acquired subsidiary 
issuer's or guarantor's financial impact on the Obligor Group until 
the operating results of the acquired business have subsequently 
been reflected in the Summarized Financial Information of the 
Obligor Group. As a result, the impact of the acquisition may be 
difficult for investors to discern from other events affecting the 
Obligor Group, even where the acquisition may be economically 
significant. Thus, we expect a numerical threshold in the case of 
these disclosures could be less costly for parent companies and 
result in more consistent disclosure to investors where transactions 
are of economic significance.
    \297\ As pointed out by one commenter, the pre-acquisition 
financial statements required by existing Rule 3-10(g) result in 
more detail for recently acquired entities than for other subsidiary 
issuers and guarantors. See letter from FEI.
    \298\ Under the final amendments, pre-acquisition financial 
information of recently acquired subsidiary issuers and/or 
guarantors will not be required for acquisitions that occur before 
the date of the parent company's most recent balance sheet included 
in the parent company's financial statements. By contrast, under 
existing Rule 3-10(g), pre-acquisition financial statements are 
required if such subsidiary issuers and/or guarantors have not yet 
been included in the parent company's audited consolidated financial 
statements for nine months and the acquisition is significant.
    \299\ In our experience, recently acquired subsidiary issuers 
and guarantors would typically be considered a business because 
separate entities, subsidiaries, or divisions are presumed to be 
businesses.
    \300\ Rule 11-01(d).
    \301\ 17 CFR 210.1-02(w).
    \302\ Rule 3-05 provides for use of a 20% significance 
threshold, rather than the 10% threshold indicated in Rule 1-02(w). 
We note that the Commission has proposed amendments to the 
significance tests used in Rule 3-05 of Regulation S-X. See 
Amendments to Financial Disclosures About Acquired and Disposed 
Businesses, Release No. 34-85765 (May 3, 2019) [84 FR 24600 (May 28, 
2019)]. Certain of these proposed amendments would affect the tests 
used to determine whether an acquired business is significant. If 
these significance tests are amended, the trigger for determining 
whether pre-acquisition financial information about recently 
acquired subsidiary issuers and guarantors would also change. We 
believe the alignment of these significance tests simplifies 
compliance for issuers while providing material information about 
recently acquired subsidiary issuers and guarantors for investors.
---------------------------------------------------------------------------

    Generally, under the final rule, a parent company will be required 
to provide pre-acquisition Summarized Financial Information of a 
recently acquired issuer or guarantor for those acquisitions where it 
will be required to provide pre-acquisition financial statements of the 
acquired business pursuant to Rule 3-05 of Regulation S-X.\303\ We 
recognize that not all of the entities that compose an acquired 
business may be issuers and/or guarantors. Accordingly, the required 
Summarized Financial Information will only be for those entities 
acquired that are issuers or guarantors, and follows the form and 
content prescribed in new Rule 13-01(a)(4). We also recognize that the 
pre-acquisition Summarized Financial Information may be required in 
advance of when pre-acquisition financial statements are required 
pursuant to Rule 3-05 of Regulation S-X.\304\ However, we believe 
investors in a registered debt offering should be provided with 
information about issuers and guarantors in advance of an investment 
decision, and we note that the level of detail required is far less 
than pre-acquisition financial statements required by Rule 3-05. In 
sum, while the adopted approach differs from the more principles-based 
approach in the proposal, we believe it will continue to alleviate 
burdens on issuers while providing greater certainty about when pre-
acquisition financial information should be provided by identifying 
specific circumstances in which such information is likely to be 
material to an investment decision.
---------------------------------------------------------------------------

    \303\ There may be some circumstances where a registrant is 
required to provide this pre-acquisition Summarized Financial 
Information of a recently acquired issuer or guarantor, but is not 
required to provide pre-acquisition financial statements of the 
acquired business pursuant to Rule 3-05 of Regulation S-X. For 
example, a parent company that is a foreign private issuer that 
consummates an acquisition of a significant business after the date 
of the most recent balance sheet presented would be required to 
provide pre-acquisition Summarized Financial Information of a 
recently acquired issuer or guarantor pursuant to new Rule 13-
01(a)(5), but may be able to omit the pre-acquisition financial 
statements of a greater than 20% but less than 50% significant 
acquired business from its registration statement pursuant to Rule 
3-05(b)(4) and from any subsequent Exchange Act filings.
    \304\ For example, Rule 3-05(b)(4) of Regulation S-X in part 
permits, in certain circumstances, pre-acquisition financial 
statements of an acquired business to be omitted from a registration 
statement if the significance of the acquisition does not exceed 50% 
and the registration statement is declared effective no more than 74 
calendar days after consummation of the acquisition. We note that 
filing requirements in Items 2.01 and 9.01 of Form 8-K may differ.
---------------------------------------------------------------------------

    We also are adopting the conforming change to remove paragraph (b) 
of Exchange Act Rule 12h-5, as proposed.\305\
---------------------------------------------------------------------------

    \305\ 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 Exchange Act Rule 12h-5 will continue to 
be exempt from Exchange Act reporting through amended Rule 12h-5.
---------------------------------------------------------------------------

f. Continuous Reporting Obligation
i. Proposed Amendments
    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

[[Page 21963]]

Act.\306\ Section 12(b) registration is required only for so long as 
the class of securities is listed for trading on a national securities 
exchange.\307\ 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.\308\ Section 15(d)(1) 
\309\ 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,\310\ or bank holding company,\311\ 
by fewer than 1,200 persons, the registrant's Section 15(d) reporting 
obligation is automatically suspended with respect to that class.\312\ 
Title 17 CFR 240.12h-3 (``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.\313\ A foreign private 
issuer likewise may terminate its Exchange Act reporting obligation 
regarding a class of equity securities under either Section 12(g) or 
Section 15(d) if it complies with the conditions of 17 CFR 240.12h-6 
(``Rule 12h-6'').\314\ Similarly, the periodic and current reporting 
requirements applicable to an issuer that has filed an offering 
statement for a Tier 2 offering that has been qualified pursuant to 
Regulation A \315\ may be suspended if the issuer complies with the 
requirements of 17 CFR 230.257(d) (``Rule 257(d)'').\316\
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    \306\ Section 12(g) registration is triggered when an issuer 
exceeds specified asset and ownership thresholds and only applies to 
equity securities.
    \307\ Accordingly, Section 12(b) reporting obligations are 
terminated when, for example, the class is delisted by the exchange 
or the registrant determines to no longer list the securities on a 
national securities exchange.
    \308\ 15 U.S.C. 78 j(a)(3).
    \309\ 15 U.S.C. 78o(d)(1).
    \310\ As that term is defined in Section 10 of the Home Owners' 
Loan Act, 12 U.S.C. 1461.
    \311\ As that term is defined in Section 2 of the Bank Holding 
Company Act of 1956, 12 U.S.C. 1841.
    \312\ 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.
    \313\ 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.
    \314\ Rule 12h-6 permits the termination of Exchange Act 
reporting regarding a class of equity securities under either 
Section 12(g) or Section 15(d) of the Exchange Act by a foreign 
private issuer if the U.S. average daily trading volume of the 
subject class of securities has been no greater than 5 percent of 
the average daily trading volume of that class of securities on a 
worldwide basis for a recent 12-month period; and the issuer has 
been an Exchange Act reporting company for at least one year, has 
filed or submitted all Exchange Act reports required for this 
period, and has filed at least one Exchange Act annual report; has 
not sold its securities in a registered offering in the United 
States, except for specified offerings, during the preceding 12 
months (except for exempted securities offerings); and has 
maintained a listing on one or more exchanges for at least a year in 
a foreign jurisdiction that, either singly or together with one 
other foreign jurisdiction, constitutes the primary trading market 
for the issuer's subject class of securities. The proposed and final 
amendments also apply to foreign private issuers. See Section 
III.D.1, ``Foreign Private Issuers,'' below.
    \315\ 17 CFR 230.251-230.263.
    \316\ Rule 257(d) permits A Tier 2 issuer that has filed all 
reports required by Regulation A for the shorter of: (1) The period 
since the issuer became subject to such reporting obligation, or (2) 
its most recent three fiscal years and the portion of the current 
year preceding the date of filing Form 1-Z to immediately suspend 
its ongoing reporting obligation under Regulation A at any time 
after completing reporting for the fiscal year in which the offering 
statement was qualified, if the securities of each class to which 
the offering statement relates are held of record by fewer than 300 
persons (1,200 persons for a bank or bank holding company) and 
offers or sales made in reliance on a Tier 2 offering statement are 
not ongoing. See generally, Securities Act Rules 257(d)(2) through 
(4). The proposed and final amendments apply to issuers offering 
securities pursuant to Regulation A and the forms applicable to such 
entities. See Section III.D.3, ``Offerings pursuant to Regulation 
A,'' below.
---------------------------------------------------------------------------

    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.\317\ 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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    \317\ 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.'').
---------------------------------------------------------------------------

    The Commission proposed 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 under the 
proposed rule, a parent company would be required to 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 would be permitted to cease providing the Proposed 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 and consistent with the 2000 Release,\318\ 
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, 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. 
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

[[Page 21964]]

able to present the Proposed Alternative Disclosures that proposed Rule 
3-10 would have allowed it to present for historical periods.
---------------------------------------------------------------------------

    \318\ See Section III.C.3. of the 2000 Release.
---------------------------------------------------------------------------

ii. Comments on the Proposed Amendments
    Comments on the proposed amendments were generally supportive. Many 
commenters supported eliminating the existing Rule 3-10 requirement 
that the parent company provide continuous reporting of the Alternative 
Disclosures for as long as the guaranteed securities are outstanding if 
the parent company elects to provide the Alternative Disclosures in 
lieu of separate financial statements of eligible subsidiary issuers 
and guarantors.\319\ One of these commenters stated that it ``supports 
the Commission's proposal to harmonize the treatment of the duration of 
the continuing reporting requirements so registrants that meet the 
criteria for presenting alternative disclosures and elect to do so are 
not unfairly burdened compared to those that elect to file separate 
audited annual and unaudited interim financial statements.'' \320\ 
Another commenter stated that the existing rule's continuous reporting 
requirement ``is highly anomalous and frequently results in an 
expensive ongoing disclosure cost with no discernable benefit to 
investors following business combination transactions.'' \321\ Some 
commenters suggested that eliminating these requirements would reduce 
burdens on issuers.\322\
---------------------------------------------------------------------------

    \319\ See, e.g., letters from Cravath, Davis Polk, FedEx, 
Freeport, Nareit, PWC, and Sullivan & Cromwell.
    \320\ See letter from Freeport.
    \321\ See letter from Cravath.
    \322\ See, e.g., letters from Cravath, Freeport, Nareit, and 
Sullivan & Cromwell.
---------------------------------------------------------------------------

    Two commenters opposed eliminating existing Rule 3-10's continuous 
reporting requirement and suggested that the Commission retain the 
requirement.\323\ These commenters argued that the Proposed Alternative 
Disclosures would be important to investors, and therefore the 
Commission should require continuous reporting for as long as the 
securities were outstanding.\324\ One of these commenters contended 
that a failure to provide continuous reporting could result in a 
ratings withdrawal by a nationally recognized statistical rating 
organization (``NRSRO'') that tracks the security, and asserted that 
many investors cannot invest in securities without a rating.\325\
---------------------------------------------------------------------------

    \323\ See letters from CII and Credit Roundtable.
    \324\ See letters from CII and Credit Roundtable.
    \325\ See letter from Credit Roundtable.
---------------------------------------------------------------------------

    A few commenters asserted that requiring continuous reporting when 
an issuer's reporting obligation could be suspended is an anomaly.\326\ 
One commenter indicated that the requirement is not needed because it 
has become commonplace for issuers to tailor contractual reporting 
obligations to meet the perceived needs of investors.\327\
---------------------------------------------------------------------------

    \326\ See letters from Cravath and Davis Polk.
    \327\ See letter from Cravath.
---------------------------------------------------------------------------

iii. Final Amendments
    After considering the comments received as well as the benefits and 
burdens of continued Exchange Act reporting when a subsidiary issuer or 
guarantor would otherwise be able to suspend its reporting obligations, 
we are eliminating, as proposed, the requirement that the parent 
company must continue to provide the Alternative Disclosures in its 
periodic reports for as long as the subject securities are outstanding. 
Instead, the parent company will be permitted to cease providing the 
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, 
thereby harmonizing the existing rule with the statutory reporting 
regime and the Commission's rules that govern when an issuer may 
terminate or suspend reporting. We agree with those commenters who 
stated that requiring continuous reporting when a subsidiary issuer's 
or guarantor's reporting obligation could be suspended is an anomaly 
and that eliminating such requirements would reduce burdens on issuers. 
We also do not believe it is necessary to require the parent company to 
continue providing the Revised Alternative Disclosures when the 
corresponding reporting obligations of its subsidiary issuers and 
guarantors with respect to the guaranteed security have been suspended 
or terminated. For similar reasons, we are making conforming amendments 
to provide analogous relief with respect to subsidiary issuers or 
guarantors that meet the definition of foreign private issuer and 
terminate their reporting obligations through compliance with Rule 12h-
6, and subsidiary issuers or guarantors that have filed an offering 
statement for a Tier 2 offering that has been qualified pursuant to 
Regulation A and suspend their reporting obligations through compliance 
with Rule 257(d). In these circumstances, we see no reason why 
reporting obligations should be different for parent companies of these 
types of subsidiary issuers and guarantors.
    Although these amendments may result in fewer entities providing 
the Revised Alternative Disclosures in periodic reports, if continued 
reporting is necessary due to the necessity of maintaining a rating for 
the debt security by a NRSRO or for other reasons, debt issuers and 
investors are free to negotiate the terms of debt instruments, 
including with respect to information to be provided about subsidiary 
issuers and guarantors, and to include the reporting requirements in 
the indentures governing the debt as they have done in the past.\328\ 
Also, as described above, a parent company would continue to be 
required to provide the Revised Alternative Disclosures with respect to 
securities that are traded on a national securities exchange. Today's 
amendments do not change this requirement.
---------------------------------------------------------------------------

    \328\ See letter from Cravath.
---------------------------------------------------------------------------

    Lastly, under the final amendments, consistent with the Proposing 
Release and the 2000 Release,\329\ if a subsidiary issuer or guarantor 
with an Exchange Act reporting obligation for the guaranteed securities 
were initially eligible to omit its financial statements, because it 
met the requirements of amended Rule 3-10 and could rely on amended 
Rule 12h-5, but later ceased to satisfy those requirements, that 
subsidiary will be required to begin filing Exchange Act reports for 
the period during which it ceased to satisfy the requirements of 
amended Rule 3-10. In addition, the subsidiary is required to present 
the financial statements that are required by Regulation S-X at the 
time a report is due and is not able to present the Revised Alternative 
Disclosures that amended Rule 3-10 would have allowed it to present for 
historical periods.
---------------------------------------------------------------------------

    \329\ See Section III.C.3. of the 2000 Release.
---------------------------------------------------------------------------

D. Application of Amendments to Certain Types of Issuers

    Rule 3-10's requirements apply to several categories of issuers, 
including foreign private issuers,\330\ smaller reporting companies 
(``SRCs''),\331\ and issuers offering securities pursuant to Regulation 
A. The proposed amendments also would apply to these types of issuers. 
In certain circumstances, Rule 3-10 also applies to the financial 
information of third parties

[[Page 21965]]

provided by issuers of asset-backed securities (``ABS'').
---------------------------------------------------------------------------

    \330\ See 17 CFR 230.405 and 240.3b-4 (defining ``foreign 
private issuer'').
    \331\ See 17 CFR 230.405 and 240.12b-2 (defining ``smaller 
reporting company'').
---------------------------------------------------------------------------

1. Foreign Private Issuers
a. Proposed Amendments
    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. The Commission also 
proposed 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, the 
Commission proposed 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.\332\ The Commission proposed to simplify the rule by deleting 
this reference.
---------------------------------------------------------------------------

    \332\ 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.
---------------------------------------------------------------------------

    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. Although the 
reconciliation requirement would be eliminated, proposed Rule 13-
01(a)(5) would have required 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.
b. Comments on the Proposed Amendments
    One commenter agreed that the proposed amendments should apply to 
foreign private issuers.\333\ This commenter also recommended that the 
Commission confirm that the periods covered under the Summarized 
Financial Information would be required to track only those covered by 
a foreign private issuer's consolidated financial statements.\334\ 
Another commenter suggested that, if the final amendments require 
interim reporting by issuers, the Commission should address the 
application of those requirements to foreign private issuers.\335\
---------------------------------------------------------------------------

    \333\ See letter from Sullivan & Cromwell.
    \334\ See letter from Sullivan & Cromwell.
    \335\ See letter from Deloitte.
---------------------------------------------------------------------------

    One commenter opposed the proposal to eliminate the requirement 
that foreign private issuers using an accounting framework other than 
U.S. GAAP or IFRS reconcile that framework with U.S. GAAP.\336\ This 
commenter maintained reconciliation promotes accounting discipline and 
thoroughness of the financial information. This commenter also 
contended that reconciliation was a key tool in educating investors 
about substantive differences between U.S. GAAP and other accounting 
standards. Another commenter expressed concern that eliminating the 
reconciliation requirement could result in investors receiving less 
consistent and relevant information, and that its elimination appears 
to contradict the view that the Summarized Financial Information is 
material to investors.\337\
---------------------------------------------------------------------------

    \336\ See letter from CII.
    \337\ See letter from KPMG.
---------------------------------------------------------------------------

c. Final Amendments
    After considering public comments, we are adopting the amendments 
as proposed. Accordingly, foreign private issuers will be required to 
comply with amended Rule 3-10 as well as new Rule 13-01.
    A few commenters requested the Commission confirm or address the 
periods of Summarized Financial Information that foreign private 
issuers would be required to present.\338\ As specified in Rule 13-
01(a)(4)(v), a parent company is required to disclose the Summarized 
Financial Information as of and for the most recently ended fiscal year 
and, if applicable, year-to-date interim period, included in the parent 
company's consolidated financial statements.
---------------------------------------------------------------------------

    \338\ See letters from Deloitte and Sullivan & Cromwell.
---------------------------------------------------------------------------

    Although a few commenters opposed or expressed concern about the 
proposed elimination of the existing Rule 3-10(i)(12) requirement for 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, we are eliminating this requirement as 
proposed. Because of the supplemental nature of the Revised 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 in the Revised Alternative Disclosures to U.S. 
GAAP is necessary. Although the reconciliation requirement would be 
eliminated, we note that Rules 13-01(a)(6) and (7) \339\ require the 
parent company to disclose additional financial information about each 
guarantor if the information would be material for investors to 
evaluate the sufficiency of the guarantee, as well as sufficient 
information so as to make the financial and non-financial information 
presented not misleading.
---------------------------------------------------------------------------

    \339\ See discussion in Section III.C.2.c, ``When Disclosure is 
Required.''
---------------------------------------------------------------------------

    For the same reasons described above,\340\ we have created new 
Exhibit 17 within Item 19 of Form 20-F, which will require the 
identification of each subsidiary that is a guarantor, issuer, or co-
issuer of each guaranteed security that the parent company issues or 
guarantees.
---------------------------------------------------------------------------

    \340\ See discussion in Section III.C.2.b.iii, ``Non-Financial 
Disclosures.''
---------------------------------------------------------------------------

    When a Canadian parent company and one or more subsidiaries 
register the offer and sale of guaranteed securities under the 
multijurisdictional disclosure system (``MJDS''),\341\ the parent 
company and the subsidiaries incur reporting obligations under Section 
15(d).\342\ When a subsidiary issuer or subsidiary guarantor is also 
eligible to register the offer and sale of its security under the 
MJDS,\343\ the financial

[[Page 21966]]

statements that would appear in the registration statement and in any 
annual report on Form 40-F \344\ filed by the Canadian parent company 
would not be affected by amended Rule 3-10 or new Rule 13-01. Instead, 
the disclosure would be in accordance with Canadian disclosure 
standards. When a subsidiary issuer or subsidiary guarantor is not 
eligible to register the offer and sale of its security under the 
MJDS,\345\ however, the requirements of amended Rule 3-10 will be 
applicable to financial statements of that subsidiary.
---------------------------------------------------------------------------

    \341\ The MJDS was adopted by the Commission to permit eligible 
Canadian issuers to satisfy the Commission's registration and 
reporting requirements by providing disclosure documents prepared in 
accordance with the requirements of Canadian securities regulatory 
authorities. See Multijurisdictional Disclosure and Modifications to 
the Current Registration and Reporting System for Canadian Issuers, 
Release No. 33-6902 (June 21, 1991) [56 FR 30036 (July 1, 1991)].
    \342\ 17 CFR 240.12h-4 (Exchange Act Rule 12h-4), however, 
exempts an issuer that has registered the offer and sale of 
securities under the Securities Act on Forms F-7, F-8 and F-80 from 
Section 15(d)'s Exchange Act reporting obligations, provided that 
the issuer is exempt from the obligations of Section 12(g) of the 
Exchange Act pursuant to 17 CFR 240.12g3-2(b) (Rule 12g3-2(b)). See 
Exchange Act Rule 12h-4.
    \343\ General Instruction I.H of Form F-10 permits majority-
owned subsidiaries to register the offer and sale of securities on 
that form if various conditions are met.
    \344\ 17 CFR 249.240f.
    \345\ This situation arises when the subsidiary issuer or 
subsidiary guarantor is not incorporated in Canada. In this 
situation, registrants have filed the registration statement on a 
combined form (e.g., Form F-10/S-4), depending on what registration 
form the subsidiary is eligible to use.
---------------------------------------------------------------------------

2. Smaller Reporting Companies
a. Proposed Amendments
    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.\346\ 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 \347\ so 
long as the subsidiary issuer or guarantor qualifies as an SRC.\348\ 
Consistent with the existing rule, if the conditions of proposed Rule 
3-10 are satisfied, the subsidiary issuer's or guarantor's financial 
statements could be omitted. While the substance of this requirement 
would not change, the Commission proposed 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, the 
Commission proposed 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, the proposed rule would 
add Rule 8-03(b)(7) to require compliance with Rules 3-10 and 13-01.
---------------------------------------------------------------------------

    \346\ Rule 8-02 of Regulation S-X.
    \347\ Article 8 of Regulation S-X.
    \348\ 17 CFR 229.10(f).
---------------------------------------------------------------------------

b. Comments on the Proposed Amendments
    One commenter agreed that the proposed amendments should apply to 
SRCs.\349\ Another commenter supported the proposed amendments to Note 
3 to Rule 8-01 of Regulation S-X to conform it to the streamlined 
structure of proposed amendments Rule 3-10(a).\350\
---------------------------------------------------------------------------

    \349\ See letter from Sullivan & Cromwell.
    \350\ See letter from ABA.
---------------------------------------------------------------------------

c. Final Amendments
    After considering the public comments, we are adopting the 
amendments as proposed. We believe that investors in smaller reporting 
companies will benefit from the simplified disclosures that will result 
from the amendments and that the cost of providing the disclosures will 
be reduced for smaller reporting companies. We are amending Note 3 to 
Rule 8-01 which, 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, will state that the 
requirements of Rule 3-10 are applicable to financial statements of the 
subsidiary issuer or guarantor. The final amendments also add a 
sentence to Note 3 to Rule 8-01 to require an SRC to provide the 
disclosures specified in proposed Rule 13-01. Finally, 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 have added Rule 8-03(b)(6) \351\ 
to require compliance with Rules 3-10 and 13-01.
---------------------------------------------------------------------------

    \351\ Proposed Rule 8-03(b)(7) would have sequentially followed 
existing 17 CFR 210.8-03(b)(6) [Rule 8-03(b)(6) of Regulation S-X]. 
Subsequent to the issuance of the Proposing Release, the Commission 
eliminated Rule 8-03(b)(6). See Disclosure Update and 
Simplification, Release No. 33-10532 (Aug. 17, 2018) [83 FR 50204 
(Oct. 4, 2018)]. The final amendments have been revised to reflect 
this change. The requirements in proposed Rule 8-03(b)(7) have been 
included in new Rule 8-03(b)(6).
---------------------------------------------------------------------------

3. Offerings pursuant to Regulation A
a. Proposed Amendments
    In connection with offerings made pursuant to Regulation A, Forms 
1-A,\352\ 1-K,\353\ and 1-SA \354\ 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,\355\ 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 could be 
omitted. While the substance of this requirement would not change, the 
Commission proposed 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.
---------------------------------------------------------------------------

    \352\ 17 CFR 239.90.
    \353\ 17 CFR 239.91.
    \354\ 17 CFR 239.92.
    \355\ 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. The Commission did 
not propose any changes to these audit requirements for 
circumstances where the separate financial statements of subsidiary 
issuers and guarantors are filed.
---------------------------------------------------------------------------

b. Comments on the Proposed Amendments
    One commenter expressed support for applying the proposed 
amendments to Regulation A issuers.\356\
---------------------------------------------------------------------------

    \356\ See letter from Sullivan & Cromwell.
---------------------------------------------------------------------------

c. Final Amendments
    After considering the public comments, we are adopting the 
amendments as proposed with minor technical modifications. We believe 
that investors in Regulation A offerings will benefit from the 
simplified disclosures that will result from the amendments and that 
the cost of providing the disclosures will be reduced for Regulation A 
Issuers.

