49630 Federal Register / Vol. 83, No. 191 / Tuesday, October 2, 2018 / Proposed Rules 

1 17 CFR 210.1–01 through 210.13.02. 

2 17 CFR 229.10 through 229.1208. 

3 15 U.S.C. 77a et seq. 

4 15 U.S.C. 78a et seq. 

SECURITIES AND EXCHANGE 

COMMISSION 

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

249 

[Release No. 33–10526; 34–83701; File No. 

S7–19–18] 

RIN 3235–AM12 

Financial Disclosures About 

Guarantors and Issuers of Guaranteed 

Securities and Affiliates Whose 

Securities Collateralize a Registrant’s 

Securities 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Proposed rule. 

SUMMARY: We are proposing 

amendments to the financial disclosure 

requirements for guarantors and issuers 

of guaranteed securities registered or 

being registered, and issuers’ affiliates 

whose securities collateralize securities 

registered or being registered in 

Regulation S–X to improve those 

requirements for both investors and 

registrants. The proposed changes are 

intended to provide investors with 

material information given the specific 

facts and circumstances, make the 

disclosures easier to understand, and 

reduce the costs and burdens to 

registrants. In addition, by reducing the 

costs and burdens of compliance, 

issuers may be encouraged to offer 

guaranteed or collateralized securities 

on a registered basis, thereby affording 

investors protection they may not be 

provided in offerings conducted on an 

unregistered basis. Finally, by making it 

less burdensome and less costly for 

issuers to include guarantees or pledges 

of affiliate securities as collateral when 

they structure debt offerings, the 

proposed revisions may increase the 

number of registered offerings that 

include these credit enhancements, 

which could result in a lower cost of 

capital and an increased level of 

investor protection. 

DATES: Comments should be received on 

or before December 3, 2018. 

ADDRESSES: Comments may be 

submitted by any of the following 

methods: 

Electronic Comments 

• Use our internet comment form 

(http://www.sec.gov/rules/other.shtml); 

or 

• Send an email to rule-comments@

sec.gov. Please include File Number S7– 

19–18 on the subject line. 

Paper Comments 

• Send paper comments to Brent J. 

Fields, Secretary, Securities and 

Exchange Commission, 100 F Street NE, 

Washington, DC 20549–1090. 

All submissions should refer to File 

Number S7–19–18. This file number 

should be included on the subject line 

if email is used. To help us process and 

review your comments more efficiently, 

please use only one method of 

submission. We will post all comments 

on our website (http://www.sec.gov/ 

rules/other.shtml). Comments also are 

available for website viewing and 

printing in our Public Reference Room, 

100 F Street NE, Washington, DC 20549, 

on official business days between the 

hours of 10:00 a.m. and 3:00 p.m. All 

comments received will be posted 

without change. Persons submitting 

comments are cautioned that we do not 

redact or edit personal identifying 

information from comment submissions. 

You should submit only information 

that you wish to make publicly 

available. 

We or the staff may add studies, 

memoranda, or other substantive items 

to the comment file during this 

rulemaking. A notification of the 

inclusion in the comment file of any 

such materials will be made available 

on our website. To ensure direct 

electronic receipt of such notifications, 

sign up through the ‘‘Stay Connected’’ 

option at www.sec.gov to receive 

notifications by email. 

FOR FURTHER INFORMATION CONTACT: 

Jarrett Torno, Assistant Chief 

Accountant, at (202) 551–3400, or John 

Fieldsend, Special Counsel, at (202) 

551–3430, in the Division of 

Corporation Finance, 100 F Street NE, 

Washington, DC 20549. 

SUPPLEMENTARY INFORMATION: The 

Commission is proposing to amend 

Commission reference CFR citation 

(17 CFR) 

Regulation S–X: 1

Rule 3–10 ....................... 210.3–10 

Rule 3–16 ....................... 210.3–16 

Rule 8–01 ....................... 210.8–01 

Rule 8–03 ....................... 210.8–03 

Rule 10–01 ..................... 210.10–01 

Rule 13–01 ..................... 210.13–01 

Rule13–02 ...................... 210.13–02 

Regulation S–K: 2

Item 504 ......................... 229.504 

Item 1100 ....................... 229.1100 

Item 1112 ....................... 229.1112 

Item 1114 ....................... 229.1114 

Item 1115 ....................... 229.1115 

Securities Act of 1933 (Securities Act): 3

Form F–1 ....................... 239.31 

Form F–3 ....................... 239.33 

Commission reference CFR citation 

(17 CFR) 

Form 1–A ....................... 239.90 

Form 1–K ....................... 239.91 

Form 1–SA ..................... 239.92 

Securities Exchange Act of 

1934 (Exchange Act): 4

Rule 12h–5 ..................... 240.12h–5 

Form 20–F ..................... 249.220f 

Table of Contents 

I. Introduction 

A. Background 

B. Scope of Proposals 

II. Rule 3–10 of Regulation S–X 

A. Background 

B. Overview of the Existing Requirements 

C. Parent Company Financial Statements 

D. 100% Owned 

E. Full and Unconditional Guarantees 

F. Exceptions 

G. Consolidating Information 

H. Securities to Which Rule 3–10 Applies 

I. Recently-Acquired Subsidiary Issuers 

and Guarantors 

J. Exchange Act Reporting Requirements 

III. Proposed Amendments to Rule 3–10 and 

Partial Relocation to Rule 13–01 

A. Overarching Principle 

B. Overview of the Proposed Amendments 

C. Conditions To Omit the Financial 

Statements of a Subsidiary Issuer or 

Guarantor 

1. Eligibility Conditions 

a. Parent Company Financial Statements 

Condition 

b. Consolidated Subsidiary Condition 

c. Debt or Debt-Like Securities Condition 

d. Eligible Issuer and Guarantor Structures 

Condition 

i. Role of Parent Company 

(A) Parent Company Obligation Is Not 

Limited or Conditional 

(B) Parent Company as Issuer or Co-Issuer 

(C) Parent Company as Full and 

Unconditional Guarantor 

ii. Role of Subsidiary Guarantors 

(A) Subsidiary Guarantee Release 

Provisions 

iii. Treatment of Currently Eligible Issuer 

and Guarantor Structures Under 

Proposed Rule 3–10 

(A) Finance Subsidiary Issuer of Securities 

Guaranteed by Its Parent Company 

(B) Obligated Parent Company and Single 

Obligated Subsidiary 

(C) Obligated Parent Company and 

Multiple Obligated Subsidiaries 

2. Disclosure Requirements 

a. Financial Disclosures 

i. Level of Detail 

ii. Presentation on a Combined Basis 

iii. Periods to Present 

b. Non-Financial Disclosures 

c. When Disclosure Is Required 

d. Location of Proposed Alternative 

Disclosures and Audit Requirement 

e. Recently-Acquired Subsidiary Issuers 

and Guarantors 

f. Continuous Reporting Obligation 

D. Application of Proposed Amendments 

to Certain Types of Issuers 

1. Foreign Private Issuers 

2. Smaller Reporting Companies 


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Federal Register / Vol. 83, No. 191 / Tuesday, October 2, 2018 / Proposed Rules 49631 

5The identity of the parent company depends on 

the particular corporate structure. See additional 

discussion in Section II.C, ‘‘Parent Company 

Financial Statements Condition.’’ 

6Proposed 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. 

7The 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. 

8Release No. 33–9929 (Sept. 25, 2015) [80 FR 

59083 (Oct. 1, 2015)]. 

9Comments that we received in response to the 

Request for Comment are available at https://

www.sec.gov/comments/s7-20-15/s72015.shtml. 

References to comment letters in this release refer 

to the comments on the Request for Comment 

unless otherwise specified. 