[[Page 21967]]

    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 have been amended to state 
that the requirements of Rule 3-10 are applicable to financial 
statements of the subsidiary issuer or guarantor. The final amendments 
also modify each form to require the disclosures specified in Rule 13-
01 and specify the location of the disclosures, similar to Rule 13-
01(b) but consistent with the requirements of Regulation A. However, if 
a parent company elects to provide the disclosures in its audited 
financial statements, the Revised Alternative Disclosures will be 
required to be audited.
    The final amendments also include a technical modification to 
address the definition of the ``parent company'' as it relates to 
issuers under Regulation A. One element of the definition of ``parent 
company'' in amended Rule 3-10(b)(1)(ii) is that the parent company 
``is, or as a result of the subject Securities Act registration 
statement will be, an Exchange Act reporting company.'' As a result, 
strict application of this definition would exclude Regulation A 
Issuers that are not and will not become Exchange Act reporting 
companies (i.e., those issuers only report pursuant to Regulation A). 
As stated in the Proposing Release, we believe these amendments should 
apply to Regulation A Issuers. Accordingly, we are adopting a technical 
modification to Forms 1-A, 1-K, and 1-SA to clarify the applicability 
of the definition of parent company as it relates to Regulation A 
Issuers.
    In addition, as described above, 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. Regulation A does not currently provide 
for a similar exemption from reporting under the Rule 257(b) reporting 
requirements for subsidiary issuers and guarantors. As a further 
technical modification, to ensure consistency in the treatment of 
subsidiary issuers and guarantors under the Exchange Act and Regulation 
A, we are adding a new paragraph to Rule 257(b) of Regulation A 
specifying that subsidiary issuers and guarantors that are permitted to 
omit their separate financial statements from Forms 1-A, 1-K and 1-SA 
through the application of Rule 3-10 are automatically exempt from the 
periodic and current reporting requirements of Rule 257(b) of 
Regulation A. Consistent with Rule 12h-5, a subsidiary issuer or 
guarantor that later ceases to satisfy the requirements of Rule 3-10 
(e.g., it ceases to be a consolidated subsidiary of the parent 
company), would then be required to begin filing reports under Rule 
257(b) for the period during which it ceased to satisfy the 
requirements of Rule 3-10.
    Lastly, for the same reasons described above,\357\ we have created 
new Exhibit 17 within Item 17 of Form 1-A, which will require the 
identification of each subsidiary that is a guarantor, issuer, or co-
issuer of each guaranteed security qualified or being qualified under 
Regulation A that the parent company issues or guarantees. This exhibit 
will also be required in Form 1-K by Item 8(b) of Part II of that form, 
and in Form 1-SA by Item 4(b) of that form.
---------------------------------------------------------------------------

    \357\ See discussion in Section III.C.2.b.iii, ``Non-Financial 
Disclosures.''
---------------------------------------------------------------------------

4. Issuers of Asset-Backed Securities--Third Party Financial Statements
a. Proposed Amendments
    The disclosure items for issuers of ABS, set forth in 17 CFR 
229.1100 through 229.1125,\358\ specify circumstances when an ABS 
issuer must provide financial information for certain third parties 
\359\ 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.
---------------------------------------------------------------------------

    \358\ Regulation AB.
    \359\ 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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    The Commission proposed conforming amendments to Items 
1100(c)(2)(ii)(C) and (D) of Regulation AB because of the proposal 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, the Commission proposed 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 ``Sec. Sec.  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.
b. Comments on the Proposed Amendments
    We did not receive any comments that addressed the proposed 
conforming amendments to Regulation AB.
c. Final Amendments
    We are adopting the amendments as proposed. Under the final 
amendments, rather than referring to the information requirements of 
Rule 3-10, Items 1100(c)(2)(ii)(C) and (D) instead state that 
disclosures specified in 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 Rule 3-10 are satisfied. The function of the eligible 
categories in Items 1100(c)(2)(ii)(C) and (D) will not change due to 
these revisions. Further, we have made 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 ``Sec. Sec.  210.1-01 through 
210.12-29.'' These citations

[[Page 21968]]

have been updated to include Rules 13-01 and 13-02 of Regulation S-
X.\360\
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    \360\ Similar to the conforming amendments that update 
references to Regulation S-X to include new Rules 13-01 and 13-02, 
we have also made a similar conforming amendment to Item 
1100(c)(2)(ii)(F) of Regulation AB. Item 1100(c)(2)(ii)(F) of 
Regulation AB referred to Regulation S-K, but the related citation 
extended only from Sec. Sec.  229.10 through 229.1208. As Regulation 
S-K extends from Sec. Sec.  229.10 through 229.1305, we have made a 
corresponding conforming change.
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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 \361\ 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'').\362\ 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).\363\ In practice, affiliates 
whose securities collateralize a registered security are almost always 
consolidated subsidiaries of that registrant.
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    \361\ 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.
    \362\ 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.
    \363\ 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.\364\
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    \364\ 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,\365\ and we proposed changes to improve the disclosures 
required by the rule.
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    \365\ 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. Amendments to Rule 3-16 and Partial Relocation to Rule 13-02

A. Overarching Principle

    The final 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, the final amendments to Rule 3-16 are based on 
our belief that the investors in securities that are collateralized by 
securities of a registrant's affiliate(s) rely primarily on the 
consolidated financial statements of the registrant and supplemental 
details about the affiliate(s) whose securities are pledged when making 
investment decisions. 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.\366\ 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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    \366\ 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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    Several commenters expressed support for the overarching principle 
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 affiliates.\367\
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    \367\ See, e.g., letters from Cravath, Davis Polk, EY, FEI, and 
Nareit.
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B. Overview of the Proposed and Final Amendments

1. Proposed Amendments
    The proposed rule would 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. Similar to the proposed 
disclosures for issuers and guarantors of guaranteed securities 
discussed above, the proposed amendments would give registrants 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.\368\ Accordingly, the disclosure requirements 
in Rule 3-16 would have been amended and relocated to proposed Rule 13-
02 and Rule 3-16 would have been removed and reserved.
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    \368\ See Section V.F, ``Location of Disclosures and Audit 
Requirement,'' 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 the 
specified disclosures unless they are not material to holders of the 
collateralized security. Further, the proposed changes would have 
required disclosure of any additional information about the collateral 
arrangement and each affiliate whose security is pledged as collateral 
that would be material to making an investment decision with respect to 
the collateralized security. The proposed amendments, comments 
received, and final amendments are discussed further below.
2. Comments on the Proposed Amendments
    Comments on the proposed amendments were generally supportive. 
Several commenters supported the proposed amendments to replace 
existing Rule 3-16 with simplified financial and non-financial 
disclosures about the affiliates and collateral

[[Page 21969]]

arrangements.\369\ Some commenters asserted the proposed amendments to 
Rule 3-16 would benefit investors, who would receive information 
critical to making informed decisions in a simpler format, as well as 
registrants by reducing the costs of conducting these types of debt 
offerings.\370\ Several commenters indicated that the requirements of 
existing Rule 3-16 were overly burdensome and have caused many issuers 
to structure transactions to avoid application of existing Rule 3-16, 
by either avoiding pledges of an affiliate's securities or pursuing 
unregistered offerings where separate financial statements are not 
included.\371\ One commenter who expressed general support for the 
Commission's effort to amend Rule 3-16 recommended that the Commission 
eliminate Rule 3-16 without amending or replacing it.\372\ This 
commenter asserted that other disclosure requirements and market 
incentives were sufficient to cause registrants to disclose relevant 
material information in offerings of debt secured by securities of 
affiliates.
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    \369\ See, e.g., letters from Davis Polk, Dell, EY, FEI, Grant 
Thornton, Nareit, NYC Bar, PWC, and Sullivan & Cromwell.
    \370\ See, e.g., letters from Davis Polk, EY, and FEI.
    \371\ See letters from Cravath, Davis Polk, Dell, NYC Bar, and 
PWC.
    \372\ See letter from Cravath.
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3. Final Amendments
    After considering the public comments, we are adopting the 
amendments largely as proposed, with modifications. Although one 
commenter recommended eliminating rather than amending or replacing 
existing Rule 3-16, as supported by several other commenters, the final 
amendments replace the requirement to provide separate financial 
statements of an affiliate with financial and non-financial disclosures 
about the affiliate(s) and collateral arrangement(s). We agree with 
those commenters that asserted such a change will benefit investors who 
would receive information critical to making informed decisions in a 
simpler format, as well as registrants by reducing offering costs.\373\ 
These amended financial and non-financial disclosures will be included 
in new Rule 13-02 \374\ and are discussed below.\375\
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    \373\ See, e.g., letters from Davis Polk, EY, and FEI.
    \374\ The disclosures specified in proposed Rule 13-02(a) would 
be required ``[f]or each class of security registered or being 
registered . . .'' As a technical modification, final Rule 13-02(a) 
has been revised to require the disclosures specified therein 
``[f]or each security subject to Section 13(a) or 15(d) of the 
Securities Exchange Act of 1934, and for each security the offer and 
sale of which is being registered under the Securities Act of 1933, 
. . .''
    \375\ As a transitional matter, the final amendments do not 
eliminate existing Rule 3-16, which will continue to be applicable 
to registered collateralized securities with collateral release 
provisions issued and outstanding as of the effective date of the 
final amendments. See Section VI.B ``Rule 3-16 Collateral Release 
Provisions.''
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C. Financial Disclosures

1. Level of Detail
a. Proposed Amendments
    Existing Rule 3-16 requires separate financial statements of each 
affiliate whose securities constitute a substantial portion of the 
collateral. These affiliates whose securities are pledged as collateral 
are almost always consolidated subsidiaries of the registrant, and 
their financial information is thus already reflected in the 
registrant's consolidated financial statements. 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.\376\ Disclosure of additional line items of financial 
information beyond what is specified in proposed Rule 13-02(a)(4) would 
have been required by proposed Rule 13-02(a)(5) if 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.
---------------------------------------------------------------------------

    \376\ As with proposed Rule 13-01(a)(4), Summarized Financial 
Information would be the information specified in Rule 1-02(bb)(1) 
of Regulation S-X.
---------------------------------------------------------------------------

    The proposed rule did not include a financial statement requirement 
for when the affiliate is either a non-subsidiary controlled affiliate 
of the registrant or a controlling affiliate of the issuer, 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 have required the registrant to disclose any other quantitative 
or qualitative information that would be material to making an 
investment decision with respect to the collateralized security.\377\ 
Because the unconsolidated affiliate's financial information is not 
included in the registrant's consolidated financial statements, the 
Commission indicated in the Proposing Release that it would expect 
disclosure beyond what is specified in proposed Rule 13-02(a)(1) 
through (4) to be provided in these circumstances.\378\ In this regard, 
separate financial statements of the unconsolidated affiliate may be 
necessary if material to an investment decision.\379\
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    \377\ See Section V.E, ``When Disclosure is Required.''
    \378\ See Section V.C,1 of the Proposing Release.
    \379\ See proposed Rule 13-02(a)(5). See also 17 CFR 210.3-13 
(``Rule 3-13 of Regulation S-X'').
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b. Comments on the Proposed Amendments
    Several commenters generally supported the proposal to replace the 
separate financial statements of an affiliate required by existing Rule 
3-16 with Summarized Financial Information.\380\ Some commenters 
asserted that the proposed amendment would reduce a registrant's costs 
and burdens \381\ while still providing investors with clear and 
sufficient information.\382\
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    \380\ See, e.g., letters from Cravath, Davis Polk, EY, and FEI.
    \381\ See, e.g., letters from Davis Polk, EY, FEI, and PWC.
    \382\ See letters from EY and FEI.
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    One commenter urged the Commission to adopt an even more simplified 
and flexible approach, based on the commenter's assertion that 
offerings pursuant to Rule 144A include less detail than what is 
required in Summarized Financial Information.\383\ This commenter 
recommended that the final rule only require quantitative disclosure of 
revenue, operating income, assets, and liabilities of the relevant 
affiliates as a group.
---------------------------------------------------------------------------

    \383\ See letter from NYC Bar.
---------------------------------------------------------------------------

    Additionally, although they mostly agreed with the proposed 
amendment to replace the separate financial statements of an affiliate 
with less detailed financial information, a few commenters stressed 
that the Commission should require more information than is called for 
by Summarized Financial Information.\384\ One commenter indicated that 
the final rule should include the balance sheet and income statement 
information of the collateralizing subsidiaries in a level of detail 
similar to that specified in Article

[[Page 21970]]

10 of Regulation S-X.\385\ Another commenter recommended that the 
Commission require additional disclosures regarding intercompany and 
related-party transactions to accompany and thereby enhance the 
transparency of the Summarized Financial Information when securities of 
affiliates are pledged as collateral in a manner similar to its 
recommendations for the level of detail in the proposed amendments to 
Rule 3-10.\386\
---------------------------------------------------------------------------

    \384\ See, e.g., letters from EY and PWC.
    \385\ See letter from PWC.
    \386\ See letter from EY. In its comments on the level of detail 
in the proposed amendments to Rule 3-10, the commenter recommended 
requiring disclosure of investments held by the obligated group in 
non-obligated subsidiaries, intercompany or related-party 
transactions between the obligated and non-obligated groups, and 
when the obligated group includes variable interest entities, a 
cross-reference to the relevant disclosures in the consolidated 
financial statements.
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c. Final Amendments
    We are adopting amendments in substantially the form proposed, but 
with modifications in response to comments received. As described 
above, one commenter recommended different and more limited information 
than what is required by Summarized Financial Information and another 
recommended more detailed information. However, and consistent with our 
rationale for the corresponding requirement in the final amendments to 
Rule 13-01(a)(4) discussed above,\387\ we agree with those commenters 
that supported requiring Summarized Financial Information. We believe 
the select balance sheet and income statement line items that 
Summarized Financial Information requires are focused on the 
information that is most likely to be material to an investment 
decision and should be less burdensome for registrants to prepare than 
Rule 3-16 Financial Statements. Under the final amendments, disclosure 
of additional line items of financial information beyond the line items 
specified in Summarized Financial Information is required if necessary 
to comply with Rule 13-02(a)(6) and (7).\388\
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    \387\ See discussion in Section III.C.2.a.i.(C), ``Level of 
Detail.''
    \388\ Proposed Rule 13-02(a)(1) through (4) set forth proposed 
requirements to disclose specific financial and non-financial 
information. Proposed Rule 13-02(a)(5), which would have required 
disclosure of ``any other quantitative or qualitative information 
that would be material to making an investment decision with respect 
to the collateralized security,'' was included to require disclosure 
about the collateral arrangements and affiliates whose securities 
are pledged that would be material but was not otherwise already 
required by the specified proposed financial and non-financial 
disclosures. Instead of proposed Rule 13-02(a)(5), the final 
amendments include Rules 13-02(a)(6) and (7), which require 
disclosure of ``[a]ny financial and narrative information about each 
such affiliate if the information would be material for investors to 
evaluate the pledge of the affiliate's securities as collateral'' 
and ``[s]ufficient information so as to make the financial and non-
financial information presented not misleading,'' respectively. See 
discussion within Section V.E.3, ``When Disclosure is Required.''
---------------------------------------------------------------------------

    Although the Commission requested comment on whether the final 
rules should specifically address the rare circumstances where the 
affiliate is not a consolidated subsidiary of a registrant, we did not 
receive any comments. As such, consistent with the proposal, the final 
rule does not include requirements specific to non-subsidiary 
affiliates, such as a non-subsidiary controlled affiliate of the 
registrant or a controlling affiliate of the issuer. However, and also 
consistent with the proposal, in the rare circumstances where the 
affiliate is not a consolidated subsidiary of the registrant, Rules 13-
02(a)(6) and (7) would require the registrant to provide any financial 
and narrative information about each such affiliate if the information 
would be material for investors to evaluate the pledge of the 
affiliate's securities as collateral and sufficient information so as 
to make the financial and non-financial information presented not 
misleading.\389\ Because the unconsolidated affiliate's financial 
information is not included in the registrant's consolidated financial 
statements, in these circumstances disclosure beyond what is specified 
in Rule 13-02(a)(1) through (4) may need to be provided. In this 
regard, separate financial statements of the unconsolidated affiliate 
may be necessary to satisfy the requirements of Rules 13-02(a)(6) and 
(7).\390\
---------------------------------------------------------------------------

    \389\ See Section V.E, ``When Disclosure is Required.''
    \390\ See also Rule 3-13 of Regulation S-X.
---------------------------------------------------------------------------

    The Proposing Release included an example of when incremental 
disclosure of related party revenues would be required under the 
proposed rule.\391\ Specifically, 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. Instead of including this as an example of 
when disclosure would be required under Rule 13-02(a)(6) and (7), we 
agree with the commenter that recommended including a requirement to 
separately disclose intercompany and related-party transactions in 
addition to Summarized Financial Information, which the commenter 
asserted would enhance the transparency of the Summarized Financial 
Information.\392\ Accordingly, as adopted, Rule 13-02(a)(4)(iii) 
requires an affiliate's amounts due from, amounts due to, and 
transactions with certain entities not included in that affiliate's 
Summarized Financial Information to be presented in separate line 
items, to the extent material. Such entities include the registrant, 
any of the registrant's subsidiaries not included in the Summarized 
Financial Information of the affiliate,\393\ and related parties. For 
example, material revenue transactions between an affiliate and a 
separate non-pledged subsidiary of the registrant that is not included 
in that affiliate's financial information (i.e., the non-pledged 
subsidiary would not be a consolidated subsidiary of the affiliate) 
must be presented in a separate line item. If the transaction was 
between the affiliate and another affiliate whose securities are 
pledged, and those affiliates' Summarized Financial Information is 
presented on a combined basis pursuant to Rule 13-02(a)(4)(i), separate 
presentation of the transaction is not required as it will be required 
to be eliminated in accordance with Rule 13-02(a)(4)(ii).\394\ We 
expect clearly establishing this expectation as a stated requirement 
will assist in the preparation of the disclosures and provide useful 
information to investors, and agree with one commenter that such 
separate disclosure enhances the transparency of the Summarized 
Financial Information presented.\395\
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    \391\ See Section V.C.1 of the Proposing Release. Such 
disclosure would have been required by proposed Rule 13-02(a)(5).
    \392\ See letter from EY. This commenter suggested flexibility 
to provide these disclosures as either explanatory notes or separate 
line items. Based on the nature of these items, and to drive 
consistency in the disclosures between registrants, Rule 13-
02(a)(4)(iii) requires the amounts to be in separate line items.
    \393\ These entities include, for example, other affiliates 
whose securities are pledged as collateral but whose Summarized 
Financial Information required by Rule 13-02(a)(4) is presented 
separately from the affiliate in question, as well as other 
subsidiaries of the registrant that are not subsidiaries of the 
affiliate.
    \394\ See Section V.C.2, ``Presentation on a Combined Basis.''
    \395\ See letter from EY.
---------------------------------------------------------------------------

    Lastly, for the same reasons described in connection with the 
corresponding requirement in final Rule 13-01(a)(4),\396\ final Rule 
13-02(a)(4) includes a requirement to briefly describe the basis of 
presentation applicable to each of the required financial disclosures 
therein. In addition to simplifying the final rule, we believe this 
requirement will better inform users about the form and content of the 
disclosures provided pursuant to final Rule 13-02(a)(4).\397\ We 
believe

[[Page 21971]]

such disclosure enhances the understandability of the financial 
information provided.
---------------------------------------------------------------------------

    \396\ See Section III.C.2.a.i.(C), ``Level of Detail.''
    \397\ Such disclosure could state, for example, that the 
financial information presented is that of the affiliates whose 
securities are pledged as collateral for the registered securities. 
If applicable, the disclosure could also state, for example: That 
the financial information of affiliates is presented on a combined 
basis; intercompany balances and transactions between affiliates 
have been eliminated; that the affiliate's amounts due from, amounts 
due to, and transactions with the registrant, any of the 
registrant's subsidiaries not included in the summarized financial 
information of the affiliate(s) subsidiaries, and related parties 
have been presented in separate line items; and that financial 
information of certain identified affiliates has been presented 
separately due to disclosed facts and circumstances applicable to 
those subsidiaries (as required by Rule 13-02(a)(4)(iv)).
---------------------------------------------------------------------------

2. Presentation on a Combined Basis
a. Proposed Amendments
    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. In the Proposing 
Release, the Commission noted that the existing requirements can result 
in potentially confusing disclosure about the extent of 
collateral.\398\ 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). The proposed amendments would permit a registrant to 
disclose the financial information of 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.\399\
---------------------------------------------------------------------------

    \398\ See Section V of the Proposing Release.
    \399\ Proposed Rule 13-01 would prohibit 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.
---------------------------------------------------------------------------

    The proposed rule took into consideration 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 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.
    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), which would have 
required disclosure of any other quantitative or qualitative 
information that would be material to making an investment decision 
with respect to the collateralized security. If such circumstances were 
applicable to one or more, but not all, affiliates, proposed Rule 13-
02(a)(4) would require separate disclosure of Summarized Financial 
Information for the affiliates to which it is applicable.
b. Comments on the Proposed Amendments
    The majority of comments we received on the proposed amendments 
supported permitting issuers to disclose the financial information of 
the group of consolidated affiliates whose securities are pledged on a 
combined rather than individual basis.\400\ One commenter contended 
that providing this type of disclosure would allow issuers to focus on 
disclosure that is material and important to investors for making an 
informed investment decision.\401\
---------------------------------------------------------------------------

    \400\ See, e.g., letters from Cravath, Davis Polk, Dell, NYC 
Bar, and PWC.
    \401\ See letter from Dell.
---------------------------------------------------------------------------

    Consistent with its comments on proposed Rule 13-01(a)(4), one 
commenter asserted the proposed amendment that would require 
registrants to separately present the Summarized Financial Information 
for an affiliate if the required qualitative disclosures differed 
within the group of affiliates was overly prescriptive.\402\ This 
commenter recommended permitting greater flexibility in such instances, 
such as allowing a registrant to present Summarized Financial 
Information for the aggregate group with supplemental qualitative or 
quantitative disclosure regarding material differences within the 
group.
---------------------------------------------------------------------------

    \402\ See letter from EY.
---------------------------------------------------------------------------

c. Final Amendments
    After considering the public comments, we are adopting the 
amendments substantially as proposed with modifications, including 
separating certain requirements within proposed Rule 13-02(a)(4) into 
distinct subparagraphs for clarity.
    As supported by several commenters, we are adopting the proposed 
amendment that permits the supplemental financial disclosures of 
affiliates specified in Rule 13-02(a)(4) to be provided on a combined 
basis. Specifically, Rule 13-02(a)(4)(i) will permit the Summarized 
Financial Information of each affiliate whose securities are pledged as 
collateral that is consolidated in the registrant's consolidated 
financial statements to be presented on a combined basis, and Rule 13-
02(a)(4)(ii) will require that intercompany balances and transactions 
between affiliates whose information is presented on a combined basis 
to be eliminated.\403\ We agree with the commenter that stated that the 
ability to provide the financial information on a combined basis would 
allow registrants to focus on disclosure that is material and important 
to investors without omitting information investors need for

[[Page 21972]]

an informed investment decision.\404\ Consistent with the proposed 
amendments, unlike the final 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 will be included in the Summarized 
Financial Information presented pursuant to Rule 13-02(a)(4), even if 
the securities of those subsidiaries are not pledged as 
collateral.\405\
---------------------------------------------------------------------------

    \403\ Proposed Rule 13-02(a)(4) would have required, in part, 
that ``[i]ntercompany transactions between affiliates whose 
summarized financial information is presented on a combined basis 
shall be eliminated.'' While we are adopting the amendments 
substantially as proposed, final Rule 13-02(a)(4)(ii) clarifies that 
intercompany ``balances'' must also be eliminated in this regard.
    \404\ See letter from Dell.
    \405\ Rule 13-01(a)(4)(iii) requires the financial information 
of non-issuer and non-guarantor subsidiaries of issuers and 
guarantors to be excluded from the financial information of issuers 
and guarantors in order to distinguish the financial information of 
entities that are legally obligated to pay from those that are not. 
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.
---------------------------------------------------------------------------

    We are adopting, substantially as proposed, the requirement that 
when information provided in response to Rule 13-02 is applicable to 
one or more, but not all, affiliates, separate disclosure of Summarized 
Financial Information for the affiliates to which the information 
applies is required. This requirement is stated in Rule 13-
02(a)(4)(iv). For clarity, the final rule includes an example of 
disclosure required by Rule 13-02 that would trigger separate 
disclosure for the affected affiliates.\406\ The example is disclosure 
that is required by Rule 13-02(a)(3): ``the trading market for the 
affiliate's security pledged as collateral or a statement that there is 
no market.'' Consistent with the corresponding requirement in final 
Rule 13-01(a)(4)(iv), we believe a registrant should consider 
materiality \407\ and exercise judgment in determining the appropriate 
level of aggregation of affiliates based on the nature of the 
disclosure. In this regard, it may be useful to consider quantitative 
factors, such as the financial significance of the affected affiliates, 
and qualitative factors, such as the nature of the facts and 
circumstances applicable to the affiliates. For example, if the trading 
market for an affiliate's security is the same as some but not all 
affiliates, and such similar affiliates represent a substantial portion 
of the Summarized Financial Information of the combined affiliates, 
aggregation of the Summarized Financial Information of such affiliates 
may be appropriate depending on the facts and circumstances. 
Conversely, it may not be appropriate to aggregate the Summarized 
Financial Information of such affiliates where the trading markets for 
the securities are different.
---------------------------------------------------------------------------

    \406\ This example is being included to clarify one situation 
requiring separate presentation of the Summarized Financial 
Information applicable to some but not all affiliates.
    \407\ The disclosures specified in Rule 13-02(a) are required to 
the extent material. Rules 13-02(a)(6) and (7) require disclosure of 
``[a]ny financial and narrative information about each such 
affiliate if the information would be material for investors to 
evaluate the pledge of the affiliate's securities as collateral,'' 
and ``[s]ufficient information so as to make the financial and non-
financial information presented not misleading,'' respectively. See 
discussion within Section V.E.3, ``When Disclosure is Required.''
---------------------------------------------------------------------------

    One commenter stated its belief that requiring separate 
presentation of the Summarized Financial Information applicable to 
affected affiliates under proposed Rule 13-02(a)(4) is overly 
prescriptive.\408\ Consistent with final amendments to Rule 13-
01(a)(4)(iv), while we do believe separate disclosure of Summarized 
Financial Information for the affected affiliates would be appropriate 
in most cases, we also agree with this commenter's suggestion that it 
could be acceptable to present Summarized Financial Information for the 
combined affiliates with supplemental qualitative and/or quantitative 
disclosure to inform investors about the disclosures affecting one or 
more, but not all affiliates. Accordingly, Rule 13-02(a)(4)(iv) 
permits, in limited circumstances, narrative disclosure to be provided 
in lieu of the separate Summarized Financial Information of the 
affected affiliates to which the paragraph otherwise requires. The 
limited circumstances when a narrative may be provided are when such 
separate financial information applicable to the affected affiliates 
can be easily explained and understood. For example, if certain terms 
and conditions of the collateral arrangement are applicable to one 
affiliate, and that affiliate constitutes a similar percentage of the 
combined group of affiliates' assets, liabilities, and operations, 
narrative disclosure may be permissible depending on the facts and 
circumstances. In other circumstances, such as if that affiliate's 
financial significance to the combined group of affiliates is not 
easily explained (e.g., the affiliate constitutes varying proportions 
of each line item within the combined group of affiliates' Summarized 
Financial Information), narrative disclosure would not be sufficient.
---------------------------------------------------------------------------

    \408\ See letter from EY.
---------------------------------------------------------------------------