10See, e.g., letters from Association of the Bar of 

the City of New York (Nov. 30, 2015) (‘‘AB–NYC’’); 

Anuradha RK (Nov. 23, 2015) (‘‘Anuradha’’); BDO 

USA, LLP (Dec. 7, 2015) (‘‘BDO’’); Cahill Gordon & 

Reindel LLP (Nov. 30, 2015) (‘‘Cahill’’); California 

Public Employees’ Retirement System (Nov. 30, 

2015) (‘‘CalPERS’’); Center for Audit Quality (Nov. 

25, 2015) (‘‘CAQ’’); CFA Institute (Mar. 2, 2016) 

(‘‘CFA’’); Comcast Corporation (Dec. 11, 2015) 

(‘‘Comcast’’); Covenant Review, LLC (Nov. 30, 2015) 

(‘‘Covenant’’); Davis Polk & Wardwell LLP (Nov. 30, 

2015) (‘‘Davis Polk’’); Deloitte & Touche LLP (Nov. 

23, 2015) (‘‘DT’’); Ernst & Young LLP (Nov. 20, 

2015) (‘‘EY’’); FedEx Corporation (‘‘Nov. 30, 2015) 

(‘‘FedEx’’); General Motors Company (Nov. 30, 

2015) (‘‘GM’’); Grant Thornton LLP (Dec. 1, 2015) 

(‘‘Grant’’); Headwaters Incorporated (Nov. 30, 2015) 

(‘‘Headwaters’’); KPMG LLP (Nov. 30, 2015) 

(‘‘KPMG’’); Medtronic plc (Nov. 30, 2015) 

(‘‘Medtronic’’); Noble Corporation plc (Dec. 1, 2015) 

(‘‘Noble-UK’’); PricewaterhouseCoopers LLP (Nov. 

30, 2015) (‘‘PwC’’); RSM US LLP (Nov. 30, 2015) 

(‘‘RSM’’); Securities Industry and Financial Markets 

Association (Nov. 30, 2015) (‘‘SIFMA’’); Simpson 

Thacher & Bartlett LLP (Nov. 30, 2015) 

(‘‘Simpson’’); U.S. Chamber of Commerce, Center 

for Capital Markets Competitiveness (Nov. 30, 2015) 

(‘‘Chamber’’); and WhiteWave Foods Company 

(Nov. 30, 2015) (‘‘WhiteWave’’). 

11See, e.g., letters from Anuradha, BDO, Cahill, 

CalPERS, CAQ, CFA, Covenant, Davis Polk, DT, EY, 

KPMG, PwC, SIFMA, and Chamber. 

12See letter from Disclosure Effectiveness 

Working Group of the Federal Regulation of 

Securities Committee and the Law and Accounting 

Committee of the Business Law Section of the 

American Bar Association (Nov. 14, 2014) (‘‘ABACommittees’’), https://www.sec.gov/comments/ 