    As described in the Proposing Release, 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 Rules 
13-02(a)(6) and (7) if material for investors to evaluate the pledge of 
the affiliate's securities as collateral, or so as to make the 
financial and non-financial information presented not misleading.\409\ 
If such circumstances are applicable to one or more, but not all, 
affiliates, Rule 13-02(a)(4)(iv) would require separate disclosure of 
Summarized Financial Information for the affiliates to which it is 
applicable.
---------------------------------------------------------------------------

    \409\ Supra note 388.
---------------------------------------------------------------------------

3. Periods to Present
a. Proposed Amendments
    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. Under the existing rule, Rule 3-16 
Financial Statements are not required in quarterly reports, such as on 
Form 10-Q.\410\ The proposed rule would require disclosure 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, the Commission proposed adding Rule 10-01(b)(10) to 
require compliance with proposed Rule 13-02.
---------------------------------------------------------------------------

    \410\ See Section III.A.6 of the 2000 Release.
---------------------------------------------------------------------------

b. Comments on the Proposed Amendments
    Comments on the proposed amendments were mixed. A few commenters 
supported providing the disclosure of the Summarized Financial 
Information as of, and for, the most recently ended fiscal year and 
interim period included in the registrant's consolidated financial 
statements.\411\ However, some commenters suggested that the Commission 
should not require interim disclosures unless there had been a material 
change since the most recent annual period.\412\ Two of these 
commenters contended that this change would be consistent with Article 
10 of Regulation S-X.\413\ One commenter

[[Page 21973]]

stated that interim reporting would be burdensome and costly.\414\ This 
commenter asserted annual disclosure should be sufficient for investors 
to make informed investment decisions.
---------------------------------------------------------------------------

    \411\ See letters from Grant Thornton and NYC Bar.
    \412\ See letters from Deloitte, EY, FEI, and PWC.
    \413\ See letters from Deloitte and PWC.
    \414\ See letter from SIFMA.
---------------------------------------------------------------------------

c. Final Amendments
    After considering the comments received, we are adopting the 
amendments as proposed, with one clarification. As adopted, consistent 
with final Rule 13-01(a)(4)(v), final Rule 13-02(a)(4)(v) requires the 
financial disclosures to be provided as of and for the most recently 
ended fiscal year and year-to-date interim period included in the 
registrant's consolidated financial statements.
    We are not adopting the approach some commenters recommended, which 
would have required the most recent interim period in limited 
circumstances, such as when there had been a material change since the 
most recent annual period. We continue to believe, as the Commission 
stated in the Proposing Release, that the most recent interim period 
should be provided so that investors can make decisions based on the 
most recent information available.\415\ Furthermore, while we 
acknowledge the concerns about the burden to provide interim 
information in all cases, consistent with our rationale for the 
corresponding requirement in the final amendments to Rule 13-
01(a)(4)(v),\416\ we believe the adopted approach will significantly 
reduce burdens on issuers while providing investors with the 
information they need to make informed investment decisions. For 
similar reasons, we are adopting the proposal that requires the amended 
disclosures in quarterly filings, such as Form 10-Q. To accomplish 
this, 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 
have added Rule 10-01(b)(10) to require compliance with Rule 13-02. 
Proposed Rule 13-02(a)(4) did not specify that the required interim 
period was only for the most recent year-to-date period. In certain 
filings, such as a registrant's Form 10-Q for its second and third 
fiscal quarters, both year-to-date and quarter-to-date interim 
financial statements are required to be presented for the registrant. 
To avoid any such confusion, and consistent with the proposed rule's 
intent and suggestions from certain commenters,\417\ the final rule's 
interim period requirement has been revised to clarify that only the 
most recent year-to-date interim period is required.
---------------------------------------------------------------------------

    \415\ See Section V.C.3 of the Proposing Release.
    \416\ See discussion in Section III.C.2.a.iii.(C), ``Periods to 
Present.''
    \417\ See, e.g., letters from EY, FEI, and PWC.
---------------------------------------------------------------------------

D. Non-Financial Disclosures

1. Proposed Amendments
    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. In addition to proposing amendments to the 
financial information required about the affiliates whose securities 
are pledged as collateral, the proposed rule would also require 
specific non-financial disclosures to be provided. Proposed Rules 13-
02(a)(1) through (3) would require 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. While the proposed requirements comprised the items the 
Commission believed would most likely be material to an investor, there 
could 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 have required 
disclosure of those facts and circumstances.\418\ Additionally, when a 
non-financial disclosure is applicable to one or more, but not all, 
affiliates, proposed Rule 13-02(a)(4) would require separate disclosure 
of Summarized Financial Information for the affiliates to which it is 
applicable.\419\
---------------------------------------------------------------------------

    \418\ See discussion in Section V.E, ``When Disclosure is 
Required.''
    \419\ See discussion in Section V.C.2, ``Presentation on a 
Combined Basis.''
---------------------------------------------------------------------------

2. Comments on the Proposed Amendments
    Comments on the proposed amendments were generally supportive. Some 
commenters generally supported the proposed rule's requirement to 
provide, 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.\420\ One asserted that such disclosure would be helpful to 
investors.\421\
---------------------------------------------------------------------------

    \420\ See letters from Davis Polk, FEI, and NYC Bar.
    \421\ See letter from Davis Polk.
---------------------------------------------------------------------------

    One commenter, however, stated that it was not clear why a 
description of the security pledged as collateral and disclosure of 
each affiliate whose security is pledged would be meaningful to an 
investor in the context of financial disclosures.\422\ This commenter 
recommended that the Commission consider requiring such disclosures be 
included as an exhibit to the filing similar to the list of 
subsidiaries required by Item 601.
---------------------------------------------------------------------------

    \422\ See letter from PWC.
---------------------------------------------------------------------------

3. Final Amendments
    After considering the comments received, we are adopting the 
amendments largely as proposed with modifications based on comments 
received. Consistent with the Proposing Release, we believe these 
requirements will 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 adopted non-financial disclosures are composed 
of the items we believe are most likely to be material to an investor, 
disclosure of additional facts and circumstances is required if 
necessary to comply with Rule 13-02(a)(6) and (7).\423\ Additionally, 
when a non-financial disclosure is applicable to one or more, but not 
all, affiliates, Rule 13-02(a)(4)(iv) requires, to the extent it is 
material, separate disclosure of Summarized Financial Information for 
the affiliates to which the non-financial disclosure applies.\424\
---------------------------------------------------------------------------

    \423\ Supra note 388.
    \424\ See discussion in Section V.C.2, ``Presentation on a 
Combined Basis.''
---------------------------------------------------------------------------

    Consistent with the final amendments to Rule 13-01 and our related 
rationale,\425\ while we are not adopting one commenter's \426\ 
suggestion that disclosure of the identification of the security 
pledged as collateral only be required upon registration of the 
collateralized securities and the related prospectuses, we are adopting 
the commenter's alternative suggestion that this disclosure be included 
in an exhibit to the subject filing.\427\ Due to this

[[Page 21974]]

change, we have revised Rule 13-02(a)(1) to require a description of 
the securities pledged as collateral and the affiliates whose 
securities are pledged as collateral. We believe this approach will 
provide the information to investors in a more efficient manner and 
make the accompanying financial and non-financial disclosures easier to 
understand.
---------------------------------------------------------------------------

    \425\ See discussion in Section III.C.2.b.iii, ``Non-Financial 
Disclosures.''
    \426\ See letter from PWC.
    \427\ See amended Item 601(a) and new Item 601(b)(22) of 
Regulation S-K. A registrant will be required to list, under an 
appropriately captioned heading that identifies the associated 
securities, each of its affiliates whose security is pledged as 
collateral for the registrant's security registered or being 
registered. For each affiliate, the security or securities pledged 
as collateral must also be identified. An affiliate need not be 
listed more than once so long as its role as affiliate whose 
security is pledged as collateral for a registrant's security is 
clearly indicated with respect to each applicable security. 
Similarly, if an affiliate required to be identified in this exhibit 
is also required to be identified as an issuer, co-issuer, or 
guarantor of a guaranteed security in this exhibit, the entity need 
not be listed more than once so long as its role as issuer, co-
issuer, or guarantor of a guaranteed security and/or as affiliate 
whose security is pledged as collateral for a registrant's security 
is clearly indicated with respect to each applicable security. This 
exhibit will be required in Forms S-1, S-3, S-4, SF-1, SF-3, S-11, 
F-1, F-3, F-4, 10, 10-Q, and 10-K. In addition, we are making 
corresponding revisions to the exhibit requirements of Form 20-F by 
creating new Exhibit 17 within Item 19, and Form 1-A by creating new 
Exhibit 17 within Item 17. This exhibit will also be required in 
Forms 1-K and 1-SA. See discussion in Section V.H.3.c, ``Offerings 
pursuant to Regulation A''.
---------------------------------------------------------------------------

E. When Disclosure Is Required

1. Proposed Amendments
    As discussed above,\428\ 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. The proposed 
rule would replace this test with one based on materiality, similar to 
the framework in proposed Rule 13-01.\429\ Under this approach, 
investors would be provided with disclosure where it is material, 
whereas under the existing rule, no disclosure would be provided unless 
the collateral represented a ``substantial portion.''
---------------------------------------------------------------------------

    \428\ See Section IV, ``Rule 3-16 of Regulation S-X.''
    \429\ Whether a disclosure specified in proposed Rule 13-02 may 
be omitted or whether additional disclosure would have been 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.c.iii, ``When Disclosure is Required,'' above.
---------------------------------------------------------------------------

    Proposed Rule 13-02(a) would have required 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. 
While the disclosures specified in proposed Rule 13-02(a)(1) through 
(4) could have been omitted if not material to holders of the 
collateralized security, for clarity, proposed Rule 13-02(a)(4) would 
have required the registrant to include a statement that the financial 
disclosures have been omitted and disclose the reason(s) 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 have required 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 have been required 
if that information is material to an investment decision in the 
collateralized security.
2. Comments on the Proposed Amendments
    Comments on the proposals were mixed. Several commenters generally 
supported replacing existing Rule 3-16's ``substantial portion'' test 
with a principles-based materiality standard.\430\ Two commenters 
asserted that the existing ``substantial portion'' test could lead to 
registrants disclosing information that is not essential to making an 
informed investment decision.\431\ One of these commenters contended 
that moving to a materiality standard under the proposed amendments 
would only require registrants to incur the cost to provide the 
required disclosure when doing so would be helpful to investors.\432\ 
However, a few commenters supported some type of numerical threshold 
for establishing whether disclosure would be deemed not material.\433\ 
One commenter suggested establishing a 50% numerical threshold as a 
non-exclusive safe harbor at or below which the share collateral would 
be deemed not material and above which the registrant must evaluate 
materiality.\434\ The other commenter suggested retaining existing Rule 
3-16's 20% threshold in the form of a safe harbor, such that any 
collateral arrangement that does not trigger the existing rule would be 
deemed not material for the purposes of the new rule.\435\
---------------------------------------------------------------------------

    \430\ See, e.g., letters from CII, Cravath, Davis Polk, 
Deloitte, EY, and FEI.
    \431\ See letters from Davis Polk and Dell.
    \432\ See letter from Davis Polk.
    \433\ See letters from NYC Bar and SIFMA.
    \434\ See letter from SIFMA.
    \435\ See letter from NYC Bar.
---------------------------------------------------------------------------

    Consistent with comments received in connection with the 
corresponding requirement in proposed Rule 13-01(a)(5),\436\ a number 
of commenters opposed proposed Rule 13-02(a)(5), which would have 
required disclosure of any information that would be material to making 
an investment decision with respect to the collateralized 
security.\437\ One commenter expressed concern that this requirement 
possibly went beyond the Commission's existing materiality 
standard.\438\ Some commenters asserted that the proposed requirement 
would cause uncertainty for issuers and auditors as they seek to apply 
and assess the adequacy of the disclosures.\439\ One commenter asserted 
that the proposed requirement would override all other relevant 
disclosure obligations; \440\ another commenter questioned whether the 
Commission was proposing to modify the overall materiality assessment 
in its disclosure framework; \441\ and a third commenter stated its 
belief that in addition to creating litigation risk, the proposed rule 
could extend the duty to disclose material information beyond 
information specific to the guarantee, such as pending merger 
negotiations and other potential transactions.\442\ However, one 
commenter supported this proposed requirement ``because it would 
provide relevant information, not otherwise explicitly required by the 
[p]roposed [r]ule, which would likely render the disclosures taken as a 
whole to be more useful for investment decisions.'' \443\
---------------------------------------------------------------------------

    \436\ See Section III.C.2.c.ii, ``When Disclosure is Required.''
    \437\ See, e.g., letters from ABA, BDO, CAQ, Cravath, Davis 
Polk, Deloitte, EY, KPMG, PWC, Shearman, and Sullivan & Cromwell.
    \438\ See letter from ABA.
    \439\ See, e.g., letters from BDO, CAQ, EY, and PWC.
    \440\ See letter from Cravath.
    \441\ See letter from Deloitte.
    \442\ See letter from Shearman.
    \443\ See letter from CII.
---------------------------------------------------------------------------

    Consistent with comments received in connection with the 
corresponding requirement in proposed Rule 13-01(a)(4),\444\ some 
commenters opposed the requirement in proposed Rule 13-

[[Page 21975]]

02(a)(4) that would require issuers to disclose, if the required 
financial disclosures were omitted because they were not material, a 
statement to that effect and the reasons therefore.\445\ Some 
commenters asserted that such disclosure would not be useful to 
investors,\446\ could possibly result in an increase in liability,\447\ 
and was counter to the Commission's objective of focusing on material 
disclosures and providing a principles-based framework.\448\ One 
commenter suggested that the Commission should make clear that, if the 
proposal were adopted, issuers would only need to make a simple 
statement that management does not believe the information is 
material.\449\ In contrast, one commenter specifically supported this 
part of proposed Rule 13-02(a)(4), asserting that the requirement would 
provide clarity about which disclosures were omitted and why.\450\
---------------------------------------------------------------------------

    \444\ See Section III.C.2.c.ii, ``When Disclosure is Required.''
    \445\ See letters from Cravath, EY, KPMG, and SIFMA.
    \446\ See letters from Debevoise and KPMG.
    \447\ See letters from Debevoise and SIFMA.
    \448\ See letter from Debevoise.
    \449\ See letter from SIFMA.
    \450\ See letter from CII.
---------------------------------------------------------------------------

    One commenter expressed concern that there could be uncertainty 
over the application of proposed Rule 13-02 because of possible overlap 
in disclosure requirements when a subsidiary is a guarantor, in which 
case proposed Rules 3-10 and 13-01 would apply, and also has securities 
pledged as collateral, in which case proposed Rule 13-02 would 
apply.\451\ This commenter suggested that the Commission clarify that 
proposed Rule 13-02 would apply only to the extent proposed Rules 3-10 
and 13-01 would not be applicable because investors would generally 
consider the guarantee to be more valuable than pledged securities.
---------------------------------------------------------------------------

    \451\ See letter from NYC Bar.
---------------------------------------------------------------------------

3. Final Amendments
    We are adopting the amendments largely as proposed with 
modifications based on comments received. As supported by several 
commenters,\452\ the final amendments replace existing Rule 3-16's 
``substantial portion'' numerical thresholds with a requirement to 
provide all disclosures specified in the final rule, unless such 
information is not material.\453\ Whereas proposed Rule 13-02(a) 
required the proposed financial and non-financial disclosures ``to the 
extent material to holders of the collateralized security,'' the final 
rule has been revised to require the financial and non-financial 
disclosures ``to the extent material,'' which is discussed in further 
detail below. A few commenters suggested including numerical thresholds 
in the rule for determining whether financial information may be 
omitted.\454\ We are not adopting this suggestion, as we agree with 
those commenters that supported the proposal to require information the 
registrant believes is material to investors. In these circumstances, 
and consistent with our rationale for the corresponding requirement in 
the final amendments to Rule 13-01(a),\455\ we believe requiring 
disclosure to the extent material provides investors with information 
useful to an investment decision and avoids certain potential 
challenges associated with numerical thresholds.\456\
---------------------------------------------------------------------------

    \452\ See, e.g., letters from CII, FedEx, FEI, Nareit, and 
Sullivan & Cromwell.
    \453\ Whether a disclosure specified in proposed Rule 13-02 may 
be omitted, as discussed below, depends on whether it would be 
material to a reasonable investor. See Section III.C.2.c, ``When 
Disclosure is Required,'' above.
    \454\ See letters from NYC Bar and SIFMA.
    \455\ See discussion in Section III.C.2.c.iii, ``When Disclosure 
is Required.''
    \456\ For example, one commenter asserted that the existing 
rule's ``substantial portion'' test could lead to registrants 
disclosing information that is not essential to making an informed 
investment decision. See letter from Dell.
---------------------------------------------------------------------------

    We are not adopting the suggestion by one commenter that we require 
compliance with Rule 13-02 only to the extent Rules 3-10 and 13-01 do 
not apply.\457\ This suggestion was based on the commenter's belief 
that there could be uncertainty over the application of proposed Rule 
13-02 because of what the commenter views as possible overlaps in 
disclosure requirements when a subsidiary is a guarantor, in which case 
proposed Rules 3-10 and 13-01 would apply, and also has securities 
pledged as collateral, in which case proposed Rule 13-02 would apply. 
This commenter asserted that investors would generally consider the 
guarantee to be more valuable than pledged securities. However, we do 
not agree that disclosure about only the guarantee should be required 
in such circumstances. Where a subsidiary is an issuer or guarantor of 
a guaranteed security and its securities also are pledged as 
collateral, each are separate credit enhancements for which different 
disclosure may be necessary. We believe that requiring compliance with 
both rules in these circumstances will help to ensure that material 
information is provided to investors about each credit enhancement.
---------------------------------------------------------------------------

    \457\ See letter from NYC Bar.
---------------------------------------------------------------------------

    The proposed rule sets forth financial and non-financial 
disclosures that were focused on information the Commission expected 
were most likely to be material. It also included proposed Rule 13-
02(a)(5), which would have required disclosure of ``any other 
quantitative or qualitative information that would be material to 
making an investment decision with respect to the collateralized 
security.'' The intent of this proposed requirement was to elicit 
disclosure about the affiliate(s) and the collateral arrangement(s) 
that would be material but was not otherwise specifically required by 
the proposed financial and non-financial disclosures. As described 
above, comments on this proposed requirement were consistent with those 
received on the corresponding requirement in proposed Rule 13-01(a)(5). 
While one commenter supported this proposed requirement, many others 
did not.
    In response to the comments received, instead of proposed Rule 13-
02(a)(5), we are adopting Rules 13-02(a)(6) and (7), which are similar 
to the disclosures required by final Rule 13-01(a)(6) and (7) but 
tailored to apply to collateral arrangements. In this regard, whereas 
final Rule 13-01(a)(6) requires disclosure of any information that 
would be material for investors to evaluate the ``sufficiency of the 
guarantee,'' final Rule 13-02(a)(6) requires disclosure of ``[a]ny 
financial and narrative information about each such affiliate if the 
information would be material for investors to evaluate the pledge of 
the affiliate's securities as collateral.'' Similarly, final Rule 13-
02(a)(7) is consistent with final Rule 13-01(a)(7), requiring 
disclosure of ``[s]ufficient information so as to make the financial 
and non-financial information presented not misleading.'' For the same 
reasons cited in adopting final Rule 13-01(a)(6) and (7),\458\ we 
believe these requirements capture the disclosures the proposed rule 
was intended to elicit while addressing the concerns raised by 
commenters as discussed above. Notwithstanding these requirements in 
the final rule, Securities Act Rule 408(a) and Exchange Act Rule 12b-20 
require a registrant to disclose, in addition to the information 
expressly required to be included, such further material information, 
if any, as may be necessary to make the required statements, in the 
light of the circumstances under which they are made not misleading. 
While some commenters indicated these requirements provide sufficient 
investor protections,\459\ we believe the

[[Page 21976]]

requirements in final Rule 13-02(a)(6) and (7), in addition to these 
other requirements, will help to ensure that material information is 
provided to investors.
---------------------------------------------------------------------------

    \458\ See discussion in Section III.C.2.c.iii, ``When Disclosure 
is Required.''
    \459\ See, e.g., letters from Deloitte and EY.
---------------------------------------------------------------------------

    Based on comments received on proposed Rule 13-02(a)(5), we have 
also revised Rule 13-02(a) for clarity, consistent with revisions to 
Rule 13-01(a).\460\ Proposed Rule 13-02(a) would have required 
disclosures ``to the extent material to holders of the collateralized 
security'' and was not intended to introduce a nuanced or different 
materiality analysis specific to these disclosure requirements. A 
registrant's responsibility to determine whether the disclosures 
specified in Rule 13-02 are material is not different from how it 
assesses materiality in connection with other information it files with 
the Commission. Accordingly, final Rule 13-02 has been revised to 
require the financial and non-financial disclosures ``to the extent 
material.''
---------------------------------------------------------------------------

    \460\ See discussion in Section III.C.2.c.iii, ``When Disclosure 
is Required.''
---------------------------------------------------------------------------

    Proposed Rule 13-02(a)(4) would have required, if the financial 
disclosures specified in proposed Rule 13-02(a)(4) were omitted because 
they are not material, disclosure of a statement to that effect and the 
reasons therefore. Most of the commenters that discussed this proposed 
requirement did not support it.\461\ In response to these comments, and 
for the same reasons cited in adopting final amendments to the 
corresponding requirement in final Rule 13-01,\462\ we are not adopting 
this requirement as proposed. Instead, we are adopting an approach that 
should help address concerns \463\ about the need for greater certainty 
as to the circumstances when omission of financial disclosures may be 
appropriate, while continuing to provide investors with the basic 
reasons as to why the financial information was omitted. As adopted, 
Rule 13-02(a)(4)(vi) identifies two scenarios, which we believe are the 
most common situations under which the financial information would not 
be material. If the scenario is applicable and disclosed, the 
registrant could then omit the financial disclosures. The two scenarios 
are:
---------------------------------------------------------------------------

    \461\ See, e.g., letters from Cravath, EY, KPMG, and SIFMA.
    \462\ See discussion in Section III.C.2.c.iii, ``When Disclosure 
is Required.''
    \463\ See, e.g., letter from Shearman.
---------------------------------------------------------------------------

    (1) The assets, liabilities and results of operations of the 
combined affiliates whose securities are pledged as collateral are not 
materially different than the corresponding amounts presented in the 
consolidated financial statements of the registrant; \464\ and
---------------------------------------------------------------------------

    \464\ This scenario is contained in Rule 13-02(a)(4)(vi)(A).
---------------------------------------------------------------------------

    (2) The combined affiliates whose securities are pledged as 
collateral have no material assets, liabilities or results of 
operations.\465\
---------------------------------------------------------------------------

    \465\ This scenario is contained in Rule 13-02(a)(4)(vi)(B).
---------------------------------------------------------------------------

    Similar to the corresponding amendments to Rule 13-01,\466\ while 
we believe these scenarios encompass most of the situations under which 
the required financial information would not be material, these 
scenarios are not intended to be exclusive. As discussed below, there 
may be other circumstances in which it would be appropriate to omit the 
required financial information on the basis that it is not material.
---------------------------------------------------------------------------

    \466\ See discussion in Section III.C.2.c.iii, ``When Disclosure 
is Required.''
---------------------------------------------------------------------------

    In the first scenario, we believe financial information of the 
combined affiliates would not be material to an investor as it is not 
materially different than that of the consolidated registrant.\467\ If 
the related scenario was disclosed, investors would not need 
supplemental financial information as it would largely duplicate the 
corresponding information in the registrant's consolidated financial 
statements. In the second scenario, we believe disclosure that the 
combined group of affiliates has no material assets, liabilities or 
results of operations obviates the need for supplemental disclosures as 
an investor would know such information would not be material.
---------------------------------------------------------------------------

    \467\ Rule 13-02(a)(4)(vi) clarifies that this scenario does not 
apply where separate disclosure of the Summarized Financial 
Information of one or more, but not all affiliates, is required by 
Rule 13-02(a)(4)(iv).
---------------------------------------------------------------------------

    While we believe these scenarios generally capture the situations 
under which the financial information would not be material and may be 
omitted, there may be other scenarios under which the registrant may 
conclude Summarized Financial Information is not necessary. These 
scenarios would be evaluated under the general materiality provision of 
Rule 13-02(a). Based on this analysis, if a registrant determines that 
not all of the required financial information is material, the 
information that is not material may be omitted without additional 
disclosure or explanation. Thus, under the final rule, the registrant 
could either rely on one of the identified scenarios, if applicable, to 
omit information that is not material, or make its own assessment based 
upon a consideration of other relevant facts and circumstances.\468\ We 
believe this approach will preserve the principles-based nature of Rule 
13-02 while providing greater certainty for issuers, and appropriate 
transparency for investors, regarding the information required to be 
disclosed.
---------------------------------------------------------------------------

    \468\ To provide clarity to an issuer that its ability to omit 
the Summarized Financial Information required by final Rule 13-
02(a)(4) is not limited to the four scenarios discussed herein, 
final Rule 13-02(a)(4)(vi) states: ``Notwithstanding that a 
registrant may omit this summarized financial information if not 
material . . . ''
---------------------------------------------------------------------------

F. Location of Disclosures and Audit Requirement

1. Proposed Amendments
    Similar to the proposed disclosures for issuers and guarantors of 
guaranteed securities discussed above,\469\ the proposed amendments 
would give registrants 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.
---------------------------------------------------------------------------

    \469\ See Section III.C.2.d.i, ``Location of Revised Alternative 
Disclosures and Audit Requirement.''
---------------------------------------------------------------------------

    Accordingly, the note to proposed Rule 13-02(a) would have allowed 
the registrant to provide the disclosures required by this section in a 
footnote to its consolidated financial statements or, alternatively, in 
MD&A in the 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.\470\ 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

[[Page 21977]]

the subject securities is completed. If the registrant provides 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.\471\ 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.\472\
---------------------------------------------------------------------------

    \470\ As described above, subsequent to the issuance of the 
Proposing Release, the Commission amended and relocated the 
requirements previously contained in Item 503(c) of Regulation S-K 
to new Item 105 of Regulation S-K.
    \471\ See Section III.C.2.d, ``Location of Revised Disclosures 
and Audit Requirement.''
    \472\ See Section V.H, ``Application of Amendments to Certain 
Types of Issuers,'' below.
---------------------------------------------------------------------------