Continued 

3. Offerings Pursuant to Regulation A 

4. Issuers of Asset-Backed Securities— 

Third Party Financial Statements 

IV. Rule 3–16 of Regulation S–X 

V. Proposed Amendments to Rule 3–16 and 

Relocation to Rule 13–02 

A. Overarching Principle 

B. Overview of the Proposed Changes 

C. Financial Disclosures 

1. Level of Detail 

2. Presentation on a Combined Basis 

3. Periods to Present 

D. Non-Financial Disclosures 

E. When Disclosure Is Required 

F. Application of Proposed Amendments to 

Certain Types of Issuers 

1. Foreign Private Issuers 

2. Smaller Reporting Companies 

3. Offerings Pursuant to Regulation A 

VI. General Request for Comment 

VII. Economic Analysis 

A. Introduction 

B. Baseline and Affected Parties 

1. Market Participants 

2. Market Conditions 

C. Anticipated Economic Effects 

1. Proposed Amendments to Rule 3–10 and 

Partial Relocation to Rule 13–01 

a. Eligibility Conditions To Omit Financial 

Statements of Subsidiary Issuer or 

Guarantor 

b. Disclosure Requirements 

i. Financial and Non-Financial Disclosures 

ii. When Disclosure Is Required 

iii. Location of Proposed Alternative 

Disclosures and Audit Requirement 

iv. Recently Acquired Subsidiary Issuers 

and Guarantors 

v. Continuous Reporting Obligation 

2. Proposed Amendments to Rule 3–16 and 

Relocation to Rule 13–02 

a. Financial Disclosures 

i. Level of Detail 

ii. Presentation on a Combined Basis 

iii. Periods to Present 

b. Non-Financial Disclosures 

c. When Disclosure Is Required 

D. Anticipated Effects on Efficiency, 

Competition, and Capital Formation 

E. Consideration of Reasonable 

Alternatives 

1. Alternative to Proposed Amendments to 

Existing Rule 3–10 

2. Alternatives Common to Proposed 

Amendments to Existing Rule 3–10 and 

Existing Rule 3–16 

F. Request for Comment 

VIII. Paperwork Reduction Act 

A. Background 

B. Summary of the Proposed Amendments 

Impact on Collection of Information 

1. Rule 3–10 

2. Rule 3–16 

C. Burden and Cost Estimates for the 

Proposed Amendments 

D. Request for Comment 

IX. Small Business Regulatory Enforcement 

Fairness Act 

X. Initial Regulatory Flexibility Act Analysis 

A. Reasons for, and Objectives of, the 

Proposing Action 

B. Legal Basis 

C. Small Entities Subject to the Proposed 

Rules 

D. Reporting, Recordkeeping, and Other 

Compliance Requirements 

E. Duplicative, Overlapping, or Conflicting 

Federal Rules 

F. Significant Alternatives 

G. Request for Comment 

XI. Statutory Authority 

Text of Proposed Rule and Form 

Amendments 

I. Introduction 

A. Background 

We are proposing changes to the 

disclosure requirements in Rules 3–10 

and 3–16 of Regulation S–X to better 

align those requirements with the needs 

of investors and to simplify and 

streamline the disclosure obligations of 

registrants. Rule 3–10 requires financial 

statements to be filed for all issuers and 

guarantors of securities that are 

registered or being registered, but also 

provides several exceptions to that 

requirement. These exceptions are 

typically available for individual 

subsidiaries of a parent company 5 when 

certain conditions are met and the 

consolidated financial statements of that 

parent company are filed. Rule 3–16 

requires a registrant to provide separate 

financial statements for each affiliate 

whose securities constitute a substantial 

portion of the collateral for any class of 

registered securities as if the affiliate 

were a separate registrant. The changes 

we are proposing include amending 

both rules and relocating part of Rule 3– 

10 and all of Rule 3–16 to new Rules 

13–01 and 13–02 in Regulation S–X, 

respectively.6 These changes are 

intended to provide investors with the 

information that is material given the 

specific facts and circumstances, make 

the disclosures easier to understand, 

and reduce the costs and burdens to 

registrants. 

This proposal results from an 

ongoing, comprehensive evaluation of 

our disclosure requirements.7 As part of 

that evaluation, in September 2015, the 

Commission issued a Request for 

Comment on the Effectiveness of 

Financial Disclosures About Entities 

Other Than the Registrant (‘‘Request for 

Comment’’).8 The Request for Comment 

sought feedback on, among other things, 

the financial disclosure requirements in 

Regulation S–X for certain entities other 

than the registrant, including the 

requirements in Rules 3–10 and 3–16. 

More specifically, the Commission 

solicited comment on how investors use 

the disclosures required by these rules 

to make investment decisions; the 

challenges that registrants face in 

providing the required disclosures; and 

potential changes to these requirements 

that could enhance the information 

provided to investors and promote 

efficiency, competition, and capital 

formation. 

In response, we received 

approximately 50 comment letters.9

About half of these comment letters 

addressed Rule 3–10,10 and nearly as 

many addressed Rule 3–16.11

Additionally, prior to issuing the 

Request for Comment, one comment 

letter was submitted, in response to the 

staff’s Disclosure Effectiveness 

Initiative, that addressed Rules 3–10 

and 3–16.12 These comments were 


amozie on DSK3GDR082PROD with PROPOSALS2
49632 Federal Register / Vol. 83, No. 191 / Tuesday, October 2, 2018 / Proposed Rules 

disclosure-effectiveness/ 

disclosureeffectiveness.shtml. 13Until 2000, the disclosure requirements for 

guarantors and issuers of guaranteed securities 

registered or being registered and those for affiliates 

whose securities collateralized securities registered 

or being registered were included in the same rule. 

The Commission separated those disclosure 

requirements in 2000 because of the significant 

change made to the structure and substance of the 

disclosure requirements for guarantors and issuers 

of guaranteed securities registered or being 

registered. See Financial Statements and Periodic 

Reports for Related Issuers and Guarantors, Release 

No. 33–7878 (Aug. 4, 2000) [65 FR 51691 (Aug. 24, 

2000)] (‘‘2000 Release’’). The Commission kept 

these new disclosure requirements in Rule 3–10 

and moved the disclosure requirements for affiliates 

whose securities collateralize securities registered 

or being registered to new Rule 3–16. The substance 

of the requirements moved to Rule 3–16 were 

unchanged. See Separate Financial Statements 

Required by Regulation S–X, Release No. 33–6359 

(Nov. 6, 1981) [46 FR 56171 (Nov. 16, 1981)]. 

14 In practice, pledges of affiliate securities as 

collateral are almost always for debt securities. 

However, the requirements of Rule 3–16 are 

applicable to any security registered or being 

registered, whether or not in the form of debt. 15The proposed amendments will not affect the 

presentation of registrants’ consolidated financial 

statements prepared in accordance with U.S. GAAP 

or International Financial Reporting Standards 

(‘‘IFRS’’) as issued by the International Accounting 

Standards Board in registration statements and 

Exchange Act periodic reports, such as Form 10– 

K. The proposed amendments are focused on the 

supplemental information about subsidiary issuers 

and guarantors as well as affiliates whose securities 

are pledged as collateral. 

16 In a recent report to Congress, the 

Commission’s Division of Economic Risk Analysis 

determined that capital raising activity in the 

registered debt market was approximately $1.3 

trillion in 2016. See U.S. Sec. & Exch. Comm’n, Div. 

of Econ. & Risk Analysis, Access to Capital and 

Market Liquidity 96 (Aug. 2017) [hereinafter Access 

to Capital and Market Liquidity Report], https://

www.sec.gov/files/access-to-capital-and-marketliquidity-study-2017.pdf. In 2016, debt offerings 

under Securities Act Rule 144A raised 

approximately $562.8 billion, based on staff 

analysis of data from the SDC Platinum (Thomson 

Reuters) database. 

17Currently, registrants often structure debt 

agreements to release affiliate securities pledged as 

collateral if the disclosure requirements of Rule 3– 

16 would be triggered, thereby depriving investors 

of that collateral protection. See additional 

discussion below. Registrants may cease structuring 

offerings to release such collateral if disclosure 

burdens are reduced by the proposed amendments, 

which would benefit investors. 

18Rule 3–10 exceptions are available to issuers 

and guarantors of guaranteed securities that are 

‘‘debt or debt-like.’’ The 2000 Release stated, in 

part, ‘‘[t]he characteristics that identify a guaranteed 

security as debt or debt-like for this purpose are: the 

issuer has a contractual obligation to pay a fixed 

sum at a fixed time; and where the obligation to 

make such payments is cumulative, a set amount 

of interest must be paid.’’ See Section III.A.4 of the 

2000 Release and additional discussion in Section 

II.H, ‘‘Securities to which Rule 3–10 Applies.’’ 