2. Comments on the Proposed Amendments
    Comments on the proposed amendments were mixed, and several 
commenters expressed views on these proposed amendments that were 
similar to their views on the corresponding proposed location and audit 
requirement for disclosures about issuers and guarantors of guaranteed 
securities discussed above.\473\ Some commenters stated that the 
proposed disclosures should be permitted to be presented outside the 
registrant's consolidated financial statements in all cases, not just 
in the registration statement and Forms 10-K and 10-Q required to be 
filed during the fiscal year in which the first bona fide sale of the 
subject securities is completed.\474\ A few commenters asserted that 
not requiring the proposed disclosures to be audited would reduce costs 
\475\ and possibly allow issuers to more quickly register these 
securities and access capital markets.\476\ A few commenters stated 
that requiring an audit of the proposed disclosures would provide 
little marginal benefit to investors,\477\ and one of these commenters 
argued that this proposed requirement would discourage issuers from 
pursuing registration of the original offering of the securities.\478\
---------------------------------------------------------------------------

    \473\ See Section III.C.2.d.ii, ``Location of Revised 
Alternative Disclosures and Audit Requirement.''
    \474\ See, e.g., letters from Cravath, Davis Polk, SIFMA, and 
Sullivan & Cromwell.
    \475\ See letters from Davis Polk and Sullivan & Cromwell.
    \476\ See letters BDO and Davis Polk.
    \477\ See letters from Davis Polk, and Sullivan & Cromwell.
    \478\ See letter from Sullivan & Cromwell.
---------------------------------------------------------------------------

    Other commenters, however, asserted that the flexibility to 
determine the location of the proposed disclosures under the proposed 
amendments could lead to investor confusion about the location of the 
disclosures,\479\ and uncertainty as to the level of audit assurance 
that applied to the disclosures.\480\ One commenter contended that the 
proposed disclosures should be required to be presented in a single 
location to avoid inconsistencies in the location and varied reliance 
by investors.\481\ Another commenter stated that companies should not 
have the option to choose where their disclosures will appear, and that 
reported disclosures should be consistently reported in the same 
location.\482\
---------------------------------------------------------------------------

    \479\ See letter from PWC.
    \480\ See letter from KPMG.
    \481\ See letter from KPMG.
    \482\ See letter from XBRL US, Inc.
---------------------------------------------------------------------------

    One commenter did not support locating the proposed disclosures 
outside the financial statements.\483\ This commenter argued that many 
investors place significant value on having required disclosures 
subject to annual audit and/or interim review, internal control over 
financial reporting, and XBRL tagging requirements, and not subject to 
the forward-looking statements safe harbor.
---------------------------------------------------------------------------

    \483\ See letter from CII.
---------------------------------------------------------------------------

    Other commenters, however, recommended the disclosures be located 
outside the financial statements in all cases.\484\ One of these 
commenters recommended the disclosures be required in the liquidity and 
capital resources section of the MD&A or in a separate section 
following ``Risk Factors'' as is currently done in the Rule 144A market 
and has been accepted by the investor community.\485\ This commenter 
also observed that if disclosure outside the financial statements is 
sufficient at the time of the initial investment decision, it should be 
sufficient for future periods. The other commenter observed the 
Proposed Alternative Disclosures would be better presented in a 
discussion about a parent's liquidity in the MD&A as opposed to in the 
financial statements given the objective of the disclosures to provide 
an investor in a debt security with information about the related 
guarantee.\486\
---------------------------------------------------------------------------

    \484\ See letters from NYC Bar and PWC.
    \485\ See letter from NYC Bar.
    \486\ See letter from PWC.
---------------------------------------------------------------------------

    Some commenters emphasized that, even if the proposed disclosures 
are allowed to be located outside of the financial statements, these 
disclosures would be derived from the same internal accounting records 
used to prepare the registrant's audited consolidated financial 
statements \487\ and would be subject to the registrant's disclosure 
controls and procedures.\488\
---------------------------------------------------------------------------

    \487\ See letter from Davis Polk.
    \488\ See letters from Cravath and EY.
---------------------------------------------------------------------------

    Some commenters asserted that underwriters will likely request 
independent auditors to provide comfort on financial information 
provided outside the consolidated financial statements in connection 
with registered offerings.\489\ Two of these commenters indicated this 
would involve performing limited procedures on such information under 
PCAOB Auditing Standard 6101, Letters for Underwriters and Certain 
Other Requesting Parties.\490\ One commenter suggested that such 
procedures may not result in a decrease in effort or cost for either 
auditors or registrants,\491\ while the other commenter stated that 
while the scope and time required to perform such procedures is less 
than an audit, the auditor involvement may delay the time to market for 
underwritten offerings.\492\ Another commenter noted that the proposed 
rules would cause issuers to incur costs related to the incremental 
procedures necessary for such comfort procedures but investors would 
lose the benefit arising out of the audit of the disclosures.\493\
---------------------------------------------------------------------------

    \489\ See, e.g., letters from BDO, EY, Grant Thornton, and KPMG.
    \490\ See letters from BDO and KPMG.
    \491\ See letter from KPMG.
    \492\ See letter from BDO.
    \493\ See letter from Grant Thornton.
---------------------------------------------------------------------------

    A few commenters suggested that because the proposed disclosures 
would be relevant only to the investors of the subject security, if 
these disclosures were required to be audited, this information should 
be included in an audited supplemental schedule that could be filed as 
an exhibit to the filing, similar to the supplemental schedules 
required under Article 12 of Regulation S-X.\494\
---------------------------------------------------------------------------

    \494\ See letters from EY and PWC.
---------------------------------------------------------------------------

3. Final Amendments
    After considering comments received, we are adopting the amendments 
largely as proposed, with modifications. As discussed above, while one 
commenter did not support locating the disclosures outside the 
financial statements, others recommended the disclosures be located 
outside the financial statements in all cases. We continue to believe, 
however, and for the same reasons cited in adopting the corresponding 
final amendments to Rule 3-10,\495\ that it is appropriate to provide 
registrants the flexibility to select the location of the disclosures, 
including locating them outside the registrant's consolidated financial 
statements. In this regard, and consistent with the views of several 
commenters, we expect not requiring the disclosures to be audited will 
reduce costs and allow issuers to register the

[[Page 21978]]

subject securities and access capital markets faster, which may 
encourage more such registered offerings.\496\
---------------------------------------------------------------------------

    \495\ See discussion in Section III.C.2.d.iii, ``Location of 
Revised Alternative Disclosures and Audit Requirement.''
    \496\ See supra note 269.
---------------------------------------------------------------------------

    Accordingly, and consistent with the proposed rule, final Rule 13-
02(b) \497\ permits the registrant to provide the disclosures required 
by final Rule 13-02(a) in a footnote to its consolidated financial 
statements or alternatively, in MD&A. If the disclosures are not 
otherwise included in the consolidated financial statements or in MD&A, 
the final rule requires the registrant to include the disclosures in 
its prospectus immediately following ``Risk Factors,'' if any, or 
otherwise, immediately following pricing information described in Item 
105 of Regulation S-K.\498\
---------------------------------------------------------------------------

    \497\ Whereas this requirement was included in a note to 
proposed Rule 13-02(a), the final rule includes it in a separate 
paragraph, Rule 13-02(b).
    \498\ 17 CFR 229.105. As described above, subsequent to the 
issuance of the Proposing Release, the Commission amended and 
relocated the requirements previously contained in Item 503(c) of 
Regulation S-K to new Item 105 of Regulation S-K. The final 
amendments have been revised to reflect this change.
---------------------------------------------------------------------------

    As discussed above, some commenters asserted that the flexibility 
to determine the location of the proposed disclosures under the 
proposed amendments could lead to investor confusion about the location 
of the disclosures and uncertainty as to the level of assurance 
applied. While the proposed rule provided flexibility on where to 
locate the disclosures, we believe the locations where disclosures may 
be provided are clearly specified, and that investors generally 
understand the levels of assurance applied to disclosures included 
inside or outside the registrant's consolidated financial statements. 
If provided in the registrant's consolidated financial statements, the 
disclosures must be included in a footnote. If provided outside the 
registrant's consolidated financial statements, they must be included 
in MD&A, or in other specified locations if the registrant's 
consolidated financial statements and MD&A are not otherwise included 
in the filing.\499\ Consistent with the proposed rule, if the 
registrant elects to provide the amended disclosures in a footnote to 
its audited consolidated financial statements, the disclosures must be 
audited. Conversely, the disclosures need not be audited if the 
registrant provides them outside the audited consolidated financial 
statements. Also consistent with the proposed rule, the final rule 
specifies the locations where disclosures must be provided. Similar to 
the proposed amendments to Rule 3-10, a few commenters recommended 
that, if audited, the information be included in a supplemental 
schedule similar to the ones required by Article 12 of Regulation S-X. 
We are not adopting this suggestion for the same reasons cited in 
connection with final amendments to Rule 3-10.\500\
---------------------------------------------------------------------------

    \499\ These circumstances include when the consolidated 
financial statements and MD&A are included in previously filed 
reports that are incorporated by reference. In such instances, the 
disclosures are required to be provided in specified prominent 
locations.
    \500\ See discussion in Section III.C.2.d.iii, ``Location of 
Revised Alternative Disclosures and Audit Requirement.''
---------------------------------------------------------------------------

    Under the proposed rule, although the registrant would initially 
have the flexibility to locate the disclosures outside of its 
consolidated financial statements in the subject registration statement 
and certain periodic reports filed thereafter, the registrant would 
have been required to provide the disclosures in a footnote to its 
consolidated financial statements starting with its annual report filed 
on Form 10-K for the fiscal year during which the first bona fide sale 
of the subject securities is completed. Comments on this proposed 
requirement were consistent with the corresponding proposed change to 
Rule 3-10, albeit from fewer commenters. Consistent with our rationale 
for the corresponding final amendments to Rule 3-10,\501\ and as 
recommended by several commenters, we are not adopting this 
requirement. Under the final rule, the registrant will have flexibility 
to locate the disclosures in a footnote to its consolidated financial 
statements or in the locations specified in Rule 13-02(b) in all of its 
filings.
---------------------------------------------------------------------------

    \501\ See Section III.C.2.d.iii, ``Location of Revised 
Alternative Disclosures and Audit Requirement.''
---------------------------------------------------------------------------

G. Recently Acquired Affiliates Whose Securities Are Pledged as 
Collateral

1. Proposed Amendments
    Existing Rule 3-16 does not contain a specific requirement to 
provide pre-acquisition financial information of recently acquired 
affiliates whose securities are pledged as collateral. However, if a 
recently acquired affiliate meets the substantial portion threshold in 
the existing rule, financial statements for periods prior to the date 
of acquisition by the registrant are required to be filed.
    In connection with the proposed amendments to the pre-acquisition 
financial statement requirement for recently acquired subsidiary 
issuers and guarantors, while the proposed rule would contain no 
specific requirement, the Commission stated in the Proposing Release 
that information about recently acquired subsidiaries would be required 
if material to an investment decision in the guaranteed security 
pursuant to proposed Rule 13-01(a)(5).\502\ Similarly, no specific 
requirement was included in proposed Rule 13-02, but information about 
recently acquired affiliates would have been required if material to an 
investment decision in the collateralized security pursuant to proposed 
Rule 13-02(a)(5).
---------------------------------------------------------------------------

    \502\ See Section III.C.2.e of the Proposing Release.
---------------------------------------------------------------------------

2. Comments on the Proposed Amendments
    We received no public comments specific to pre-acquisition 
financial information of recently acquired affiliates. However, we 
considered comments received in connection with the proposed amendments 
to Rule 3-10(g).\503\ As it related to the proposed amendments to Rules 
3-10 and 13-01, one commenter encouraged the Commission ``not to 
perpetuate separate disclosure rules in this context for recently 
acquired subsidiaries.'' \504\ One commenter recommended that the 
Commission should consider requiring Summarized Financial Information 
of a recently acquired guarantor in registration statements if the 
guarantor is not already included in the Summarized Financial 
Information of the obligated group (i.e., it is acquired after the most 
recent balance sheet date) and if the guarantor had a material effect 
on the financial capacity of the obligated group.\505\ Another 
commenter indicated that the existing disclosure requirements under ASC 
805-10-50 would continue to provide sufficient information related to 
material subsidiaries acquired and their impact on the consolidated 
entity.\506\
---------------------------------------------------------------------------

    \503\ See Section III.C.2.e.ii, ``Recently Acquired Subsidiary 
Issuers and Guarantors.''
    \504\ See letter from Cravath.
    \505\ See letter from EY.
    \506\ See letter from T-Mobile.
---------------------------------------------------------------------------

3. Final Amendments
    Under the proposed rule, information about such recently acquired 
affiliates would have been required if material to an investment 
decision in the collateralized security pursuant to proposed Rule 13-
02(a)(5).\507\ The disclosures required by Rule 13-01 and 13-02 are 
similar in many respects, and we believe such similarities should

[[Page 21979]]

extend to pre-acquisition financial information of recently acquired 
affiliates. After considering the comments received, we are adopting 
amendments requiring disclosure similar to what is required for 
recently acquired subsidiary issuers and guarantors by new Rule 13-
01(a)(5). Our rationale for these amendments is consistent with our 
rationale for adopting the amendments to new Rule 13-01(a)(5).\508\ To 
that end, in certain circumstances (discussed below), pre-acquisition 
Summarized Financial Information for recently acquired affiliates will 
be required to be provided in a Securities Act registration statement 
\509\ filed in connection with the offer and sale of the subject 
collateralized security. Similar to the amendments to final Rule 13-
01(a)(5), the pre-acquisition Summarized Financial Information will be 
required when a registrant has acquired a significant ``business'' 
after the date of its most recent balance sheet included in its 
consolidated financial statements, and that acquired business and/or 
one or more of its subsidiaries are affiliates whose securities are 
pledged as collateral. Whether a ``business'' has been acquired will be 
determined in accordance with the guidance set forth in Sec.  210.11-
01(d), and the registrant would also need to treat acquisitions of 
related businesses as a single business acquisition in a manner 
consistent with Sec.  210.3-05(a)(3). An acquired business will be 
deemed significant if it meets any of the conditions specified in the 
definition of significant subsidiary in Sec.  210.1-02(w), substituting 
20 percent for 10 percent each place it appears therein, based on a 
comparison of the most recent annual financial statements of the 
acquired business and the registrant's most recent annual consolidated 
financial statements filed at or prior to the date of acquisition. To 
simplify compliance and provide certainty as to when disclosure is 
required, these significance tests are the same tests used to determine 
whether pre-acquisition financial statements are required for an 
acquired business pursuant to Rule 3-05 of Regulation S-X.
---------------------------------------------------------------------------

    \507\ The requirements applicable to recently acquired 
affiliates whose securities are pledged as collateral have been 
included in final Rule 13-02(a)(5). Proposed Rule 13-02(a)(5) would 
have required disclosure of ``any other quantitative or qualitative 
information that would be material to making an investment decision 
with respect to the collateralized security.'' Instead of this 
proposed requirement, the final amendments include Rules 13-02(a)(6) 
and (7). See discussion within Section V.E.3, ``When Disclosure is 
Required.''
    \508\ See Section III.C.2.e.iii, ``Recently Acquired Subsidiary 
Issuers and Guarantors.''
    \509\ This requirement is only applicable to Securities Act 
registration statements. In subsequent Exchange Act reports, 
financial information of a recently acquired affiliate whose 
securities are pledged as collateral will be included in the 
financial information of affiliates required by final Rule 13-
02(a)(4).
---------------------------------------------------------------------------

    Generally, under the final rule, a registrant will be required to 
provide pre-acquisition Summarized Financial Information of a recently 
acquired affiliate for those acquisitions where it will be required to 
provide pre-acquisition financial statements of the acquired business 
pursuant to Rule 3-05 of Regulation S-X.\510\ We recognize that not all 
of the entities that comprise an acquired business may be affiliates 
whose securities are pledged. Accordingly, the required Summarized 
Financial Information will only be for those entities acquired that are 
affiliates whose securities are pledged, and follows the form and 
content prescribed in new Rule 13-02(a)(4). We also recognize that the 
pre-acquisition Summarized Financial Information may be required in 
advance of when pre-acquisition financial statements are required 
pursuant to Rule 3-05 of Regulation S-X.\511\ However, we believe 
investors in a registered debt offering should be provided with 
information about affiliates whose securities are pledged in advance of 
an investment decision, and we note that the level of detail required 
is far less than pre-acquisition financial statements required by Rule 
3-05.
---------------------------------------------------------------------------

    \510\ See discussion in Section III.C.2.e.iii, ``Recently 
Acquired Subsidiary Issuers and Guarantors.''
    \511\ For example, Rule 3-05(b)(4) of Regulation S-X in part 
permits, in certain circumstances, pre-acquisition financial 
statements of an acquired business to be omitted from a registration 
statement if the significance of the acquisition does not exceed 50% 
and the registration statement is declared effective no more than 74 
calendar days after consummation of the acquisition. Note that 
filing requirements in Items 2.01 and 9.01 of Form 8-K may differ.
---------------------------------------------------------------------------

H. Application of 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.
1. Foreign Private Issuers
a. Proposed Amendments
    Foreign private issuers are required to comply with existing Rule 
3-16. Under the proposal, Rule 3-16 would be eliminated and foreign 
private issuers would be required to comply with the disclosures 
specified in proposed Rule 13-02. Accordingly, Instruction 1 to Item 8 
of Form 20-F would be amended to specifically require compliance with 
proposed Rule 13-02.
b. Comments on Proposed Amendments
    We received one comment on this aspect of the proposed amendments. 
The commenter recommended that the Commission confirm that the periods 
covered under the Summarized Financial Information would be required to 
track only those covered by a foreign private issuer's consolidated 
financial statements.\512\
---------------------------------------------------------------------------

    \512\ See letter from Sullivan & Cromwell.
---------------------------------------------------------------------------

c. Final Amendments
    After considering public comments, we are adopting the proposed 
amendments with modifications. For clarity, as the final amendments do 
not delete existing Rule 3-16, Instruction 1 to Item 8 of Form 20-F 
will be amended to make reference to required compliance with Rule 3-
16.\513\ Consistent with the proposal, that instruction also will be 
modified to require compliance with proposed Rule 13-02.
---------------------------------------------------------------------------

    \513\ This instruction cites rules under which a foreign private 
issuer may be required to provide financial statements or financial 
information for entities other than the issuer. This instruction, 
however, does not currently make reference to Rule 3-16. As the 
proposed and final amendments make reference to new Rule 13-02, for 
clarity, the instruction has been revised to also make reference to 
Rule 3-16.
---------------------------------------------------------------------------

    One commenter requested the Commission confirm the periods of 
Summarized Financial Information that foreign private issuers would be 
required to present.\514\ Consistent with our response to a similar 
comment on proposed Rule 13-01, as specified in Rule 13-02(a)(4)(v), a 
registrant is required to disclose the Summarized Financial Information 
as of and for the most recently ended fiscal year and, if applicable, 
year-to-date interim period, included in the registrant's consolidated 
financial statements.
---------------------------------------------------------------------------

    \514\ See letter from Sullivan & Cromwell.
---------------------------------------------------------------------------

    Lastly, for the same reasons described above,\515\ we have created 
new Exhibit 17 within Item 19 of Form 20-F, which will require the 
identification of each affiliate whose security is pledged as 
collateral, as well as the identification of the security or securities 
pledged as collateral.
---------------------------------------------------------------------------

    \515\ See discussion in Section V.D.3, ``Non-Financial 
Disclosures.''
---------------------------------------------------------------------------

2. Smaller Reporting Companies
a. Proposed Amendments
    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

[[Page 21980]]

collateral for securities registered or being registered, except that 
the periods presented are those required by Rule 8-02 of Regulation S-
X. As the proposed amendments would have eliminated Rule 3-16 and 
required 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 was therefore 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 to the 
periods required by Rule 8-02 of Regulation S-X in Note 4 to Rule 8-01 
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, the Commission proposed adding Rule 8-03(b)(8) to require 
compliance with proposed Rule 13-02.
b. Comments on Proposed Amendments
    We did not receive any comments that addressed this aspect of the 
proposed amendments.
c. Final Amendments
    We are adopting the proposed amendments with modifications. We 
believe that investors in smaller reporting companies will benefit from 
the simplified disclosures that will result from the amendments and 
that the cost of providing the disclosures will be reduced for smaller 
reporting companies. As the final amendments do not delete existing 
Rule 3-16, we are not adopting the proposed amendment that would have 
eliminated the reference to that requirement in Note 4 to Rule 8-01, 
nor are we eliminating the reference to the periods required in such 
financial statements. We are, however, adopting the proposed change 
that requires compliance with Rule 13-02, but with slightly different 
wording than proposed. The final amendments to Note 4 to Rule 8-01 
establish that the requirements of final Rules 3-16 and 13-02 are 
applicable if a smaller reporting company's securities registered or 
being registered are collateralized by the securities of the smaller 
reporting company's affiliates,\516\ and that the periods presented for 
purposes of compliance with final Rule 3-16 are those required by Rule 
8-02. Finally, as proposed, 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 have added Rule 8-03(b)(7) to require compliance with Rule 
13-02.\517\
---------------------------------------------------------------------------

    \516\ Because the final amendments do not eliminate existing 
Rule 3-16, which will continue to be applicable to registered 
collateralized securities with collateral release provisions issued 
and outstanding as of the effective date of the final amendments, 
amended Note 4 to Rule 8-01 states, for clarity, that final Rule 13-
02 must be followed unless amended Rule 3-16 applies. See Section 
VI.B ``Rule 3-16 Collateral Release Provisions.''
    \517\ Proposed Rule 8-03(b)(8) would have sequentially followed 
existing Rule 8-03(b)(6) of Regulation S-X [17 CFR 210.8-03(b)(6)] 
and proposed Rule 8-03(b)(7). As described within Section III.D.2 
``Smaller Reporting Companies,'' subsequent to the issuance of the 
Proposing Release, the Commission eliminated Rule 8-03(b)(6). The 
final amendments have been revised to reflect this change. The 
requirements in proposed Rule 8-03(b)(8) have been included in new 
Rule 8-03(b)(7), which follows new Rule 8-03(b)(6).
---------------------------------------------------------------------------

3. Offerings Pursuant to Regulation A
a. Proposed Amendments
    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, the proposed 
rule would have replaced the existing requirement in those 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.\518\ 
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.
---------------------------------------------------------------------------

    \518\ If a Regulation A Issuer elects to provide the proposed 
disclosures in its audited financial statements, such disclosures 
would be required to be audited.
---------------------------------------------------------------------------

b. Comments on Proposed Amendments
    We did not receive any comments that addressed this aspect of the 
proposed amendments.
c. Final Amendments
    We are adopting the proposed amendments with modifications. We 
believe that investors in Regulation A offerings will benefit from the 
simplified disclosures that will result from the amendments and that 
the cost of providing the disclosures will be reduced for Regulation A 
Issuers. As the final amendments do not delete existing Rule 3-16, we 
are not adopting the proposed amendment that would have eliminated the 
existing requirement in Forms 1-A and 1-K that Regulation A Issuers 
comply with Rule 3-16. We are, however, adopting the proposed change to 
those forms that requires compliance with Rule 13-02, but with slightly 
different wording than proposed. The final amendments to Forms 1-A and 
1-K establish that the requirements of final Rules 3-16 and 13-02 are 
applicable if a Regulation A Issuer's securities qualified or being 
qualified pursuant to Regulation A are collateralized by the securities 
of the issuer's affiliates.\519\ We are also adopting the proposed 
requirement specifying the location of the disclosures, similar to Rule 
13-02(b) but consistent with the requirements of Regulation A. 
Consistent with the discussion above about requiring registrants to 
comply with Rule 13-02 in filings made on Form 10-Q, a requirement to 
comply with Rule 13-02 has been added to Form 1-SA. Lastly, for the 
same reasons described above,\520\ we have created new exhibit 17 
within Item 17 of Form 1-A, which will require the identification of 
each affiliate whose security is pledged as collateral, as well as the 
identification of the security or securities pledged as collateral. 
This exhibit will also be required in Form 1-K by Item 8(b) of Part II 
of that form, and in Form 1-SA by Item 4(b) of that form.
---------------------------------------------------------------------------

    \519\ Because the final amendments do not eliminate existing 
Rule 3-16, which will continue to be applicable to registered 
collateralized securities with collateral release provisions issued 
and outstanding as of the effective date of the final amendments, 
amended Forms 1-A and 1-K state, for clarity, that final Rule 13-02 
must be followed unless amended Rule 3-16 applies. See Section VI.B 
``Rule 3-16 Collateral Release Provisions.''
    \520\ See discussion in Section V.D.3, ``Non-Financial 
Disclosures.''
---------------------------------------------------------------------------

VI. Transition to Final Amendments and Rule 3-16 Collateral Release 
Provisions

A. Transition to Final Amendments

    A number of commenters recommended that the Commission provide 
transition guidance or a phase-in period for proposed Rules 13-01 and 
13-02.\521\ In response to these concerns, we are providing the 
following transition period for compliance to mitigate any potential 
burdens that issuers may experience in transitioning to the final 
amendments:
---------------------------------------------------------------------------

    \521\ See letters from BDO, CAQ, Cravath, Deloitte, EY, FedEx, 
Grant Thornton, KPMG, NYC Bar, PWC, and Shearman.
---------------------------------------------------------------------------

    For Securities Act registration statements: \522\
---------------------------------------------------------------------------

    \522\ This transition period is also applicable to filings made 
in connection with offerings of securities pursuant to Regulation A, 
including Form 1-A and post-qualification amendments thereto.