19See Section 2(a)(1) of the Securities Act. 

20These 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. 

21The 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. 

22A foreign private issuer need only provide 

interim period disclosure in certain registration 

statements. 

23See 15 U.S.C. 78o(d). 

24The 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. 

25See Section I of the 2000 Release. 

26Parent company consolidated financial 

statements must be filed in all instances where the 

omission of financial statements of subsidiary 

issuers and guarantors are permitted under existing 

Rule 3–10. See paragraph (4) in each of Rules 3– 

10(b)–(f). 

27Typically, all of a parent company’s 

subsidiaries support the parent company’s debtpaying ability. However, in the event of default, the 

holders of debt without the benefit of guarantees are 

comparatively disadvantaged. In the event of 

default, a holder of a debt security issued by a 

parent company can make claims for payment 

directly against the issuer and guarantors. The 

assets of non-issuer and non-guarantor subsidiaries 

typically would be accessible only by the holder 

indirectly through a bankruptcy proceeding. In such 

a proceeding, without a direct guarantee, the claims 

of the holder would be structurally subordinate to 

the claims of other creditors, including trade 

creditors of the non-issuer and non-guarantor 

subsidiaries. 

28 Debt-paying activities typically include, but are 

not limited to, the use of the subsidiary issuer’s and 

guarantor’s assets and the timing and amount of 

distributions. 

29A parent company that prepares its financial 

statements in accordance with U.S. Generally 

considered carefully in developing these 

proposals. 

B. Scope of Proposals 

We are proposing changes to the 

disclosure requirements contained in 

Rules 3–10 and 3–16. These rules 

represent a discrete, but important, 

subset of the Regulation S–X disclosure 

requirements.13 Both rules affect 

disclosures made in connection with 

registered debt offerings 14 and 

subsequent periodic reporting.15 We 

believe that revising these rules would 

reduce the cost of compliance for 

registrants and encourage potential 

issuers to conduct registered debt 

offerings or private offerings with 

registration rights. The proposed 

amendments would benefit investors by 

simplifying and streamlining the 

disclosure provided to them about 

registered transactions and improve 

transparency in the market to the extent 

more offerings are registered.16 In 

addition, if the proposed changes 

reduce the burden associated with 

providing guarantees or pledges of 

affiliate securities as collateral,17

investors may benefit from access to 

more registered offerings that are 

structured to include such 

enhancements and, accordingly, the 

additional protections that come with 

Section 11 liability for disclosures made 

in those offerings. 

II. Rule 3–10 of Regulation S–X 

A. Background 

A guarantee of a debt or debt-like 

security (‘‘debt security’’) 18 is a separate 

security under the Securities Act 19 and, 

as a result, offers and sales of these 

guarantees 20 must be either registered 

or exempt from registration. If the offer 

and sale is registered, the issuer of the 

debt security and the guarantor 21 must 

each file its own audited annual and 

unaudited interim 22 financial 

statements required by Regulation S–X. 

Additionally, the offer and sale of the 

securities pursuant to a Securities Act 

registration statement causes the issuer 

and guarantor to become subject to 

reporting under Section 15(d) of the 

Exchange Act.23 Reporting under 

Section 15(d) requires filing periodic 

reports that include audited annual and 

unaudited interim financial statements 

for at least the fiscal year in which the 

related Securities Act registration 

statement became effective.24

When the Commission amended Rule 

3–10 in 2000, it recognized that ‘‘[t]here 

are circumstances, however, where full 

Securities Act and Exchange Act 

disclosure by both the issuer and the 

guarantors may not be useful to an 

investment decision and, therefore, may 

not be necessary.’’ 25 Common examples 

are when: (1) A parent company offers 

its own securities that its subsidiary 

guarantees; and (2) a subsidiary offers 

securities that its parent company fully 

and unconditionally guarantees. In 

these and similar situations, in which a 

parent company and one or more of its 

subsidiaries serve as issuers and/or 

guarantors of guaranteed securities, we 

believe the disclosure requirements 

generally have been guided by an 

overarching principle: The consolidated 

financial statements of the parent 

company are the principal source of 

information for investors when 

evaluating the debt security and its 

guarantee together.26 This principle is 

grounded in the idea that the 

investment is in the consolidated 

enterprise when: (1) The parent 

company is fully obligated as either 

issuer or full and unconditional 

guarantor of the security; 27 (2) the 

parent company controls each 

subsidiary issuer and guarantor, 

including having the ability to direct all 

debt-paying activities; 28 and (3) the 

financial information of each subsidiary 

issuer and guarantor is included as part 

of the consolidated financial statements 

of the parent company.29 In these 


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Federal Register / Vol. 83, No. 191 / Tuesday, October 2, 2018 / Proposed Rules 49633 

Accepted Accounting Principles (‘‘U.S. GAAP’’), 

would apply Accounting Standards Codification 

(‘‘ASC’’) 810, Consolidation, in determining 

whether to consolidate a subsidiary issuer or 

guarantor. A parent company that qualifies as a 

foreign private issuer and prepares its financial 

statements in accordance with IFRS would apply 

IFRS 10, Consolidated Financial Statements. 

30See Rules 3–10(b)–(f) of Regulation S–X. See 

Section II.F, ‘‘Exceptions,’’ below. 

31See Section III.C.1 of the 2000 Release and 

additional discussion in Section II.J, ‘‘Exchange Act 

Reporting Requirements.’’ 

32Rule 3–10(g) of Regulation S–X. 

33See Section III.A.6. of the 2000 Release. 

34The three conditions for an entity to be 

considered the ‘‘parent company’’ are that the 

entity: (1) Is an issuer or guarantor of the subject 

securities; (2) is an Exchange Act reporting 

company, or will become one as a result of the 

subject Securities Act registration statement; and (3) 

owns 100% of each subsidiary issuer or guarantor 

directly or indirectly. See id. A number of examples 

illustrating when an entity is or is not the parent 

company were included in an appendix to the 2000 

Release. See id. at Appendix C. 

35The 2000 Release states that ‘‘[u]nincorporated 

entities operate differently than corporations. For 

example, in a limited liability corporation, the 

ability to vote can be separated from the ability to 

manage the financial affairs of the entity.’’ See 

Section III.A.1.a.ii of the 2000 Release. In 

recognition of such differences, separate definitions 

of 100% owned were included in existing Rule 3– 

10(h)(1) for corporate and non-corporate entities. 

36See Section III.A.1.a.i.(A) of the 2000 Release. 

37See id. 

38For example, a guarantee is not full and 

unconditional if it is not operative until some time 

after default or if the amount the guarantor is 

obligated to pay differs from the amount the issuer 

must pay. As the payment obligation does not fall 

uniformly across the issuer and related guarantors 

before enforceability of the guarantee, each party in 

that structure must provide separate financial 

statements. See Section III.A.1.b.i. of the 2000 

Release. However, a guarantee can meet the full and 

unconditional condition if it has a fraudulent 

conveyance ‘‘savings clause,’’ such as the guarantee 

being limited to the maximum amount that can be 

guaranteed without constituting a fraudulent 

conveyance or fraudulent transfer under applicable 

insolvency laws, or if the guarantee is enforceable 

to the fullest extent of the law. See Section 

III.A.1.b.ii. of the 2000 Release. Additionally, a 

guarantee can be full and unconditional even if it 

has different subordination terms than the 

guaranteed securities. For example, a parent 

company’s guarantee can be full and unconditional 

if the subsidiary’s debt obligation ranks senior to all 

of its other debt and the parent company’s 

guarantee ranks junior to other debt obligations of 

the parent company. While different subordination 

terms may mean the guaranteed security holders 

have different rights in the priority of payment with 

respect to the issuer and guarantor, both the issuer 

and guarantor remain fully liable to holders for all 

amounts due under the guaranteed security. See 

Section III.A.1.b.iii. of the 2000 Release. 