---------------------------------------------------------------------------

[[Page 21981]]

     Any registration statement that is first filed on or after 
January 4, 2021, must comply with the final amendments; and
     Any post-effective amendment filed on or after January 4, 
2021, to include either the registrant's latest audited financial 
statements in the registration statement or to update the prospectus 
under Section 10(a)(3) must comply with the final amendments.
    For Exchange Act registration statements:
     Any registration statement that is first filed on or after 
January 4, 2021, must comply with the final amendments.
    For Exchange Act periodic reports: \523\
---------------------------------------------------------------------------

    \523\ This transition period is also applicable to periodic 
reporting pursuant to Rule 257 of Regulation A, including Forms 1-K 
and 1-SA.
---------------------------------------------------------------------------

     If the reporting company was required to comply with the 
final amendments in a registration statement, all Exchange Act periodic 
reports for periods ending after that registration statement became 
effective must comply with the final amendments; and
     For all other Exchange Act reporting companies, the annual 
report on Form 10-K or Form 20-F, as applicable, for fiscal years 
ending after January 4, 2021, and quarterly reports on Form 10-Q for 
quarterly periods ending after January 4, 2021, must comply with the 
final amendments.\524\
---------------------------------------------------------------------------

    \524\ For example, a registrant with a fiscal year ending on 
January 31st would be required to comply with the final amendments 
in its Form 10-K for its fiscal year ended January 31, 2021, and 
subsequent quarterly reports on Form 10-Q starting with its Form 10-
Q for the quarterly period ended April 30, 2021. As another example, 
a registrant with a fiscal year ending on December 31st would be 
required to comply with the final amendments in its Forms 10-Q for 
quarterly periods ended March 31, 2021, June 30, 2021, and September 
30, 2021, and in its Form 10-K for its fiscal year ended December 
31, 2021.
---------------------------------------------------------------------------

    Voluntary compliance with the final amendments in advance of 
January 4, 2021, will be permitted. After voluntary compliance, 
subsequent Exchange Act or Regulation A periodic reports must comply 
with the final rules.

B. Rule 3-16 Collateral Release Provisions

    As described in the Proposing Release,\525\ 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. 
Some commenters observed that in many registered debt offerings, the 
indenture will contain such collateral release provisions.\526\ 
Commenters expressed concern that, depending on the wording of such 
collateral release provisions in previously issued indentures, the 
proposed elimination of existing Rule 3-16 and new requirements in 
proposed Rule 13-02 could change the collateral available to holders of 
these debt securities, causing unintended credit consequences.\527\
---------------------------------------------------------------------------

    \525\ See Section II of the Proposing Release.
    \526\ See letters from Cravath, NYC Bar, PWC, and Shearman.
    \527\ See supra note 526.
---------------------------------------------------------------------------

    In response to these comments, so as not to change the amount of 
collateral available to investors in previously issued debt securities 
that include collateral release provisions, the final amendments will 
not apply to existing collateralized debt securities with such 
provisions. To accomplish this, the final amendments do not eliminate 
existing Rule 3-16 as was proposed. Instead, Rule 3-16 has been amended 
to include a scope paragraph stating that the requirements of Rule 3-16 
apply to each registered security issued and outstanding before January 
4, 2021 for which the registrant has not previously been required to 
provide Rule 3-16 Financial Statements.\528\ While we recognize that 
these investors will not receive the disclosures required by Rule 13-
02, their investment decision in such securities presumably 
contemplated the release of collateral were it to exceed the 
substantial portion threshold, and we note that these investors have 
historically not received supplemental information. In contrast to 
those indentures with collateral release provisions, the new 
disclosures will apply to existing collateralized debt securities that 
do not contain such provisions. To accomplish this, final Rule 13-02 
includes a scope paragraph stating that the requirements of new Rule 
13-02 apply to each registered security issued and outstanding before 
January 4, 2021, for which the registrant has previously been required 
to provide Rule 3-16 Financial Statements. Finally, any collateralized 
debt securities issued on or after the compliance date of the final 
amendments must comply with new Rule 13-02, which is clearly stated in 
the scope paragraph to final Rule 13-02.
---------------------------------------------------------------------------

    \528\ A registrant that has issued securities with collateral 
release provisions would not have been required to provide Rule 3-16 
Financial Statements. Requiring continued compliance with the 
requirements of existing Rule 3-16 will allow such collateral 
release provisions to operate as intended and not change the amount 
of collateral available to investors.
---------------------------------------------------------------------------

VII. Other Matters

    If any of the provisions of these rules, or the application thereof 
to any person or circumstance, is held to be invalid, such invalidity 
shall not affect other provisions or application of such provisions to 
other persons or circumstances that can be given effect without the 
invalid provision or application.
    Pursuant to the Congressional Review Act,\529\ the Office of 
Information and Regulatory Affairs has designated these rules a ``major 
rule,'' as defined by 5 U.S.C. 804(2).
---------------------------------------------------------------------------

    \529\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

VIII. Economic Analysis

A. Introduction

    As discussed above, we are adopting 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 
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 pledges of affiliate securities as collateral and may 
unnecessarily restrict the set of investment opportunities available to 
some investors. The discussion below addresses the potential economic 
effects of the final 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 to the 
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.\530\ 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

[[Page 21982]]

adopt any rule that would impose a burden on competition that is not 
necessary or appropriate in furtherance of the Exchange Act.\531\
---------------------------------------------------------------------------

    \530\ 15 U.S.C. 77b(b), 78c(f), 80a-2(c), and 80b-2(c).
    \531\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

B. Baseline and Affected Parties

    The existing regulatory requirements of Rules 3-10 and 3-16 under 
Regulation S-X are described above \532\ and have prompted registrants 
to adopt disclosure and business practices specifically designed to 
comply with or avoid these requirements. We analyze the economic 
effects of the final amendments by assessing their impact on affected 
parties as compared to the current disclosure regime, including both 
existing disclosure requirements and available exemptions, where 
applicable.
---------------------------------------------------------------------------

    \532\ See Section II for Rule 3-10 and Section IV for Rule 3-16.
---------------------------------------------------------------------------

    The parties that are likely to be affected by these amendments 
include issuers and guarantors of guaranteed debt securities, issuers 
of debt securities collateralized by securities of those issuers' 
affiliate(s), and investors in each of these types of securities.\533\
---------------------------------------------------------------------------

    \533\ While the amendments would apply to registered closed end 
funds and business development companies (``BDCs''), and could 
thereby affect registered investment advisers, based on staff 
experience, we believe closed end funds and BDCs are unlikely to 
engage in the activities addressed by the final amendments. 
Accordingly, we also we believe the amendments are unlikely to 
affect registered investment advisers.
---------------------------------------------------------------------------

1. Market Participants
    The first main group of market participants affected by the 
amendments consists of issuers and guarantors of guaranteed debt 
securities and issuers of debt securities collateralized by securities 
of those issuers' affiliate(s). These issuers will be affected because 
the disclosures called for by the amendments will differ from the 
content and format of disclosures currently required to be presented in 
registered debt offerings and in certain ongoing reporting. 
Additionally, issuers and guarantors of guaranteed debt securities may 
be affected by amendments to the eligibility conditions that must be 
met to omit the separate financial statements of subsidiary issuers and 
guarantors of guaranteed debt securities. The amendments may also alter 
the capital raising decisions of potential issuers.
    The second group of market participants affected by the amendments 
consists of investors in these securities. These investors can be 
divided into three main categories: (1) Qualified Institutional Buyers 
(``QIBs''); \534\ (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 will also depend on whether there is a change in the number 
of registered debt offerings by new issuers, issuers that would have 
offered debt securities under Rule 144A before the amendments,\535\ or 
both, as a result of the amendments.
---------------------------------------------------------------------------

    \534\ 17 CFR 230.144A(a)(1).
    \535\ Only QIBs can participate in Rule 144A offerings; retail 
and institutional investors other than QIBs are unable to 
participate in such offerings.
---------------------------------------------------------------------------

    Currently, there are four options that issuers typically consider 
in deciding whether and how to issue guaranteed or collateralized debt 
securities. First, issuers may offer and sell guaranteed and/or 
collateralized debt securities in a registered securities offering and 
provide the required disclosures and any separate financial statements 
under existing Rules 3-10 and 3-16. Second, issuers may opt to offer 
the debt securities in transactions that rely on Rule 144A's safe 
harbor exemption from Securities Act registration, with guarantees or 
pledges of affiliate securities as collateral and registration rights. 
This may allow issuers to access the capital markets more quickly 
because they would not have to provide the disclosures required by 
existing Rules 3-10 and 3-16 at the time of the Rule 144A offering. 
Issuers do, however, have to provide the disclosures and financial 
statements required by existing Rules 3-10 and 3-16 when the 
unregistered debt securities are exchanged for debt securities issued 
in a registered offering. Third, issuers may opt to offer the debt 
securities in transactions that rely on Rule 144A's safe harbor 
exemption from Securities Act registration, with guarantees or pledges 
of affiliate securities as collateral, but without registration rights. 
Under this approach, issuers do not have to provide the disclosures or 
financial statements 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 without including 
guarantees or pledges of affiliated securities as collateral. In this 
case, while issuers do not have to provide disclosures or financial 
statements required by existing Rules 3-10 and 3-16, they may incur a 
higher cost of capital than if they had structured their debt 
securities offerings with these credit enhancements. Issuers in this 
category may decide not to offer these credit enhancements because the 
cost of providing the required disclosures exceeds the premium that 
must be paid to issue the debt on an unsecured basis.
    Collateralized debt offerings are often structured to include 
collateral release provisions, which automatically reduce the amount of 
pledged collateral that investors might receive in the event of default 
if it would trigger the existing requirement for a registrant to file 
Rule 3-16 Financial Statements. To the extent the practice of 
structuring these offerings in this manner changes as a result of the 
final amendments, investors may experience both a change in the number 
of investment opportunities in collateralized debt, 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 the final amendments, Table 1 provides estimates of the 
number and dollar amount of all registered debt offerings and Rule 144A 
debt offerings per year since 2013.\536\ The dollar volume of 
registered debt and Rule 144A offerings generally appears to be higher 
in recent years (i.e., 2016, 2017, 2018) than in earlier years (i.e., 
2013, 2014, 2015), which may be a result of improving macroeconomic 
conditions and a low interest rate environment.\537\
---------------------------------------------------------------------------

    \536\ 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.
    \537\ See id.

[[Page 21983]]



                      Table 1--Registered Debt and Rule 144A Debt Offerings From 2013--2018
----------------------------------------------------------------------------------------------------------------
                                                          Registered debt                    Rule 144A
                                                 ---------------------------------------------------------------
                      Year                           Number of       $ Amount        Number of       $ Amount
                                                    offerings *        (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
2018............................................           1,671           1,132             871             658
----------------------------------------------------------------------------------------------------------------
Source: DERA staff analysis.
* The number of registered offerings and amounts raised do not include registered exchanges of debt securities
  previously issued pursuant to an exemption from Securities Act registration, such as Rule 144A. Based on staff
  analysis of Commission filings on Forms S-4 and F-4, there was an average of 129 registered exchange offers
  per year between 2013 and 2018, seeking an average (median) amount of proceeds of approximately $146 billion
  ($140 billion) per year. These estimates are based on information disclosed at the time of initial filing;
  actual offering amounts may have differed upon effectiveness of the registration statement. Debt securities
  with registration rights are usually issued under Rule 144A and, thus, may also be included in the columns
  summarizing Rule 144A offerings. One study estimates that approximately 98% of high-yield Rule 144A bonds and
  40% of investment-grade Rule 144A bonds have registration rights. See Miles Livingston & Lei Zhou, The Impact
  of Rule 144A Debt Offerings Upon Bond Yields and Underwriter Fees, 31 Fin. Mgmt. 5 (2002).

    According to studies examining registered debt offerings and debt 
offerings made under Rule 144A, the two types of debt 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.\538\ These conditions may 
increase the likelihood that investors require guarantees and 
collateral from these issuers 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.\539\ 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) relatively high 
liquidity, given the possibility to exchange the securities for 
registered securities.\540\
---------------------------------------------------------------------------

    \538\ 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).
    \539\ 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.
    \540\ See, e.g., Fenn (2000), note 539 above.
---------------------------------------------------------------------------

    As discussed above,\541\ existing 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 existing rule: (1) 
Consolidating Information; and (2) a brief narrative. Consolidating 
Information is the most common type of Alternative Disclosure under 
existing Rule 3-10. Table 2 presents data on the number of unique 
registrants and filings that included Consolidating Information under 
Rule 3-10 in that filing for the period 2013-2018.\542\
---------------------------------------------------------------------------

    \541\ See Section II.A, ``Background.''
    \542\ To identify these disclosures, we searched all Forms 10-K, 
10-Q, 20-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 2013-2018. 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. 
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 using specific 
search terms. We were unable to find any filings on the remaining 
affected forms that included the Alternative Disclosures. Our 
analysis did not include Forms S-3 or F-3, because Consolidating 
Information included with those registration statements is typically 
incorporated by reference from Exchange Act reports.

                Table 2--Estimated Number of Unique Registrants and Filings Including Consolidating Information Under Existing Rule 3-10
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                   Number of    Number of
                      Year                           unique       total         10-K         10-Q         20-F         S-1          S-4          F-4
                                                  registrants    filings
--------------------------------------------------------------------------------------------------------------------------------------------------------
2013............................................          533         1834          431         1339           12           15           34            3
2014............................................          530         1861          461         1360           10            9           21            0
2015............................................          500         1750          437         1288            9            5           11            0
2016............................................          469         1641          417         1199            8            1           16            0
2017............................................          403         1430          369         1043            5            1           11            0
2018............................................          349         1261          328          922            6            0            4            0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: DERA staff analysis of Edgar Filings.


[[Page 21984]]

    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, we 
are unable to determine that number due to methodological and data 
extraction challenges.\543\
---------------------------------------------------------------------------

    \543\ 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.
---------------------------------------------------------------------------

    As discussed above,\544\ 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.\545\
---------------------------------------------------------------------------

    \544\ See Section IV, ``Rule 3-16 of Regulation S-X.''
    \545\ There are no XBRL tags specific to Rule 3-16. To identify 
these disclosures, we searched all Forms 10-K, 10-Q, 20-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. We manually sifted through these false returns to identify the 
positive results listed in Table 3.

      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
2018............................................               7               7               6               1
----------------------------------------------------------------------------------------------------------------
Source: DERA staff analysis of EDGAR filings.

C. Anticipated Economic Effects

    In this section we discuss the anticipated economic benefits and 
costs of the amendments to Rules 3-10 and 3-16.
1. Amendments to Rule 3-10 and Partial Relocation to Rule 13-01
    The final rules amend the disclosure requirements in Rule 3-10 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 expect the amendments to benefit issuers and investors.
    As a result of the overall reduced burdens associated with the 
amendments, investors may benefit from access to more registered 
offerings that are structured to include guarantees and, accordingly, 
the additional protections that come with a registered offering. 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 disadvantaged as compared to the direct creditors of any 
subsidiary not providing a guarantee. 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. In a bankruptcy 
proceeding, the assets of non-guarantor subsidiaries that are not 
issuers typically would be accessible only by the holder indirectly 
through the parent's equity interest. 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 those subsidiaries. The less burdensome disclosures under the final 
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 access the capital markets more quickly than under the 
existing Rule 3-10 requirements because it is likely to take issuers 
less time and cost to prepare Summarized Financial Information under 
the final amendments than to prepare Consolidating Information under 
existing Rule 3-10. By registering the initial offering, these issuers 
would incur the cost of only one offering, rather than two; that is, 
issuers would not incur any additional costs associated with exchanging 
the guaranteed debt securities issued in an unregistered Rule 144A 
offering for guaranteed debt securities issued in an offering 
registered under the Securities Act.
    Commenters generally agreed with these assessments.\546\ Some 
commenters argued that the expected reduction in registrants' costs and 
burdens of providing the proposed disclosures would lead to an increase 
in the number of registered debt offerings with guarantees.\547\ One 
commenter suggested that this increase would result from the 
disclosures that would be required in proposed Rule 13-01 more closely 
resembling the disclosure practice in the Rule 144A and Regulation S 
market.\548\ One commenter noted that, although the proposed amendments 
would reduce the burdens of registering offerings of guaranteed 
securities, the proposed amendments may not result in a significant 
increase in such offerings because of the general

[[Page 21985]]

trend toward Rule 144A transactions.\549\ Even so, the commenter 
asserted that the proposed amendments could result in more uniform and 
better financial disclosures for investors if they are incorporated 
into market practice for Rule 144A offerings. Another commenter, 
however, was skeptical that, due to the proposed amendments, high-yield 
issuers using the Rule 144A market would return to the registered 
market ``to a meaningful extent'' because, according to that commenter, 
the Rule 144A market has ``largely eliminated the historical pricing 
benefits'' of registered offerings.\550\
---------------------------------------------------------------------------

    \546\ See, e.g., letters from Ball Corp., Cravath, Davis Polk, 
Eaton Corp., EY, FEI, and Simpson Thacher.
    \547\ See, e.g., letters from Ball Corp., Davis Polk, EY, and 
FEI.
    \548\ See letter from Cravath.
    \549\ See letter from NYC Bar.
    \550\ See letter from Shearman.
---------------------------------------------------------------------------

    Several commenters provided us with burden estimates regarding the 
disclosure requirements of Rule 3-10. One commenter noted that 
presentation of Consolidating Information required under existing rules 
comprises approximately 10% of the total pages in its Forms 10-Q and 
10-K and the preparation of this information is both costly and time 
consuming.\551\ Another commenter indicated that the existing Rule 3-10 
disclosure requirements add approximately one week of additional time 
to the preparation of its annual and quarterly reports on Forms 10-K 
and 10-Q, respectively, and stated that its annual report for 2017 
included nine pages of Rule 3-10 disclosures even though its compliance 
with the terms of its credit facility and indentures is measured based 
on consolidated financial statement amounts and not guarantor financial 
information.\552\ One commenter stated that its 2017 annual report on 
Form 10-K contained 27 pages of Rule 3-10 disclosures.\553\ Another 
commenter estimated that the existing Rule 3-10 disclosure requirements 
add approximately three weeks of additional time annually to the 
preparation of its quarterly and annual reports.\554\ One commenter 
stated that the preparation and review of its Consolidating Information 
is time-consuming and costly, requiring approximately 280 hours per 
year.\555\
---------------------------------------------------------------------------

    \551\ See letter from T-Mobile.
    \552\ See letter from Windstream.
    \553\ See letter from WTW.
    \554\ See letter from Freeport.
    \555\ See letter from FedEx.
---------------------------------------------------------------------------

a. Eligibility Conditions To Omit Financial Statements of Subsidiary 
Issuer or Guarantor
    As detailed in Section III.C.1.b, ``Consolidated Subsidiary 
Condition,'' the final amendments will 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 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 change 
will 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 final rule will 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 change from 100%-owned to consolidation, we are 
simplifying the other eligibility conditions. Namely, as discussed in 
Section III.C.1.d, ``Eligible Issuer and Guarantor Structures 
Condition,'' the final amendments will 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, will no longer impact the eligibility to omit 
separate subsidiary financial statements and instead will only impact 
the extent of disclosure in the Revised Alternative Disclosures.
    Overall, these final amendments should permit a broader scope of 
issuers and guarantors to be eligible to provide the Revised 
Alternative Disclosures in lieu of separate financial statements of 
each subsidiary issuer and guarantor than under existing Rule 3-10. 
This, in turn, will reduce the compliance costs associated with 
preparation of disclosures for these registered debt offerings and 
ongoing periodic reporting. To the extent there are more issuers and 
guarantors that are eligible to provide the Revised Alternative 
Disclosures in lieu of separate financial statements of each subsidiary 
issuer and guarantor under amended Rule 3-10, these entities may be 
more likely to register their guaranteed 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,\556\ 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 could have 
reduced compliance costs to the extent they meet the revised 
eligibility criteria under the final Rule 3-10 and the Revised 
Alternative Disclosures are provided in lieu of their separate 
financial statements.
---------------------------------------------------------------------------

    \556\ See discussion within Section VIII.B.2, ``Market 
Conditions.'' See also supra note 539.
---------------------------------------------------------------------------

    Certain investors could also benefit from the final 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 final 
amendments to the eligibility conditions encourage additional 
registered debt offerings, more investment opportunities would be made 
available, and a resulting increase in market participation could 
improve the overall competitiveness and efficiency of the capital 
markets. Furthermore, registered 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 final 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 
less than 100%-owned by the parent company. If these subsidiaries are 
consolidated in the parent company's financial statements and all other 
conditions of amended 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

[[Page 21986]]

with non-controlling interest holders that may affect payments to 
holders of the guaranteed security. Where all eligibility conditions of 
the final rule are met, we believe the Revised Alternative Disclosures 
will provide the information investors need to make informed investment 
decisions with respect to a guaranteed security.
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 final rule retains the 
requirement to provide the Alternative Disclosures, but with 
modifications. We address below the amendments related to the 
Alternative Disclosures (the Revised Alternative Disclosures).
i. Financial and Non-Financial Disclosures
    As described in Section III.C.2.a, ``Financial Disclosures,'' the 
final rules should 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 Summarized Financial Information is intended 
to focus on the information that we believe is most likely to be 
material to an investment decision. Additional line items beyond what 
is required in the Summarized Financial Information are required to be 
disclosed if they are material for investors to evaluate the 
sufficiency of the guarantee and/or are necessary to make the financial 
and non-financial information presented not misleading. Additionally, 
the final rules require that an issuer's or guarantor's receivables 
from, payables to, and transactions with non-obligated subsidiaries and 
related parties be presented in separate line items. This requirement 
in the final rule, which is a change from the proposal, should enhance 
the transparency of the Summarized Financial Information and further an 
investor's evaluation of the sufficiency of the guarantee. At the same 
time, we do not expect this requirement to impose significant costs on 
issuers.
    The final 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, and that investors on 
average take more time to incorporate complex financial 
disclosures.\557\ More generally, we believe the final amendments will 
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 final amendments have their intended 
effect of reducing complexity while maintaining the material 
completeness of financial disclosures, we anticipate that the financial 
disclosures that result from the final amendments will improve price 
discovery, enhance the allocative efficiency of markets, and facilitate 
capital formation. Commenters generally agreed with such arguments, 
asserting that providing the Summarized Financial Information instead 
of the Consolidating Information would reduce an issuer's burdens \558\ 
while continuing to provide investors with sufficient information to 
make informed investment decisions.\559\
---------------------------------------------------------------------------

    \557\ See Haifeng You & Xiao-jun Zhang, Financial Reporting 
Complexity and Investor Underreaction to 10-K Information, 14 Rev. 
of Acct. Stud. 559 (2009); Brian P. Miller, The Effects of Reporting 
Complexity on Small and Large Investor Trading, 85 Acct. Rev. 2107 
(2010); Alastair Lawrence, Individual Investors and Financial 
Disclosure, 56 J. of Acct. & Econ. 130 (2013).
    \558\ See, e.g., letters from Ball Corp., Eaton Corp., EY, FEI, 
Freeport, KPMG, NYC Bar, Sullivan & Cromwell, and T-Mobile.
    \559\ See, e.g., letters from Ball Corp., EY, FedEx, FEI, 
Freeport, and Sullivan & Cromwell.
---------------------------------------------------------------------------

    Under the final rules, a parent company will generally be permitted 
to provide financial disclosures about the Obligor Group on a combined 
basis rather than on a disaggregated basis. As proposed, if non-
financial disclosure provided in response to Rule 13-01 were applicable 
to one or more, but not all, issuers and/or guarantors, such as where a 
subsidiary's guarantee is limited to a particular dollar amount, 
separate disclosure of Summarized Financial Information for the 
affected issuers and/or guarantors would be required, to the extent 
material. In a change from the proposal, the final rules will permit, 
in limited circumstances (i.e., where the separate financial 
information of the affected issuers and guarantors can be easily 
explained and understood), narrative disclosure in lieu of separate 
disclosure of the financial information of the subsidiary issuers and 
guarantors affected by those factors. This change to the final rule is 
expected to reduce the compliance burden for registrants without loss 
of relevant information for investors. By simplifying and streamlining 
the disclosure of financial and non-financial information, this 
amendment could also facilitate investors' information processing, 
leading to more efficient investment decisions.\560\
---------------------------------------------------------------------------

    \560\ See supra note 557.
---------------------------------------------------------------------------

    Whereas the existing rule required issuers and guarantors to 
account for their investments in non-issuer and non-guarantor 
subsidiaries under the equity method of accounting within the 
Alternative Disclosures, the final rules require the complete exclusion 
of non-issuer and non-guarantor subsidiary financial information from 
the combined financial information of the Obligor Group. In this 
regard, investments in non-issuer and non-guarantor subsidiaries held 
by issuers and guarantors will be excluded from the financial 
information of the issuers and guarantors. The financial information 
depicted will be only that of the issuers and guarantors. This 
requirement represents a change from the proposal, which would have 
permitted parent companies to determine the method of exclusion. We 
acknowledge that a parent company may have incurred lower costs under 
the proposed amendments by being able to select the method of excluding 
non-issuer and non-guarantor subsidiary information at its choice 
(e.g., the parent company would likely incur lower costs if its systems 
were already designed to utilize a particular method). However, under 
the final amendments, a parent company is not required to justify that 
its selected method was reasonable under the circumstances as was 
proposed, and we expect in most circumstances that requiring exclusion 
of non-issuer and non-guarantor subsidiary financial information will 
be a less costly presentation than methods that would have required the 
disclosure of such financial information under the proposed amendments 
or than the required used of the equity method under the existing rule. 
By requiring the complete exclusion of non-issuer and non-guarantor 
subsidiary financial information, the final rule will also avoid 
potential confusion among issuers and investors about the appropriate 
method of exclusion.
    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 final amendments would not adversely impact 
investment decisions and could offer investors more readable, 
streamlined financial information. To

[[Page 21987]]

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 final amendments may 
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.\561\ Some commenters argued that providing this 
information on a combined basis would still provide investors with 
material information in making an investment decision \562\ while also 
reducing a burdensome requirement for issuers.\563\
---------------------------------------------------------------------------

    \561\ 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).
    \562\ See, e.g., letters from Dell, FedEx, and Sullivan & 
Cromwell.
    \563\ See, e.g., letters from Davis Polk, KPMG, and Sullivan & 
Cromwell.
---------------------------------------------------------------------------

    The final rule also will require that Summarized Financial 
Information be provided for the most recently ended 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 provide information that is 
material to an investment decision while reducing compliance costs for 
registrants. Some commenters, however, recommended requiring the most 
recent interim period only in limited circumstances, such as when there 
had been a material change since the most recent annual period.\564\ 
While we acknowledge the concerns about the burden to provide interim 
information in all cases, we note that the final amendments already 
significantly reduce the burdens on parent companies by eliminating the 
earliest two years of required Summarized Financial Information and, in 
filings on Form 10-Q, by eliminating both the quarter-to-date interim 
period requirement in filings covering more than one fiscal quarter and 
comparable prior year interim period(s), as applicable. Under the final 
amendments, investors will continue to receive the most recent interim 
and annual period information, and we continue to believe this is the 
most appropriate approach to reducing burdens for parent companies 
while providing investors with the relevant information they need to 
make informed investment decisions.
---------------------------------------------------------------------------

    \564\ See, e.g., letters from ABA, Ball Corp., Comcast, Dell, 
Deloitte, EY, FedEx, FEI, and PWC.
---------------------------------------------------------------------------

    In addition, the final rules will require non-financial disclosures 
to supplement the amended financial disclosures with additional 
information, to the extent material. This would include information 
about how payments to holders of guaranteed securities may be affected 
by such factors as the issuer and guarantor structure, the terms and 
conditions of the guarantees, the impact of non-controlling ownership 
interests, or other facts and circumstances specific to the offering. 
These final 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.
    Finally, as with any change to reporting format and presentation of 
information, the final amendments may lead companies and investors to 
incur costs to adjust to the new disclosures. As further discussed in 
Sections VIII.C.1.b.ii and iii 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 are eliminating the numerical thresholds of existing Rule 3-10 that 
are used to determine the form and content of disclosure.\565\ Instead, 
disclosures specified in new Rule 13-01 will be required unless such 
information would not be material. Additionally, the final rule will 
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 and non-financial information presented not 
misleading. While numerical thresholds may be easier to apply than a 
materiality standard that requires judgment, this change will allow for 
a more principles-based disclosure approach that is more tailored to 
the specific circumstances and the needs of investors.\566\ 
Furthermore, registrants are already well-versed in making judgements 
about whether disclosure is material as part of complying with other 
disclosure requirements.
---------------------------------------------------------------------------

    \565\ While we are eliminating the numerical thresholds of 
existing Rule 3-10 used to determine the form and content of 
disclosure for existing issuers and guarantors and instead requiring 
disclosure to the extent material, the final amendments continue to 
use a numerical test for determining whether pre-acquisition 
financial information of recently acquired subsidiary issuers and 
guarantors is required. See discussion in Section VIII.C.1.b.iv, 
``Recently Acquired Subsidiary Issuers and Guarantors.''
    \566\ A number of academic studies have explored the use of 
numerical 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 numerical threshold for lease 
capitalization).
---------------------------------------------------------------------------

    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 currently providing the brief 
narrative to incur significant costs to provide the Revised Alternative 
Disclosures. For example, where Alternative Disclosures under the 
current rule 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 amendments.
    Proposed Rule 13-01(a)(4) would have required, if the financial 
disclosures specified in proposed Rule 13-01(a)(4) were omitted because 
they are not material, disclosure of a statement to that effect and the 
reasons therefore. As discussed above, we did not adopt this proposed 
requirement.\567\ In a change from the proposal, the final rule 
identifies four scenarios which we believe generally capture the 
situations under which the financial disclosures would not be material. 
These scenarios are intended to help address concerns \568\ about the 
need for greater certainty as to the circumstances when the omission of 
financial disclosures may be appropriate while continuing to provide 
investors with the basic reasons as to why the financial information 
was omitted in a manner similar to existing Rule 3-10's narrative 
exceptions. If the scenario is applicable and disclosed, the parent 
company could then omit the financial disclosures. We believe the 
greater certainty afforded to a parent company that chooses to rely on 
one of the identified scenarios, if applicable, will result in lower 
burdens in preparing the disclosure. If one of the identified scenarios 
does not apply, however, the parent company has the option to make its 
own assessment

[[Page 21988]]

based upon a consideration of other relevant facts and circumstances 
under the general materiality provision of Rule 13-01(a).
---------------------------------------------------------------------------

    \567\ See discussion in Section III.C.2.c.iii, ``When Disclosure 
is Required.''
    \568\ See, e.g., letter from Shearman.
---------------------------------------------------------------------------

    Allowing the parent company to omit information that is not 
material will lower the costs of disclosure relative to existing 
requirements and may help focus investor attention on decision-relevant 
information. This could also increase the risk that a parent company 
would omit, potentially inadvertently, value-relevant information, and 
that investors may make suboptimal investment decisions. Such risk will 
be mitigated, however, by the requirement to disclose any financial and 
narrative information about each guarantor if it would be material for 
investors to evaluate the sufficiency of the guarantee and sufficient 
information to make the financial and non-financial information 
presented not misleading. Also, omitting material information 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.\569\ 
However, there is also evidence of investor benefits from rules-based 
reporting standards.\570\ While the final amendments could result in 
reduced comparability across registrants and transactions, investors 
could benefit from disclosures that are more tailored to the material 
facts and circumstances through registrants' application of a 
principles-based standard.
---------------------------------------------------------------------------

    \569\ 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 numerical 
thresholds can deviate from investor preferences).
    \570\ 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.
---------------------------------------------------------------------------

iii. Location of Alternative Disclosures and Audit Requirement
    The final amendments will allow the parent company the choice of 
whether to provide the Revised Alternative Disclosures in its 
consolidated financial statement footnotes or, alternatively, in MD&A. 
If not otherwise included in the consolidated financial statements or 
MD&A, the disclosures must be provided in other specified prominent 
locations. Under the proposed amendments, this flexibility of where to 
locate the disclosures would only be available in the 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 
required to be filed during the fiscal year in which the first bona 
fide sale of the subject securities is completed. Under the final 
amendments, consistent with the recommendation of a number of 
commenters,\571\ the parent company will have flexibility to locate the 
disclosures in a footnote to its consolidated financial statements or 
in the locations specified in Rule 13-01(b) in all of its filings.
---------------------------------------------------------------------------

    \571\ See, e.g., letters from ABA, Cravath, Davis Polk, Dell, 
SIFMA, Simpson Thacher and Sullivan & Cromwell.
---------------------------------------------------------------------------

    If the parent company were to provide the Revised Alternative 
Disclosures in its consolidated financial statements, 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.
    In contrast, if the parent company were to provide the Revised 
Alternative Disclosures outside its financial statements, lower 
compliance costs would likely result with respect to these filings. 
Consistent with this, some commenters argued that not requiring the 
disclosures to be audited will reduce costs.\572\ While we generally 
expect lower compliance costs for parent companies that provide the 
Revised Alternative Disclosures outside of their consolidated financial 
statements, these parent companies may incur other costs, such as due 
diligence activities (e.g., comfort letters).\573\ Additionally, this 
optionality may reduce the potential for delay in offerings that exists 
under the current rule due to the requirement to have the Alternative 
Disclosures audited. Parent companies using this 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. Several commenters agreed 
with our assessment that such an option would allow issuers to register 
guaranteed debt securities and access capital markets faster.\574\
---------------------------------------------------------------------------

    \572\ See, e.g., letters from ABA, Ball Corp., Cravath, Davis 
Polk, Dell, Freeport, SIFMA, Simpson Thacher, Sullivan & Cromwell, 
and WTW.
    \573\ See, e.g., letters from BDO, EY, Grant Thornton, KPMG, and 
Windstream.
    \574\ See, e.g., letters from ABA, BDO, Cravath, Davis Polk, 
Dell, and Simpson Thacher. Cf. letter from BDO. See also note 269.
---------------------------------------------------------------------------

    Although these disclosures are supplemental in nature, investors 
may nevertheless perceive them to be less reliable if a parent company 
provides these disclosures outside its financial statements as they 
would not benefit from an audit or interim review conducted by the 
auditor. Some commenters asserted that the flexibility to determine the 
location of the Proposed Alternative Disclosures under the proposed 
amendments could lead to investor confusion about the location of the 
disclosures,\575\ and uncertainty as to the level of audit assurance 
that is applied to the disclosures.\576\ One commenter did not support 
locating the Proposed Alternative Disclosures outside the financial 
statements,\577\ and another suggested either requiring the Proposed 
Alternative Disclosures be audited or limiting unaudited disclosures to 
underwritten offerings.\578\ One of these commenters indicated that 
many investors place significant value on having required disclosures 
subject to annual audit and/or interim review, internal control over 
financial reporting, and XBRL tagging requirements, and not subject to 
the forward-looking statements safe harbor.\579\ To the extent that 
investors prefer the Revised Alternative 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.
---------------------------------------------------------------------------

    \575\ See letters from Deloitte, FedEx, and PWC.
    \576\ See letters from Deloitte and KPMG.
    \577\ See letter from CII.
    \578\ See letter from BDO.
    \579\ See letter from CII.
---------------------------------------------------------------------------

    Additionally, the amount of information that investors receive in 
the registration statement and in certain Exchange Act periodic reports 
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 Revised Alternative Disclosures outside its consolidated 
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 Revised Alternative Disclosures in its

[[Page 21989]]

consolidated financial statements. Such supplemental forward-looking 
information, if provided, could benefit investors. The location 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.\580\
---------------------------------------------------------------------------

    \580\ 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).
---------------------------------------------------------------------------

    If a parent company provides the Revised Alternative Disclosures in 
its financial statements, consistent with the existing rule, such 
disclosures would be subject to XBRL tagging 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 additional costs 
to comply with these tagging requirements. In contrast, Revised 
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 Revised Alternative Disclosures in XBRL, and hence the incremental 
cost savings of not having to tag the Revised Alternative Disclosures 
likely would be relatively low, as issuers already would have software 
or processes in place for tagging financial statement information. One 
commenter argued that the cost of XBRL formatting should be 
minimal.\581\
---------------------------------------------------------------------------

    \581\ See letter from XBRL.
---------------------------------------------------------------------------

iv. Recently Acquired Subsidiary Issuers and Guarantors
    The final rule eliminates the requirement to provide pre-
acquisition audited financial statements of a recently acquired 
subsidiary issuer or guarantor. 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. 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 require issuers to provide audited 
financial statements of a recently acquired subsidiary that is small 
relative to its consolidated parent company, which would increase 
issuers' compliance burdens.
    The proposed rule would have required parent companies to provide 
information about recently acquired subsidiary issuers and guarantors 
only if material to an investment decision in the guaranteed security. 
The final rule contains a different test for determining whether 
disclosures about recently acquired subsidiary issuers and guarantors 
must be provided. More specifically, the final rule requires, in 
certain circumstances,\582\ pre-acquisition Summarized Financial 
Information for significant recently acquired subsidiary issuers and 
guarantors to be provided in a Securities Act registration statement 
filed in connection with the offer and sale of the subject guaranteed 
security. Whereas separate financial statements are required for 
significant recently acquired subsidiary issuers and guarantors under 
existing Rule 3-10(g), the final rule requires Summarized Financial 
Information for significant recently acquired subsidiary issuers and 
guarantors, which is substantially less burdensome and costly for 
issuers to prepare and consistent with what is required for existing 
issuers and guarantors under the final amendments. We believe 
Summarized Financial Information required by the final rule for 
recently acquired subsidiary issuers and guarantors will provide 
investors with material information with which to make an informed 
investment decision while reducing costs for issuers.
---------------------------------------------------------------------------

    \582\ See description of the circumstances when pre-acquisition 
summarized financial information is required in Section 
III.C.2.e.iii, ``Recently Acquired Subsidiary Issuers and 
Guarantors.''
---------------------------------------------------------------------------

    Consistent with existing Rule 3-10(g), the final amendments specify 
a numerical threshold-based significance test for determining whether 
pre-acquisition financial information for recently acquired subsidiary 
issuers and guarantors is required, albeit a different significance 
test than existing Rule 3-10(g), and the information continues to be 
required only in Securities Act registration statements. The continued 
use of a numerical threshold for pre-acquisition financial information 
is in contrast to the amendments to existing Rule 3-10 to determine the 
form and content of disclosures related to existing issuers and 
guarantors.\583\ Unlike disclosure that relates to existing issuers and 
guarantors, which will be prepared by the parent company on an ongoing 
basis, and where materiality will therefore be evaluated regularly, in 
an acquisition context parent companies must rely on information 
provided by third parties to make a determination of whether the 
acquisition is significant and whether the related disclosure is 
material. In these circumstances, a numerical threshold will provide 
parent companies with a level of certainty that allows them to 
efficiently make determinations of what level of disclosure is required 
in an environment where delay of the debt securities offering can be 
costly. In addition, absent a specific numerical threshold requirement, 
if the parent company determines not to provide disclosure, investors 
would not receive information about the recently acquired subsidiary 
issuer's or guarantor's financial impact on the Obligor Group until the 
operating results of that acquired issuer or guarantor have been 
subsequently reflected in the Summarized Financial Information of the 
Obligor Group. As a result, the impact of the acquisition may be 
difficult for investors to discern from other events affecting the 
Obligor Group, even where the acquisition may be economically 
significant. Thus, we expect a numerical threshold requirement in the 
case of these disclosures to be less costly for parent companies and 
result in more consistent disclosure for investors where transactions 
are of economic significance.
---------------------------------------------------------------------------

    \583\ See discussion in Section VII. C.1.b.ii, ``When Disclosure 
is Required.''
---------------------------------------------------------------------------

    Overall, we believe replacing the existing pre-acquisition 
financial statement requirement with pre-acquisition Summarized 
Financial Information in certain circumstances will reduce the 
compliance burden for preparers without reducing material information 
for investors. Furthermore, investors may find the information

[[Page 21990]]

provided under the existing pre-acquisition financial statement 
requirement redundant, as it overlaps with Rule 3-05 of Regulation S-X. 
Consequently, eliminating the existing requirement would streamline 
disclosures. Academic research suggests that individuals invest more in 
firms with more concise financial disclosures.\584\ Thus, to the extent 
that the final 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.
---------------------------------------------------------------------------

    \584\ See Lawrence, note 557 above.
---------------------------------------------------------------------------

v. Continuous Reporting Obligation
    As discussed in Section III.C.2.f, ``Continuous Reporting 
Obligation,'' the final rules permit a parent company to cease 
providing the Revised Alternative Disclosures in its ongoing reporting 
if the corresponding subsidiary issuers' and guarantors' reporting 
obligations under Section 13 and/or Section 15(d) of the Exchange Act 
with respect to the guaranteed securities are terminated or suspended. 
This amendment will 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 Revised Alternative Disclosures beyond when the 
subsidiary would otherwise have to report under the Exchange Act with 
respect to the guaranteed securities, or otherwise deter issuers and 
guarantors from engaging in public debt offerings to avoid such 
reporting obligations, this amendment will address such issues.
    Many commenters supported eliminating the existing Rule 3-10 
requirement to provide continuous reporting for as long as the 
guaranteed securities are outstanding if they use the Alternative 
Disclosures.\585\ One commenter stated that the existing rule's 
continuous reporting requirement ``is highly anomalous and frequently 
results in an expensive ongoing disclosure cost with no discernable 
benefit to investors following business combination transactions.'' 
\586\ Some commenters suggested that eliminating these requirements 
would reduce burdens on issuers.\587\ In contrast, two commenters 
opposed eliminating existing Rule 3-10's continuous reporting 
requirement and stressed that the Commission should retain the 
requirement.\588\ These commenters asserted that the Proposed 
Alternative Disclosures are important to investors, and recommended the 
Commission require continuous reporting for as long as the securities 
are outstanding.\589\ These commenters also argued that investors 
accept less compensation for securities whose issuers provide financial 
reporting because it reduces the risks of investing in those 
securities, so issuers should not be able to pay less interest while 
being permitted to stop financial reporting. We note that any potential 
adverse effects from eliminating continuous reporting may be mitigated 
by the fact that, as one commenter indicated, it has become commonplace 
for issuers to tailor contractual reporting obligations to meet the 
perceived needs of investors.\590\
---------------------------------------------------------------------------

    \585\ See, e.g., letters from Cravath, Davis Polk, FedEx, 
Freeport, Nareit, PWC, and Sullivan & Cromwell.
    \586\ See letter from Cravath.
    \587\ See, e.g., letters from Cravath, Freeport, Nareit, and 
Sullivan & Cromwell.
    \588\ See letters from CII and Credit Roundtable.
    \589\ See letters from CII and Credit Roundtable.
    \590\ See letter from Cravath.
---------------------------------------------------------------------------

2. Amendments to Rule 3-16 and Partial Relocation to Rule 13-02
    As discussed in detail in Section V.B, ``Overview of the 
Amendments,'' 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. The final rule will 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 as a supplement to the consolidated financial statements of 
the registrant that issues the collateralized security.\591\
---------------------------------------------------------------------------

    \591\ As a transitional matter, the final amendments do not 
eliminate existing Rule 3-16, which will continue to be applicable 
to registered collateralized securities with collateral release 
provisions issued and outstanding as of the effective date of the 
final amendments. See Section VI.B ``Rule 3-16 Collateral Release 
Provisions.''
---------------------------------------------------------------------------

    Debt agreements are often structured to avoid the requirements of 
Rule 3-16 by either structuring the debt agreement to release pledges 
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. 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 final amendments will reduce the burden of 
having to provide separate financial statements of affiliates in 
comparison to the requirements under the existing rule and thereby 
provide issuers with the flexibility to structure their debt agreements 
with pledges of affiliate securities. If, as a result of the final 
amendments, debt agreements are no longer structured to avoid 
disclosure requirements about affiliates whose securities are pledged 
as collateral, investors would obtain the benefit of the collateral as 
well as the related disclosures, which would be subject to Section 11 
liability. This flexibility may also permit issuers 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. Commenters 
generally supported the amendments to Rule 3-16. Several commenters 
asserted the proposed amendments to Rule 3-16 would benefit investors, 
who would receive information critical to making informed decisions in 
a simpler format, as well as registrants by reducing offering 
costs.\592\
---------------------------------------------------------------------------

    \592\ See, e.g., letters from Davis Polk, EY, and FEI.
---------------------------------------------------------------------------

    Finally, as with any change to reporting format and presentation of 
information, the amendments may lead companies and investors to incur 
costs to adjust to the new disclosures, as further discussed in 
Sections VIII.C.2.a through c 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,\593\ and their financial 
information is thus already reflected in the registrant's consolidated 
financial statements. The final amendments require Summarized Financial 
Information for each such affiliate and disclosure of additional 
financial information about each affiliate if material for investors to 
evaluate the

[[Page 21991]]

pledge of the affiliate's securities as collateral and/or necessary to 
make the financial and non-financial information presented not 
misleading. For registrants, this will reduce compliance costs by 
reducing the amount of information they need to prepare and 
disclose.\594\ For investors, we do not anticipate significant costs 
since material information will still be required to be provided. The 
simplified disclosures will highlight material information needed to 
make informed investment decisions and therefore should enable 
investors to process information more efficiently and make more 
informed investment decisions.
---------------------------------------------------------------------------

    \593\ In the rare circumstances where the affiliate is not a 
consolidated subsidiary of the registrant, Rule 13-02(a)(6) requires 
the registrant to provide ``[a]ny financial and narrative 
information about each such affiliate if the information would be 
material for investors to evaluate the pledge of the affiliate's 
securities as collateral'' and Rule 13-02(a)(7) requires 
``[s]ufficient information so as to make the financial and non-
financial information presented not misleading.'' In this regard, 
separate financial statements of the unconsolidated affiliate may be 
necessary to comply with these requirements. See additional 
discussion in Section V.C.1, ``Level of Detail.''
    \594\ For purposes of the PRA, we estimate that the final 
amendments to Rule 3-16 will result in an overall reduction of 30 
burden hours for each form (other than Form 10-Q) affected by the 
final amendments. See Section VIII.B.2, ``Rule 3-16,'' below.
---------------------------------------------------------------------------

    Several commenters asserted that the proposed amendment would 
reduce a registrant's costs and burdens \595\ while still providing 
investors with clear and sufficient information.\596\
---------------------------------------------------------------------------

    \595\ See, e.g., letters from Davis Polk EY, FEI, and PWC.
    \596\ See letters from EY and FEI.
---------------------------------------------------------------------------

ii. Presentation on a Combined Basis
    The final rules will permit a registrant to provide the Summarized 
Financial Information of consolidated affiliates that are pledged as 
collateral on a combined rather than individual basis. However, if non-
financial disclosure provided in response to Rule 13-02 were applicable 
to one or more, but not all, affiliates, separate disclosure of 
Summarized Financial Information for the affected affiliates would be 
required, to the extent material. The final rules will permit, in 
limited circumstances (i.e., where the separate financial information 
of the affected affiliates can be easily explained and understood), 
narrative disclosure in lieu of separate disclosure of the financial 
information of the affiliates affected by those factors. Although this 
narrative would be allowed in limited circumstances, separate columnar 
financial information for affected affiliates would generally be 
expected. As with the effects of the final amendments to Rules 3-10 and 
13-01 discussed above,\597\ we believe the simplified disclosures in 
the final amendments to Rules 3-16 and 13-02 will both lower compliance 
costs for issuers and provide investors with more streamlined and 
concise disclosures that will promote more efficient decision-making by 
investors. We do not anticipate significant costs to investors since 
material information will still be required to be provided.
---------------------------------------------------------------------------

    \597\ See discussion in Section VII.C.1.b.i, ``Financial and 
Non-Financial Disclosures.''
---------------------------------------------------------------------------

iii. Periods to Present
    Under the existing rule, the periods required in Rule 3-16 
Financial Statements are those required by Rules 3-01 and 3-02 of 
Regulation S-X, or, for smaller reporting companies, the periods 
required by Rule 8-02 of Regulation S-X. The final amendments will 
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, consistent with the 
proposed amendments to Rule 3-10 above. Rule 3-16 financial statements 
are not currently required in quarterly reports, and as such, 
registrants will incur costs to provide this additional interim 
disclosure.\598\ While we acknowledge the concerns about the burden to 
provide interim information in all cases, consistent with our analysis 
of the economic effect of the corresponding requirement in the final 
amendments to Rules 3-10 and 13-01 above, we believe the adopted 
approach will significantly reduce burdens on issuers while providing 
investors with the relevant information they need to make informed 
investment decisions.\599\
---------------------------------------------------------------------------

    \598\ For purposes of the PRA, we estimate that the amendments 
to Rule 3-16 will result in an increase of 70 burden hours per Form 
10-Q filing. See Section VIII.B.2, ``Rule 3-16,'' below.
    \599\ See discussion in Section VII.C.1.b.i, ``Financial and 
Non-Financial Disclosures.''
---------------------------------------------------------------------------

b. Non-Financial Disclosures
    The final rules will require non-financial information about 
affiliates whose securities are pledged as collateral and the 
collateral arrangements. We do not believe this amendment will impose 
undue costs for issuers, as the majority of the information required to 
be disclosed under the final amendments should be readily available or 
attainable.\600\ We believe the amendments will benefit investors by 
supplementing the required financial disclosures with additional, 
material information, thereby rendering the combined financial and non-
financial disclosures more informative for investment decisions.
---------------------------------------------------------------------------

    \600\ The content of the amended 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, will impose a significant 
burden on a registrant to prepare.
---------------------------------------------------------------------------

    Commenters generally supported the proposed rules' requirement to 
provide 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.\601\ Consistent with our analysis of the potential impact 
on investors, one commenter explicitly stated that such disclosure 
would be helpful to investors.\602\
---------------------------------------------------------------------------

    \601\ See, e.g., letters from Davis Polk, FEI, and NYC Bar.
    \602\ See letter from Davis Polk.
---------------------------------------------------------------------------

c. When Disclosure Is Required
    Rather than utilizing existing numerical thresholds, disclosure of 
the specified financial and non-financial disclosures will be required 
unless the information is not material. Additionally, the final rule 
will require disclosure of any financial and narrative information 
about each affiliate if it would be material for investors to evaluate 
the pledge of the affiliate's securities as collateral, and disclosure 
of sufficient information to make the financial and non-financial 
information presented not misleading. A number of commenters stated 
explicitly that they supported replacing existing Rule 3-16's numerical 
threshold requirement with a principles-based materiality 
standard.\603\ One commenter noted that, by focusing on materiality, 
proposed Rule 13-02 would require registrants to undertake the expense 
of providing the required disclosures only when doing so would be 
helpful to investors.\604\ Another commenter contended that the 
existing substantial portion numerical threshold requirement could 
cause registrants to provide information that is not material or 
possibly not require financial statements even if such affiliates are 
material to the registrant's business.\605\ To the extent the numerical 
thresholds under the existing rule result in disclosure of information 
that is not material, investors may benefit from reduced search costs 
and the facilitation of more efficient information processing.\606\ 
Further, we believe that, compared to the existing rule, final Rule 13-
02 will reduce compliance costs for issuers and increase the likelihood 
that offerings will be registered because

[[Page 21992]]

issuers will only be required to provide disclosure to the extent 
material. At the same time, compared to numerical thresholds, having a 
principles-based disclosure approach may create more uncertainty for 
issuers as it requires more judgement. However, we expect any 
additional uncertainty would be justified by the ability to provide 
disclosures more tailored to the specific circumstances and the needs 
of investors, and we note that registrants are already well-versed in 
making judgements about whether disclosure is material as part of 
complying with other disclosure requirements.
---------------------------------------------------------------------------

    \603\ See, e.g., letters from CII, Cravath, Davis Polk, 
Deloitte, EY, and FEI.
    \604\ See letter from Davis Polk.
    \605\ See letter from Dell.
    \606\ 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.
---------------------------------------------------------------------------

    Proposed Rule 13-02(a)(4) would have required, if the financial 
disclosures specified in proposed Rule 13-02(a)(4) were omitted because 
they were not material, disclosure of a statement to that effect and 
the reasons therefor. As discussed above, we did not adopt this 
proposed requirement.\607\ Similar to the final amendments to Rules 3-
10 and 13-01, in a change from the proposal, the final rule identifies 
two scenarios which we believe generally capture the situations under 
which the financial disclosures would not be material. These scenarios 
were intended to help address concerns \608\ about the need for greater 
certainty as to the circumstances when the omission of financial 
disclosures may be appropriate while continuing to provide investors 
with the basic reasons as to why the financial information was omitted. 
If the scenario is applicable and disclosed, the parent company could 
then omit the financial disclosures. We believe the greater certainty 
afforded to a registrant that chooses to rely on one of the identified 
scenarios, if applicable, will result in lower burdens in preparing the 
disclosure. If one of the identified scenarios does not apply, however, 
the registrant has the option to make its own assessment based upon a 
consideration of other relevant facts and circumstances under the 
general materiality provision of Rule 13-02(a).
---------------------------------------------------------------------------

    \607\ See discussion in Section V.E.3, ``When Disclosure is 
Required.''
    \608\ See, e.g., letter from Shearman.
---------------------------------------------------------------------------

d. Location of Disclosures and Audit Requirement
    As discussed above for the final amendments to Rule 3-10, new Rule 
13-02 will allow registrants the choice of whether to provide the 
amended disclosures in its consolidated financial statement footnotes 
or, alternatively, in MD&A. If not otherwise included in the 
consolidated financial statements or MD&A, the disclosures must be 
provided in other specified prominent locations. Under the proposed 
amendments, this flexibility of where to locate the disclosures would 
only be available in the 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 required to be filed during 
the fiscal year in which the first bona fide sale of the subject 
securities is completed. Under the final amendments, registrants will 
have flexibility to locate the disclosures in a footnote to the 
consolidated financial statements or in the locations specified in Rule 
13-02(b) in all of its filings. Our analysis of this amendment is 
generally consistent with our analysis of the economic effect of the 
corresponding requirement in the final amendments to Rule 13-01 above. 
If a registrant provides the amended disclosures in its consolidated 
financial statements, the disclosures will be subject to annual audit, 
interim review, internal control over financial reporting, and XBRL 
tagging requirements. Investors may perceive this choice of placement 
to indicate that the disclosures are more reliable. 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 disclosures in their financial statements.
    In contrast, if a registrant provides the disclosures outside its 
financial statements, lower compliance costs would likely result with 
respect to these filings, and the registrant may be able to register 
guaranteed debt offerings more quickly than under the existing rule and 
thereby more promptly access favorable market conditions. However, 
registrants may incur other costs, such as due diligence activities. 
Although these disclosures are supplemental in nature, investors may 
nevertheless perceive them to be less reliable if a registrant provides 
these disclosures outside its financial statements as they would not 
benefit from an audit or interim review conducted by the auditor. To 
the extent that investors prefer the disclosures to be included in the 
registrant'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.
e. Recently Acquired Affiliates Whose Securities Are Pledged as 
Collateral
    The proposed rule would have required registrants to provide 
information about recently acquired subsidiary affiliates only if 
material to an investment decision in the collateralized security. The 
final rule contains a different test for determining whether 
disclosures about recently acquired affiliates must be provided. More 
specifically, the final rule requires, in certain circumstances,\609\ 
pre-acquisition Summarized Financial Information for recently acquired 
affiliates to be provided in a Securities Act registration statement 
filed in connection with the offer and sale of the subject 
collateralized security. Existing Rule 3-16 does not contain a specific 
requirement to provide pre-acquisition financial information of 
recently acquired affiliates whose securities are pledged as 
collateral. However, if a recently acquired affiliate meets the 
substantial portion threshold in the existing rule, financial 
statements for periods prior to the date of acquisition by the 
registrant are required to be filed. Generally consistent with the 
effects of the corresponding final amendments to Rule 3-10 discussed 
above, we believe requiring pre-acquisition Summarized Financial 
Information of affiliates whose securities are pledged as collateral in 
certain circumstances will provide material information for investors 
without imposing significant burdens on issuers.\610\
---------------------------------------------------------------------------

    \609\ See description of the circumstances when pre-acquisition 
summarized financial information is required in Section V.G.3, 
``Recently Acquired Affiliates Whose Securities are Pledged as 
Collateral.''
    \610\ See discussion in Section VII.C.1.b.iv, ``Recently 
Acquired Subsidiary Issuers and Guarantors.''
---------------------------------------------------------------------------

D. Anticipated Effects on Efficiency, Competition, and Capital 
Formation

    As discussed above, and as a general matter, we believe the final 
amendments will 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 final 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.
    To the extent that the final amendments ease registration burdens 
for issuers, there could be an increase in the number of registered 
offerings. If such issuers would not have otherwise

[[Page 21993]]

issued debt securities, 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.
    Since the final rule amendments may increase the number of 
registered debt offerings as discussed above, the investment 
opportunities available for different types of investors may be 
broadened and may allow for more efficient matching of investors with 
assets that meet their investment objectives and preferences. To the 
extent that the final amendments to the eligibility conditions that 
must be met to omit the separate financial statements of subsidiary 
issuers and guarantors of guaranteed debt securities encourage 
additional registered guaranteed debt offerings, more investment 
opportunities would be made available, and a resulting increase in 
market participation could improve the overall competitiveness and 
efficiency of the capital markets. 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 final amendments provide investors with 
streamlined and easier to understand financial information while 
maintaining the material completeness of the financial disclosures, we 
expect that the financial disclosures that result from the final 
amendments would improve price discovery, enhance the allocative 
efficiency of markets, and facilitate capital formation.
    Rather than only 100%-owned subsidiaries of the parent company, the 
final amendments permit subsidiary issuers or guarantors that are 
consolidated in the parent company's financial statements to omit 
separate subsidiary issuer and guarantor financial statements, if the 
other criteria in amended Rule 3-10 are satisfied. To the extent that 
the final amendments expand the scope of subsidiary issuers and 
guarantors that meet Rule 3-10 eligibility requirements, the final 
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.
    As describe above,\611\ many outstanding registered debt securities 
have a collateral release provision, which automatically reduces the 
pledged collateral if it would trigger existing Rule 3-16's requirement 
for a registrant to file 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 proposed amendments could possibly have 
affected senior lenders and unsecured lenders indirectly as these 
collateral release provisions may no longer be operable and the 
collateral available to lenders may be modified, potentially causing 
unintended credit consequences. As a transitional matter, the final 
amendments do not eliminate existing Rule 3-16, which will continue to 
be applicable to registered collateralized securities with collateral 
release provisions issued and outstanding as of the effective date of 
the final amendments.\612\ Subsequent to the transition period, new 
issuances of registered securities collateralized by affiliate 
securities must comply with new Rule 13-02, and provide certain 
financial and non-financial disclosures of that affiliate in all cases, 
to the extent material. If, as a result of the final amendments, 
issuers no longer include collateral release provisions in their 
indentures, the pledged collateral would be maintained, which would 
lead to improved investment options for investors and thus increased 
market efficiency.
---------------------------------------------------------------------------

    \611\ See Section VI.B ``Rule 3-16 Collateral Release 
Provisions.''
    \612\ See id.
---------------------------------------------------------------------------

E. Consideration of Reasonable Alternatives

    We discuss below potential alternatives to the final amendments to 
existing Rules 3-10 and 3-16.
1. Alternative to Final Amendments to Existing Rule 3-10
    An alternative to the final amendments to Rule 3-10 would have been 
to permit the Revised Alternative Disclosures to 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.\613\ 
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 final amendments, as detailed above. As a result, we 
believe the final amendments better serve to enhance efficiency, 
competition and capital formation, while still maintaining appropriate 
investor protections. Many commenters supported the revision to 
existing Rule 3-10's condition that a subsidiary issuer or guarantor be 
100% owned by the parent company to one in which the subsidiary issuer 
or guarantor be consolidated in the parent company's financial 
statements.\614\
---------------------------------------------------------------------------

    \613\ 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.)).
    \614\ See, e.g., letters from Comcast, Cravath, Davis Polk, EEI/
AGA, FedEx, FEI, Nareit, NYC Bar, and Sullivan & Cromwell.
---------------------------------------------------------------------------

2. Alternatives Common to Final Amendments to Existing Rule 3-10 and 
Existing Rule 3-16
    One alternative to each set of final amendments would have been to 
require that the Revised Alternative Disclosures, or the disclosures 
specified in final 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 disclosures outside its consolidated 
financial statements. 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 permitted to be 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 final 
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 costs associated with including the 
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

[[Page 21994]]

available for disclosures provided in the financial statements. As 
discussed above,\615\ 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 statement 
footnotes of the parent company, or registrant, as applicable.
---------------------------------------------------------------------------

    \615\ See Section VII.C.1, ``Amendments to Rule 3-10 and Partial 
Relocation to Rule 13-01.''
---------------------------------------------------------------------------

    While providing additional flexibility to the parent company or 
registrant in the location of the disclosures will likely further 
reduce the compliance burdens associated with registered offerings with 
guarantees or collateral, we acknowledge that investors may demand a 
higher expected return if they perceive reduced reliability of the 
Revised Alternative Disclosure. The potential for higher borrowing 
costs may encourage issuers to voluntarily include the Revised 
Alternative Disclosures in the financial statements of the parent 
company, or registrant, as applicable.
    Finally, another alternative relevant to each set of final 
amendments would have been to require the Summarized Financial 
Information specified in final Rules 13-01 and 13-02 to be provided for 
the same periods as the parent company or registrant, as applicable, 
instead of the most recent annual and interim period. While this 
alternative would increase the amount of information available to 
investors in the specific filing, the additional information may not be 
material in making informed investment decisions. As discussed 
above,\616\ 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.
---------------------------------------------------------------------------

    \616\ See note 557 and accompanying text.
---------------------------------------------------------------------------

    Related to the above alternative, some commenters recommended not 
requiring the most recent interim period disclosures or requiring them 
only in limited circumstances, such as when there had been a material 
change since the most recent annual period.\617\ As discussed in 
Section VIII.C.1.b.i. with respect to new Rule 13-01, we acknowledge 
that parent companies will continue to incur compliance costs to 
include the most recent interim period disclosure under the final 
amendments. However, we believe that the most recent interim period 
disclosures provide timely and relevant information for investors to 
make informed investment decisions. Moreover, in comparison to the 
existing rules, the final amendments already significantly reduce the 
burdens on parent companies by eliminating, in filings on Form 10-Q, 
both the quarter-to-date interim period requirement in filings covering 
more than one fiscal quarter and the comparable prior year interim 
period(s), as applicable. These observations related to new Rule 13-01 
also extend to new Rule 13-02. Overall, we believe that the benefit of 
providing the most recent interim period disclosures under the final 
amendments justifies the compliance costs to registrants.
---------------------------------------------------------------------------

    \617\ See note 564 and accompanying text.
---------------------------------------------------------------------------

IX. Paperwork Reduction Act

A. Background

    Certain provisions of our rules, schedules, and forms that would be 
affected by the rule amendments contain ``collection of information'' 
requirements within the meaning of the Paperwork Reduction Act of 1995 
(``PRA'').\618\ We published a notice requesting comment on revisions 
to these collections of information requirements in the Proposing 
Release and have submitted these requirements to the Office of 
Management and Budget (``OMB'') for review in accordance with the 
PRA.\619\ The hours and costs associated with preparing, filing, and 
sending the schedules and forms 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 comply with, a collection of 
information 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 collections of information are:
---------------------------------------------------------------------------

    \618\ 44 U.S.C. 3501 et seq.
    \619\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

     Regulation S-X (OMB Control No. 3235-0009);
     Regulation S-K (OMB Control No. 3235-0071); \620\
---------------------------------------------------------------------------

    \620\ The paperwork burdens for Regulation S-K and Regulation S-
X are imposed through the forms, schedules and reports that are 
subject to the requirements in these regulations and are reflected 
in the analysis of those documents.
---------------------------------------------------------------------------

     Form S-1 (OMB Control No. 3235-0065);
     Form S-4 (OMB Control No. 3235-0324);
     Form S-3 (OMB Control No. 3235-0073);
     Form S-11 (OBM Control No. 3235-0067);
     Form F-1 (OMB Control No. 3235-0258);
     Form F-3 (OMB Control No. 3235-0256);
     Form F-4 (OMB Control No. 3235-0325);
     Form 20-F (OMB Control No. 3235-0288);
     Form 10-K (OMB Control No. 3235-0063);
     Form 10-Q (OMB Control No. 3235-0070);
     Form SF-1 (OMB Control No. 3235-0707);
     Form SF-3 (OMB Control No. 3235-0690);
     Form 1-A (OMB Control No. 3235-0286);
     Form 1-K (OMB Control No. 3235-0720); and
     Form 1-SA (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.
    As described in more detail above, we are amending 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 amending 
both rules and relocating parts of the disclosure requirements of Rule 
3-10 and Rule 3-16 to new Rules 13-01 and 13-02. We also are making 
conforming amendments to Items 504, 1100, 1112, 1114, and 1115 of 
Regulation S-K; Forms F-1, F-3, 1-A, 1-K, 1-SA, and Rule 257(b) 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 material given the specific facts and 
circumstances,

[[Page 21995]]

make the disclosures easier to understand, and reduce the costs and 
burdens to registrants.

B. Summary of Comment Letters

    In the Proposing Release, the Commission requested comment on the 
PRA burden hour and cost estimates and the analysis used to derive such 
estimates. We did not receive any comments that directly addressed the 
PRA analysis of the proposed amendments. Several commenters, however, 
did provide responses to certain requests for comment that have 
informed some of our PRA estimates. In this regard, several commenters 
indicated that the costs and burdens of providing the disclosures under 
the proposed amendments would be lower than the compliance burdens 
under the current disclosure requirements and could potentially result 
in an increase in the number of registered debt offerings.\621\
---------------------------------------------------------------------------

    \621\ See letters from Ball Corp., Davis Polk, EY, and FEI. Cf. 
letter from NYC Bar (indicating that the proposed amendments would 
reduce the burdens for registering offerings but may not result in a 
significant increase in such offerings because of the general trend 
toward private offerings).
---------------------------------------------------------------------------

C. Summary of the Impact on Collections of Information

    As discussed in more detail in the Proposing Release,\622\ we 
derived the burden hour estimates by estimating change in paperwork 
burden as a result of the amendments, both in terms of the change to 
the paperwork burden for current responses as well as the change in the 
number of responses. For purposes of the PRA, we estimate that the 
current disclosure burdens under Rules 3-10 and 3-16 require an average 
of 100 burden hours to prepare and process, and that the amendments 
would reduce these burdens by 30 hours. Correspondingly, we estimate 
that the disclosure burdens under the amendments will require 70 hours 
to prepare and process. We estimated the number of responses by 
conducting separate database searches of filings containing XBRL tags 
most commonly associated with Consolidating Information and terms 
associated with the Alternative Disclosures during the calendar years 
of 2016 through 2018.
---------------------------------------------------------------------------

    \622\ See Section VIII of the Proposing Release.
---------------------------------------------------------------------------

    As discussed in Sections III through V, we have made some changes 
to the proposed amendments as a result of comments received. While 
certain of these changes could further reduce burdens on registrants, 
others may incrementally increase those burdens relative to the 
proposals. Considered together, we do not expect these changes to 
appreciably impact our assessment of the compliance burdens of the 
final rule amendments for purposes of the PRA. Accordingly, we have not 
revised the estimates from the Proposing Release of the impact on the 
per hour burden for the affected forms.
    PRA Table 1 summarizes the estimated impact of the final amendments 
on the paperwork burdens associated with the affected forms listed 
above.

 PRA Table 1--Estimated Paperwork Burden Effects of the Final Amendments
------------------------------------------------------------------------
                                                         Estimated net
  Final amendments and effects      Affected forms          effect
------------------------------------------------------------------------
Rule 3-10 and New Rule 13-01 of
 Regulation S-X:
     Replaces the          Forms S-    30 hour
     Consolidating Information     1, S-3, S-4, S-     net decrease in
     required by current Rule 3-   11, F-1, F-3, F-    compliance burden
     10 with Summarized            4, SF-1, SF-3, 20-  per each existing
     Financial Information for     F, 10-K, 10-Q, 1-   filing containing
     each issuer and guarantor     A, 1-K, and 1-SA.   current Rule 3-10
     and in certain                                    disclosures.
     circumstances additional                          Small
     summarized disclosure of                          increase in the
     intercompany and related-                         number of Form S-
     party transactions.                               1, Form S-3, Form
                                                       S-4, Form S-11,
                                                       Form F-1, Form F-
                                                       4, and Form 20-F
                                                       filings.
     Allows supplemental
     financial and non-financial
     disclosure about subsidiary
     issuers and/or guarantors
     to be disclosed outside of
     the parent company's
     financial statements;.
     Eliminates current
     requirement to provide pre-
     acquisition financial
     statements of recently
     acquired subsidiary issuers
     and guarantors, but
     requires, in certain
     instances, pre-acquisition
     Summarized Financial
     Information about
     significant recently
     acquired subsidiary issuers
     and guarantors.
Rule 3-16 and New Rule 13-02 of
 Regulation S-X:
     Replaces current      Forms S-    30 hour
     Rule 3-16's requirement to    1, S-3, S-4, S-     net decrease in
     provide separate financial    11, F-1, F-3, F-    compliance burden
     statements for each           4, SF-1, SF-3, 20-  per each existing
     affiliate whose securities    F, 10-K, 10-Q, 1-   filing containing
     are pledged as collateral     A, 1-K, and 1-SA.   current Rule 3-16
     with a requirement that the                       disclosures.
     registrant provide                                Small
     Summarized Financial                              increase in the
     Information and non-                              number of Form S-
     financial disclosures about                       1, Form S-3, Form
     the affiliate(s) and the                          S-4, Form S-11,
     collateral arrangement as a                       Form F-1, Form F-
     supplement to the                                 4, Form 20-F,
     registrant's consolidated                         Form 10-K, Form
     financial statements,                             10-Q, and Form 1-
     including disclosure of                           A filings.
     intercompany and related-
     party transactions.
     Permits the
     Summarized Financial
     Information and non-
     financial disclosures to be
     presented outside of the
     registrant's financial
     statements;.
     Requires, in
     certain instances, pre-
     acquisition Summarized
     Financial Information about
     significant recently
     acquired affiliates.
------------------------------------------------------------------------


[[Page 21996]]

D. Burden and Cost Estimates to the Amendments

    Below we estimate the incremental change in paperwork burdens as a 
result of the final amendments. 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 size 
and 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 the disclosures required under 
the proposed amendments. For purposes of the PRA, the burden is 
allocated between internal burden hours and outside professional costs. 
The table below sets forth the percentage estimates the Commission 
typically uses for the burden allocation for each affected form. We 
also estimate that the average cost of retaining an outside 
professional is $400 per hour.\623\
---------------------------------------------------------------------------

    \623\ 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 entities that regularly assist registrants in preparing and 
filing documents with the Commission.

  PRA Table 2--Standard Estimated Burden Allocation for Specified Forms
                              and Schedules
------------------------------------------------------------------------
                                                              Outside
           Form/Schedule type              Internal (%)    professionals
                                                                (%)
------------------------------------------------------------------------
Forms S-1, S-3, S-4, S-11, F-1, F-3, F-               25              75
 4, 20-F, SF-1, and SF-3................
Forms 10-K, 10-Q, 1-A, and..............              75              25
1-K.....................................
Form 1-SA...............................              85              15
------------------------------------------------------------------------

    PRA Table 3 illustrates the estimated incremental reduction to the 
annual compliance burdens for the affected forms, in hours and in 
costs, as a result of the final amendments.

 PRA Table 3--Calculation of the Reduction in Burden Estimates to Existing Affected Responses That Include Disclosures Under Current Rules 3-10 and 3-16
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                            Estimated
                                                           Estimated       Estimated         Total         Estimated       Estimated         outside
                         Form                              number of      incremental     incremental      internal         outside       professional
                                                           affected      burden hours/   burden hours    burden hours    professional    costs/affected
                                                           responses         form                                            hours          responses
                                                                 (A) *             (B)     (C) = (A) x     (D) = (C) x     (E) = (C) x  (F) = (E) x $400
                                                                                                   (B)  (allocation %)  (allocation %)
--------------------------------------------------------------------------------------------------------------------------------------------------------
10-K..................................................             481            (30)        (14,430)      (10,822.5)       (3,607.5)      ($1,443,000)
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..................................................              15            (30)           (450)         (112.5)         (337.5)         (135,000)
S-4...................................................             100            (30)         (3,000)           (750)         (2,250)         (900,000)
S-11..................................................               5            (30)           (150)          (37.5)         (112.5)          (45,000)
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
                                                       -------------------------------------------------------------------------------------------------
    Totals............................................  ..............  ..............  ..............      (40,057.5)  ..............       (6,346,845)
--------------------------------------------------------------------------------------------------------------------------------------------------------
* The number of estimated affected responses is an estimate of the average number of filings that included Consolidating Information under Rule 3-10,
  Alternative Disclosures or Rule 3-16 financial statements over the 2016-2018 calendar years.

    PRA Table 4 below illustrates the estimated increase in the number 
of filings and the related total annual compliance burdens of the 
affected forms, in hours and in costs, as a result of the final 
amendments.

[[Page 21997]]



  PRA Table 4--Calculation of the Incremental Change in Burden Estimates From the Increase in the Number of Affected Responses Filed as a Result of the
                                                                    Final Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                            Estimated
                                                           Estimated       Estimated         Total         Estimated       Estimated         outside
                         Form                             increase in     incremental     incremental      internal         outside       professional
                                                           affected      burden hours/   burden hours    burden hours    professional    costs/affected
                                                           responses         form                                            hours          responses
                                                                   (A)             (B)     (C) = (A) x     (D) = (C) x     (E) = (C) x  (F) = (E) x $400
                                                                                                   (B)  (allocation %)  (allocation %)
--------------------------------------------------------------------------------------------------------------------------------------------------------
10-K..................................................               6              70             420             315             105           $42,000
10-Q..................................................              18              70           1,260             945             315           126,000
S-1...................................................               4              70             280              70             210            84,000
S-3...................................................               4              70             280              70             210            84,000
20-F..................................................               4              70             280              70             210            84,000
S-4...................................................              37              70           2,590           647.5         1,942.5           777,000
S-11..................................................               3              70             210            52.5           157.5            63,000
F-1...................................................               3              70             210            52.5           157.5            63,000
F-3...................................................               1              70              70            17.5            52.5            21,000
F-4...................................................               3              70             210            52.5           157.5            63,000
1-A...................................................               1              70              70            52.5            17.5             7,000
1-K...................................................               0
1-SA..................................................               0
SF-1..................................................               0
SF-3..................................................               0
                                                       -------------------------------------------------------------------------------------------------
    Totals............................................  ..............  ..............  ..............           2,345  ..............         1,414,000
--------------------------------------------------------------------------------------------------------------------------------------------------------

    PRA Table 5 illustrates the estimated net incremental change to the 
total annual compliance burdens for the affected forms, in hours and in 
costs, as a result of the final amendments.

 PRA Table 5--Calculation of the Net Incremental Change in Burden Estimates of Affected Responses Resulting From
                                              the Final Amendments
----------------------------------------------------------------------------------------------------------------
                                                     Estimated                                       Estimated
                                     Estimated       change in       Estimated        Outside         outside
              Form                   number of     burden hours/     internal      professional    professional
                                     affected        affected      burden hours        hours      costs/affected
                                     responses       response                                        response
                                             (A)             (B)             (C)             (D)             (E)
----------------------------------------------------------------------------------------------------------------
10-K............................             487        (14,610)        (10,958)         (3,652)    ($1,460,800)
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)
S-4.............................             137           (410)         (102.5)         (307.5)       (123,000)
S-11............................               8              60              15              45          18,000
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
                                 -------------------------------------------------------------------------------
    Total.......................  ..............  ..............      (38,235.5)  ..............     (5,227,800)
----------------------------------------------------------------------------------------------------------------

    PRA Table 6 summarizes the current OMB collections of information 
inventory for the affected forms and the requested change in the total 
reporting burdens and costs as a result of the final amendments.\624\
---------------------------------------------------------------------------

    \624\ For convenience, figures in the table have been rounded to 
the nearest whole number.

[[Page 21998]]



                                                               PRA Table 6--Requested Paperwork Burden Under the Final Amendments
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  Current burden                                  Program change                            Requested change in burden
                                                 -----------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                    Increase or
                      Form                        Current annual  Current burden   Current cost      Number of      Increase or    reduction in       Annual
                                                     responses         hours          burden         affected      reduction in    professional      responses     Burden hours     Cost burden
                                                                                                     responses     company hours       costs
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
S-1.............................................             901         148,556    $182,048,700              14             (5)        ($6,000)             905         148,551    $182,042,700
S-3.............................................           1,657         193,730     236,322,036               4              70          84,000           1,661         193,800     236,406,036
S-4.............................................             551         563,216     678,291,204             137           (103)       (123,000)             588         563,113     678,168,204
S-11............................................              64          12,290      15,016,968               8              15          18,000              67          12,305      15,034,968
F-1.............................................              63          26,815      32,445,300               8              15          18,000              66          26,830      32,463,300
F-3.............................................             112           4,448       5,712,000               1              18          21,000             113           4,466       5,733,000
F-4.............................................              39          14,076      17,106,000              10               0               0              42          14,076      17,106,000
SF-1............................................               6           2,076       2,491,200               0                                               6           2,076       2,491,200
SF-3............................................              71          24,548      29,457,900               0
10-K............................................           8,137      14,220,652   1,898,891,869             487        (10,958)     (1,460,800)           8,143      14,209,694   1,897,431,069
10-Q............................................          22,907       3,253,411     432,290,354           1,270        (27,225)     (3,630,000)          22,925       3,226,186     428,660,354
1-A.............................................             179          98,396      13,111,912               1              53           7,000             180          98,449      13,118,912
20-F............................................             725         479,304     576,875,025              19            (43)        (51,000)             729         479,262     576,824,025
1-K.............................................              36          16,200       2,160,000               0                                              36          16,200       2,160,000
1-SA............................................              55           8,791         618,420               0                                              55           8,791         618,420
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

X. Final Regulatory Flexibility Act Analysis

    This Final Regulatory Flexibility Analysis (``FRFA'') has been 
prepared in accordance with the Regulatory Flexibility Act 
(``RFA'').\625\ It relates to amendments to Rules 3-10 and 3-16 of 
Regulation S-X, and corresponding amendments to certain other rules and 
forms to improve the disclosures of guarantors and issuers of 
guaranteed securities and issuers' affiliates whose securities 
collateralize securities.
---------------------------------------------------------------------------

    \625\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

A. Need for, and Objectives of, the Amendments

    The purpose of the amendments is to modernize and simplify Rules 3-
10 and 3-16 of Regulation S-X to better align the requirements of these 
rules with the needs of investors and reduce disclosure burdens on 
registrants. Specifically, the amendments modernize and simplify these 
rules by clarifying, consolidating, relocating and eliminating elements 
of these rules. These changes are intended to provide investors with 
information that is material to an investment decision, make the 
disclosures easier to understand, and reduce costs and burdens of these 
requirements on registrants. The amendments are discussed in more 
detail in Sections III through V, above. We discuss the economic impact 
and potential alternatives to the amendments in Section VIII (Economic 
Analysis), and the estimated compliance costs and burdens, of the 
amendments Section IX (Paperwork Reduction Act) above.

B. Significant Issues Raised by Public Comments

    In the Proposing Release, the Commission requested comment on any 
aspect of the Initial Regulatory Flexibility Analysis (``IRFA''), 
including how the proposed amendments could achieve their objective 
while lowering the burden on small entities, the number of small 
entities that would be affected by the proposed rule and form 
amendments, the existence or nature of the potential effects of the 
proposed amendments on small entities discussed in the analysis, and 
how to quantify the effects of the proposed amendments. We did not 
receive any comments that specifically addressed the IRFA. However, 
some commenters addressed aspects of the proposed rules that could 
potentially affect small entities. One commenter indicated that the 
costs and challenges of preparing condensed consolidating information 
currently required by Rule 3-10 is likely far greater for smaller 
reporting companies in comparison to larger companies, and that the 
proposed summarized financial information would be easier for issuers 
and guarantors to prepare and disclose.\626\ Another commenter agreed 
that the proposed amendments should apply to smaller reporting 
companies.\627\
---------------------------------------------------------------------------

    \626\ See letter from Freeport. Under Commission rules, most 
small entities would qualify as smaller reporting companies.
    \627\ See letter from Sullivan & Cromwell.
---------------------------------------------------------------------------

C. Small Entities Subject to the Amendments

    The amendments will apply to some registrants that are small 
entities. The RFA defines ``small entity'' to mean ``small business,'' 
``small organization,'' or ``small governmental jurisdiction.'' \628\ 
For purposes of the RFA, under our rules, a registrant, 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.\629\ An investment company, including a business development 
company,\630\ is considered to be a ``small business'' if it, together 
with other investment companies in the same group of related investment 
companies, has net assets of $50 million or less as of the end of its 
most recent fiscal year.\631\
---------------------------------------------------------------------------

    \628\ 5 U.S.C. 601(6).
    \629\ See 17 CFR 230.157 [Securities Act Rule 157] and 17 CFR 
240.0-10(a) [Exchange Act Rule 0-10(a)].
    \630\ Business development companies are a category of closed-
end investment company that are not registered under the Investment 
Company Act [15 U.S.C. 80a-2(a)(48) and 80a-53-64].
    \631\ See 17 CFR 270.0-10(a) [Investment Company Act Rule 0-
10(a)].
---------------------------------------------------------------------------

    Commission staff estimates that there are 1,171 registrants that 
file with the Commission, other than investment companies, that may be 
considered small entities.\632\ In addition, our staff estimates that, 
as of June 2019, there were 99 investment companies that may be 
considered small entities.\633\
---------------------------------------------------------------------------

    \632\ This estimate is based on staff analysis of EDGAR filings 
and related XBRL submissions made during the 2018 calendar year, and 
data from Compustat, and Audit Analytics.
    \633\ This estimate is derived from an analysis of data obtained 
from Morningstar Direct as well as data reported to the Commission 
for the period ending June 2019.
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

    As described in greater detail above, the amendments will simplify 
and update disclosure requirements of Rules 3-10 and 3-16 of Regulation 
S-X. For example, the amendments replace existing requirements that 
registrants must provide consolidating information

[[Page 21999]]

or separate financial statements with Summarized Financial Information, 
and allows registrants to present supplemental financial and non-
financial disclosure outside of the registrant's financial statements. 
We anticipate that the amendments will reduce reporting, recordkeeping, 
and other compliance burdens for all registrants, including small 
entities. As noted above, one commenter indicated that currently 
required disclosures are disproportionately burdensome for smaller 
reporting companies to produce.\634\ As a result, these companies may 
particularly benefit from any resulting decrease in compliance burdens. 
The professional skills necessary to comply with the amendments may 
include legal, accounting, and information technology skills.
---------------------------------------------------------------------------

    \634\ See letter from Freeport.
---------------------------------------------------------------------------

E. Agency Action To Minimize Effect on Small Entities

    The RFA directs us to consider alternatives that would accomplish 
our stated objectives, while minimizing any significant adverse impact 
on small entities. In connection with the 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.
    The amendments clarify, consolidate and simplify compliance and 
reporting requirements for small entities and other registrants. For 
example, the amendments streamline the five exceptions in existing 
Rules 3-10(b) through (f) by consolidating these elements into a single 
set of eligibility criteria that applies to all issuer and guarantor 
structures. The amendments also consolidate the requirements for the 
Revised Alternative Disclosures by including them in a single location 
in new Rule 13-01, as opposed to the existing requirements under Rule 
3-10 which are dispersed among multiple provisions in the rule. 
Similarly, the amendments simplify the requirements of existing Rule 3-
16 by replacing the current requirement to provide separate financial 
statements for each affiliate whose securities are pledged as 
collateral with a requirement to provide 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. As discussed above, the 
amendments are expected to reduce compliance burdens for all 
registrants, including small entities.\635\
---------------------------------------------------------------------------

    \635\ See supra Sections VIII (Economic Analysis) and IX 
(Paperwork Reduction Act).
---------------------------------------------------------------------------

    We do not believe that the amendments will impose any significant 
new compliance obligations. Moreover, we do not believe it is necessary 
to establish different compliance and reporting requirements or 
timetables or to exempt small entities from all or part of the 
amendments. Nevertheless, to minimize the initial compliance burden on 
all registrants we are adopting a transition period for compliance to 
mitigate any potential compliance burdens that registrants may 
experience in transitioning to the final rule amendments.\636\
---------------------------------------------------------------------------

    \636\ See supra Section VI (Transition to Final Amendments).
---------------------------------------------------------------------------

    Finally, with respect to using performance rather than design 
standards, the amendments use a combination of design and performance 
standards in order to promote uniform filing requirements for all 
registrants. We believe the final rules will be more beneficial to 
investors and registrants if there are specific uniform disclosure 
requirements that apply to all registrants. In addition, the amendments 
introduce more principles-based disclosure requirements that will 
provide registrants with increased flexibility to determine what 
information to disclose.

XI. Statutory Authority

    The amendments contained in this release are being adopted 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, 230, 239, 240, and 249

    Reporting and recordkeeping requirements, Securities.

Text of the Amendments

    For the reasons set out in the preamble, the Commission amends 
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 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; and
    (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:

[[Page 22000]]

    (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.

0
3. Amend Sec.  210.3-16 by adding introductory text to read as follows:


Sec.  210.3-16  Financial statements of affiliates whose securities 
collateralize an issue registered or being registered.

    The requirements of this section shall apply to each registered 
security issued and outstanding before January 4, 2021, unless the 
requirements of Sec.  210.13-02 apply.
* * * * *

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: The requirements of Sec.  210.3-16 or Sec.  
210.13-02 are applicable if a smaller reporting company's securities 
registered or being registered are collateralized by the securities of 
the smaller reporting company's affiliates. Section 210.13-02 must be 
followed unless Sec.  210.3-16 applies. The periods presented for 
purposes of compliance with Sec.  210.3-16 are those required by Sec.  
210.8-02.
* * * * *

0
5. Amend Sec.  210.8-03 by adding paragraphs (b)(6) and (7) before 
Instruction 1 to read as follows:


Sec.  210.8-03   Interim financial statements.

* * * * *
    (b) * * *
    (6) 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.
    (7) 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 guaranteed security subject to Section 13(a) or 15(d) 
of the Securities Exchange Act of 1934, and for each guaranteed 
security the offer and sale of which is being registered under the 
Securities Act of 1933, for which the registrant is the parent company 
(as that term is defined in Sec.  210.3-10(b)(1)) of one or more 
subsidiaries that issue or guarantee the guaranteed security, provide 
the following disclosures to the extent material:
    (1) A description 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 as 
follows, with an accompanying note that briefly describes the basis of 
presentation:
    (i) 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;
    (ii) Intercompany balances and transactions between issuers and 
guarantors whose summarized financial information is presented on a 
combined basis shall be eliminated;
    (iii) The summarized financial information shall exclude 
subsidiaries that are not issuers or guarantors. An issuer's or 
guarantor's investment in a subsidiary that is not an issuer or 
guarantor shall not be presented. An issuer's or guarantor's amounts 
due from, amounts due to, and transactions with any of the following 
shall be presented in separate line items:
    (A) Subsidiaries that are not issuers or guarantors; and
    (B) Related parties;
    (iv) If the information provided in response to the requirements of 
this

[[Page 22001]]

section (e.g., factors that may affect payments to holders of the 
guaranteed security) 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. In limited 
circumstances (i.e., where the separate financial information 
applicable to those issuers and/or guarantors can be easily explained 
and understood), narrative disclosure may be provided in lieu of the 
separate summarized financial information otherwise required by this 
paragraph (a)(4)(iv);
    (v) Disclose this summarized financial information as of and for 
the most recently ended fiscal year and year-to-date interim period 
included in the parent company's consolidated financial statements; and
    (vi) Notwithstanding that a parent company may omit this summarized 
financial information if not material, it may also be omitted if one of 
the following in paragraphs (a)(4)(vi)(A) through (D) of this section 
is true and disclosed. However, paragraph (a)(4)(vi)(A) does not apply 
if separate disclosure of summarized financial information applicable 
to one or more, but not all, issuers and/or guarantors is required by 
paragraph (a)(4)(iv) of this section. For the purposes of this section, 
a finance subsidiary is a subsidiary that has no assets or operations 
other than those related to the issuance, administration and repayment 
of the security being registered and any other securities guaranteed by 
its parent company:
    (A) The assets, liabilities and results of operations of the 
combined issuers and guarantors of the guaranteed security are not 
materially different than corresponding amounts presented in the 
consolidated financial statements of the parent company;
    (B) The combined issuers and guarantors, excluding investments in 
subsidiaries that are not issuers or guarantors, have no material 
assets, liabilities or results of operations;
    (C) The issuer is a finance subsidiary of the parent company, the 
parent company has fully and unconditionally guaranteed the security, 
and no other subsidiary of the parent company guarantees the security; 
or
    (D) The issuer is a finance subsidiary that co-issued the security, 
jointly and severally, with the parent company, and no other subsidiary 
of the parent company guarantees the security;
    (5) In a Securities Act registration statement filed in connection 
with the offer and sale of the guaranteed security, if the parent 
company acquired a significant business after the date of the parent 
company's most recent balance sheet included in its consolidated 
financial statements and the acquired business, one or more of the 
acquired business's subsidiaries, or the acquired business and one or 
more of its subsidiaries are issuers or guarantors of the guaranteed 
securities, disclose pre-acquisition summarized financial information 
as specified in paragraph (a)(4) of this section for each such issuer 
or guarantor. The acquired business is significant if it meets any of 
the conditions specified in the definition of significant subsidiary in 
Sec.  210.1-02(w), substituting 20 percent for 10 percent each place it 
appears therein, based on a comparison of the most recent annual 
financial statements of the acquired business and the parent company's 
most recent annual consolidated financial statements filed at or prior 
to the date of acquisition. The determination of whether a business has 
been acquired shall be made in accordance with the guidance set forth 
in Sec.  210.11-01(d). Acquisitions of a group of related businesses 
shall be treated as if they are a single business acquisition for 
purposes of this comparison. The determination of whether a group of 
businesses are related shall be made in a manner consistent with Sec.  
210.3-05(a)(3);
    (6) Any financial and narrative information about each guarantor if 
the information would be material for investors to evaluate the 
sufficiency of the guarantee; and
    (7) Sufficient information so as to make the financial and non-
financial information presented not misleading.
    (b) 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. 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.  
229.105 (Item 105 of Regulation S-K) of this chapter.


Sec.  210.13-02  Affiliates whose securities collateralize securities 
registered or being registered.

    The requirements of this section shall apply to each security 
registered or being registered that is issued on or after January 4, 
2021, and to each registered security issued and outstanding before 
January 4, 2021, for which the registrant had prior to that date 
provided the financial statements specified in Sec.  210.3-16.
    (a) For each security subject to Section 13(a) or 15(d) of the 
Securities Exchange Act of 1934, and for each security the offer and 
sale of which is being registered under the Securities Act of 1933, 
that is collateralized by a security of the registrant's affiliate or 
affiliates, provide the following disclosures to the extent material:
    (1) A description of the securities pledged as collateral and the 
affiliates whose securities are 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 
as follows, with an accompanying note that briefly describes the basis 
of presentation:
    (i) The summarized financial information of each such affiliate 
consolidated in the registrant's financial statements may be presented 
on a combined basis;
    (ii) Intercompany balances and transactions between affiliates 
whose summarized financial information is presented on a combined basis 
shall be eliminated;
    (iii) An affiliate's amounts due from, amounts due to, and 
transactions with any of the following shall be presented in separate 
line items:
    (A) The registrant;
    (B) Any of the registrant's subsidiaries not included in the 
summarized financial information of the affiliate(s); and
    (C) Related parties;
    (iv) If the information provided in response to the requirements of 
this section (e.g., the trading market for the affiliate's security 
pledged as collateral or a statement that there is no market) is 
applicable to one or more, but not all, affiliates, separately disclose 
the summarized financial information applicable to those affiliates. In 
limited circumstances (i.e., where the separate financial information 
applicable to those affiliates can be easily explained and understood), 
narrative disclosure may be provided in lieu of the separate summarized 
financial information

[[Page 22002]]

otherwise required by this paragraph (a)(4)(iv);
    (v) Disclose this summarized financial information as of and for 
the most recently ended fiscal year and year-to-date interim period 
included in the registrant's consolidated financial statements; and
    (vi) Notwithstanding that a registrant may omit this summarized 
financial information if not material, it may also be omitted if one of 
the following in paragraph (a)(4)(vi)(A) or (B) of this section is true 
and disclosed. However, paragraph (a)(4)(vi)(A) does not apply if 
separate disclosure of summarized financial information applicable to 
one or more, but not all, affiliates is required by paragraph 
(a)(4)(iv) of this section:
    (A) The assets, liabilities and results of operations of the 
combined affiliates whose securities are pledged as collateral are not 
materially different than the corresponding amounts presented in the 
consolidated financial statements of the registrant; or
    (B) The combined affiliates whose securities are pledged as 
collateral have no material assets, liabilities or results of 
operations;
    (5) In a Securities Act registration statement filed in connection 
with the offer and sale of the collateralized security, if the 
registrant acquired a significant business after the date of the 
registrant's most recent balance sheet included in its consolidated 
financial statements and the acquired business, one or more of the 
acquired business's subsidiaries, or the acquired business and one or 
more of its subsidiaries are affiliates whose securities collateralize 
the registrant's collateralized security, disclose pre-acquisition 
summarized financial information as specified in paragraph (a)(4) of 
this section for each such affiliate. The acquired business is 
significant if it meets any of the conditions specified in the 
definition of significant subsidiary in Sec.  210.1-02(w), substituting 
20 percent for 10 percent each place it appears therein, based on a 
comparison of the most recent annual financial statements of the 
acquired business and the registrant's most recent annual consolidated 
financial statements filed at or prior to the date of acquisition. The 
determination of whether a business has been acquired shall be made in 
accordance with the guidance set forth in Sec.  210.11-01(d). 
Acquisitions of a group of related businesses shall be treated as if 
they are a single business acquisition for purposes of this comparison. 
The determination of whether a group of businesses are related shall be 
made in a manner consistent with Sec.  210.3-05(a)(3);
    (6) Any financial and narrative information about each such 
affiliate if the information would be material for investors to 
evaluate the pledge of the affiliate's securities as collateral; and
    (7) Sufficient information so as to make the financial and non-
financial information presented not misleading.
    (b) 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. 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.  229.105 (Item 105 of Regulation 
S-K) of this chapter.

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, 78mm, 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.

* * * * *
    Instructions to Item 504: * * *
    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 Regulation S-
X, 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.
* * * * *

0
 10. Amend Sec.  229.601 by:
0
a. In the exhibit table in paragraph (a), adding entry 22; and
0
 b. Adding paragraph (b)(22).
    The revisions read as follows:


Sec.  229.601   (Item 601) Exhibits.

    (a) * * *

                                                                                          Exhibit Table
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                    Securities Act forms                                                     Exchange Act forms
                                                 -----------------------------------------------------------------------------------------------------------------------------------------------
                                                    S-1      S-3      SF-1     SF-3   S-4 \1\    S-8      S-11     F-1      F-3    F-4 \1\     10    8-K \2\    10-D     10-Q     10-K    ABS-EE
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
 
                                                                                          * * * * * * *
(22) Subsidiary guarantors and issuers of              X        X        X        X        X   .......       X        X        X        X        X   .......  .......       X        X   .......
 guaranteed securities and affiliates whose
 securities collateralize securities of the
 registrant.....................................
 
                                                                                          * * * * * * *
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ An exhibit need not be provided about a company if: (1) With respect to such company an election has been made under Form S-4 or F-4 to provide information about such company at a level
  prescribed by Form S-3 or F-3; and (2) the form, the level of which has been elected under Form S-4 or F-4, would not require such company to provide such exhibit if it were registering a
  primary offering.

[[Page 22003]]

 
\2\ A Form 8-K exhibit is required only if relevant to the subject matter reported on the Form 8-K report. For example, if the Form 8-K pertains to the departure of a director, only the
  exhibit described in paragraph (b)(17) of this section need be filed. A required exhibit may be incorporated by reference from a previous filing.

* * * * *
    (b) * * *
    (22) Subsidiary guarantors and issuers of guaranteed securities and 
affiliates whose securities collateralize securities of the registrant. 
List each of the entities in paragraphs (b)(22)(i) and (ii) of this 
section under an appropriately captioned heading that identifies the 
associated securities. An entity need not be listed more than once so 
long as its role as issuer, co-issuer, or guarantor of a guaranteed 
security and/or as affiliate whose security is pledged as collateral 
for a registrant's security is clearly indicated with respect to each 
applicable security:
    (i) For a registrant that is the parent company (as that term is 
defined in Sec.  210.3-10(b)(1) of this chapter) and subject to Sec.  
210.13-01 of this chapter, each of the registrant's subsidiaries that 
is a guarantor, issuer, or co-issuer of the guaranteed security subject 
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, or 
the offer and sale of which is being registered under the Securities 
Act of 1933; and
    (ii) For a registrant that is subject to Sec.  210.13-02 of this 
chapter, each of the registrant's affiliates whose security is pledged 
as collateral for the registrant's security subject to Section 13(a) or 
Section 15(d) of the Securities Exchange Act of 1934, or the offer and 
sale of which is being registered under the Securities Act of 1933. For 
each affiliate, also identify the security or securities pledged as 
collateral.
* * * * *

0
 11. 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 this part (Regulation S-K).
* * * * *

0
12. 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
13. 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
14. 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 section.
* * * * *

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

0
15. The general authority citation for part 230 continues to read as 
follows:

    Authority: 15 U.S.C. 77b, 77b note, 77c, 77d, 77f, 77g, 77h, 
77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o-
7 note, 78t, 78w, 78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-
30, and 80a-37, and Pub. L.

[[Page 22004]]

112-106, sec. 201(a), sec. 401, 126 Stat. 313 (2012), unless 
otherwise noted.
* * * * *

0
16. Amend Sec.  230.257 by adding paragraph (b)(7) to read as follows:


Sec.  230.257   Periodic and current reporting; exit report.

* * * * *
    (b) * * *
    (7) 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 Item (b)(7)(i) of Part F/S of Form 1-A (referenced in Sec.  239.90), 
Item 7(g)(1) of Part II of Form 1-K (referenced in Sec.  239.91), and 
Item 3(e) of Form 1-SA (referenced in Sec.  239.92), is exempt from the 
requirements of this paragraph (b).
* * * * *

PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

0
17. The general authority citation for part 239 continues 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 note, 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
18. 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
19. 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.

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
20. Amend Sec.  239.33 by designating the Note to paragraph (a)(5) as 
Note 1 to paragraph (a)(5) and revising newly designated Note 1 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 1 to paragraph (a)(5): In the situations described in 
paragraphs (a)(5)(iii) through (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
 21. Amend Form F-3 (referenced in Sec.  239.33) by designating the 
Note to Instruction I.A.5. under ``General Instructions'' as Note 1 and 
revising newly designated Note 1 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

[[Page 22005]]

subsidiary, security offerings may be registered on this Form if:
* * * * *

    Note 1: In the situation described in paragraphs I.A.5(iii) 
through (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
 22. Amend Form 1-A (referenced in Sec.  239.90) by:
0
a. Revising paragraph (b)(7) of Part F/S; and
0
b. Revising Item 17 of Part III.
    The revisions 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 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 definition of ``parent company'' is the same 
as in Rule 3-10(b)(1) of Regulation S-X, except that Rule 3-
10(b)(1)(ii) instead reads as follows: ``Is, or as a result of the 
subject offering statement will be, required to file reports with the 
Commission pursuant to Rule 257(b) of Regulation A (Sec. Sec.  230.251-
230.263), or is an Exchange Act reporting company.'' 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 offering statement 
on Form 1-A filed in connection with the offer and sale of the subject 
securities.
    (ii) Financial Statements of and Disclosures About Affiliates Whose 
Securities Collateralize an Issuance. The requirements of Rules 3-16 or 
13-02 of Regulation S-X are applicable if an issuer's securities that 
are qualified or being qualified pursuant to Regulation A are 
collateralized by the securities of the issuer's affiliates. Rule 13-02 
of Regulation S-X must be followed unless Rule 3-16 of Regulation S-X 
applies. The issuer may elect to provide the disclosures specified in 
Rule 13-02 of Regulation S-X 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.
* * * * *

Item 17. Description of Exhibits

    As appropriate, the following documents must be filed as exhibits 
to the offering statement.
* * * * *
    17. Subsidiary guarantors and issuers of guaranteed securities and 
affiliates whose securities collateralize securities of the issuer. 
List each of the entities in paragraphs (a) and (b) below under an 
appropriately captioned heading that identifies the associated 
securities. An entity need not be listed more than once so long as its 
role as issuer, co-issuer, or guarantor of a guaranteed security and/or 
as affiliate whose security is pledged as collateral for an issuer's 
security is clearly indicated with respect to each applicable security:
    (a) For an issuer that is the parent company (as that term is 
defined in paragraph (b)(7(i) of Part F/S) and subject to Sec.  210.13-
01 as described in paragraph (b)(7)(i) of Part F/S, each of the 
issuer's subsidiaries that is a guarantor, issuer, or co-issuer of the 
guaranteed security for which the issuer is required to file reports 
with the Commission pursuant to Rule 257(b) of Regulation A, or is an 
Exchange Act reporting company subject to Section 13(a) or Section 
15(d) of the Securities Exchange Act of 1934, or the offer and sale of 
which is qualified or being qualified pursuant to Regulation A; and
    (b) For an issuer that is subject to Sec.  210.13-02 as described 
in paragraph (b)(7)(i) of Part F/S, each of the issuer's affiliates 
whose security is pledged as collateral for the issuer's security for 
which the issuer is required to file reports with the Commission 
pursuant to Rule 257(b) of Regulation A, or is an Exchange Act 
reporting company subject to Section 13(a) or Section 15(d) of the 
Securities Exchange Act of 1934, or the offer and sale of which is 
qualified or being qualified pursuant to Regulation A. For each 
affiliate, also identify the security or securities pledged as 
collateral.
* * * * *

0
23. 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

* * * * *

[[Page 22006]]

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 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 definition of ``parent company'' is the 
same as in Rule 3-10(b)(1) of Regulation S-X, except that Rule 3-
10(b)(1)(ii) instead reads as follows: ``Is, or as a result of the 
subject offering statement will be, required to file reports with the 
Commission pursuant to Rule 257(b) of Regulation A (Sec. Sec.  230.251-
230.263), or is an Exchange Act reporting company.'' 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 2 of Part II of Form 1-K.
    (2) Financial Statements of and Disclosures About Affiliates Whose 
Securities Collateralize an Issuance. The requirements of Rules 3-16 or 
13-02 of Regulation S-X are applicable if an issuer's securities that 
are qualified or being qualified pursuant to Regulation A are 
collateralized by the securities of the issuer's affiliates. Rule 13-02 
of Regulation S-X must be followed unless Rule 3-16 of Regulation S-X 
applies. The issuer may elect to provide the disclosures specified in 
Rule 13-02 of Regulation S-X 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 2 of Part II of Form 1-K.
* * * * *

0
24. 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 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 definition of ``parent company'' is the same 
as in Rule 3-10(b)(1) of Regulation S-X, except that Rule 3-
10(b)(1)(ii) instead reads as follows: ``Is, or as a result of the 
subject offering statement will be, required to file reports with the 
Commission pursuant to Rule 257(b) of Regulation A (Sec. Sec.  230.251-
230.263), or is an Exchange Act reporting company.'' 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 1 of Form 1-SA.
    (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 1 of 
Form 1-SA.

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
25. The general authority citation for part 240 continues 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, 78dd, 78ll, 78mm, 
80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 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; Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-
106, secs. 503 and 602, 126 Stat. 326 (2012), unless otherwise 
noted.
* * * * *

0
26. 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
 27. 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,

[[Page 22007]]

129 Stat. 1312 (2015), unless otherwise noted.
* * * * *

0
28. Amend Form 20-F (referenced in Sec.  249.220f) by:
0
a. Revising Instruction 1 to Item 8;
0
b. Revising Instruction 17 to the ``Instructions as to Exhibits''; and
0
c. Reserving Instructions 18 through 100 under ``Instructions as to 
Exhibits''.
    The revisions 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

* * * * *

Item 8. Financial Information

* * * * *

Instructions to Item 8:

    1. This item refers to the company, but note that under Rules 3-05, 
3-09, 3-10, 3-14, 3-16, 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.
* * * * *

Item 19. Exhibits.

* * * * *
INSTRUCTIONS AS TO EXHIBITS
* * * * *
    17. Subsidiary guarantors and issuers of guaranteed securities and 
affiliates whose securities collateralize securities of the registrant. 
List each of the entities in paragraphs (a) and (b) below under an 
appropriately captioned heading that identifies the associated 
securities. An entity need not be listed more than once so long as its 
role as issuer, co-issuer, or guarantor of a guaranteed security and/or 
as affiliate whose security is pledged as collateral for a registrant's 
security is clearly indicated with respect to each applicable security:
    (a) For a registrant that is the parent company (as that term is 
defined in Sec.  210.3-10(b)(1)) and subject to Sec.  210.13-01, each 
of the registrant's subsidiaries that is a guarantor, issuer, or co-
issuer of the guaranteed security subject to Section 13(a) or 15(d) of 
the Securities Exchange Act of 1934, or the offer and sale of which is 
being registered under the Securities Act of 1933; and
    (b) For a registrant that is subject to Sec.  210.13-02, each of 
the registrant's affiliates whose security is pledged as collateral for 
the registrant's security subject to Section 13(a) or Section 15(d) of 
the Securities Exchange Act of 1934, or the offer and sale of which is 
being registered under the Securities Act of 1933. For each affiliate, 
also identify the security or securities pledged as collateral.
    18 through 100 [Reserved]
* * * * *

    By the Commission.

    Dated: March 2, 2020.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020-04776 Filed 4-17-20; 8:45 am]
BILLING CODE 8011-01-P

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