circumstances, we believe full 

Securities Act and Exchange Act 

disclosures for each subsidiary issuer 

and guarantor are generally not material 

for an investor to make an informed 

investment decision about a guaranteed 

security. Instead, we believe 

information included in the 

consolidated disclosures about the 

parent company, as supplemented with 

details about the issuers and guarantors, 

is sufficient. These disclosures help an 

investor understand how the 

consolidated entities within the 

enterprise support the obligation. 

B. Overview of the Existing 

Requirements 

Rule 3–10(a) states the general rule 

that every issuer of a registered security 

that is guaranteed and every guarantor 

of a registered security must file the 

financial statements required for a 

registrant by Regulation S–X. The rule 

also sets forth five exceptions to this 

general rule.30 Each exception specifies 

conditions that must be met, including, 

in each case, that the parent company 

provide certain disclosures 

(‘‘Alternative Disclosures’’). If the 

conditions are met, separate financial 

statements of each qualifying subsidiary 

issuer and guarantor may be omitted. 

Only one of the five exceptions can 

apply to any particular offering and the 

subsequent Exchange Act reporting. 

Two primary conditions, included in 

each of the exceptions, must be satisfied 

for a subsidiary issuer or guarantor to be 

eligible to omit its separate financial 

statements: 

• Each subsidiary issuer and 

guarantor must be ‘‘100% owned’’ by 

the parent company; and 

• each guarantee must be ‘‘full and 

unconditional.’’ 

The form and content of the 

Alternative Disclosures are determined 

based on the facts and circumstances 

and can range from a brief narrative to 

highly-detailed condensed 

consolidating financial information 

(‘‘Consolidating Information’’). 

Subsidiary issuers and guarantors that 

are permitted to omit their separate 

financial statements under Rule 3–10 

are also automatically exempt from 

Exchange Act reporting under Exchange 

Act Rule 12h–5. The parent company, 

however, must continue to provide the 

Alternative Disclosures for as long as 

the guaranteed securities are 

outstanding.31

Recently acquired subsidiary issuers 

and guarantors are addressed separately 

within Rule 3–10. Rule 3–10(g) 32

requires the Securities Act registration 

statement of a parent company filed in 

connection with issuing guaranteed debt 

securities to include one year of 

audited, and, if applicable, unaudited 

interim pre-acquisition financial 

statements for recently-acquired 

subsidiary issuers and guarantors that 

are significant and have not been 

reflected in the parent company’s 

audited results for at least nine months 

of the most recent fiscal year. 

C. Parent Company Financial 

Statements 

Each of the exceptions in Rule 3–10 

requires the parent company to file its 

financial statements, but Rule 3–10 does 

not address when an issuer or guarantor 

is, in fact, the ‘‘parent company’’ 

because, as noted in the 2000 Release, 

the identity of the parent company will 

vary based on the particular corporate 

structure.33 The 2000 Release identified 

three conditions that must be met before 

an entity can be considered the ‘‘parent 

company’’ for purposes of Rule 3–10, 

including that the entity owns 100% of 

each subsidiary issuer or guarantor 

directly or indirectly.34

D. 100% Owned 

Rule 3–10(h)(1) defines a subsidiary 

as ‘‘100% owned’’ if all of its 

outstanding voting shares are owned, 

either directly or indirectly, by its 

parent company. A subsidiary not in 

corporate form is ‘‘100% owned’’ if the 

sum of all interests are owned, either 

directly or indirectly, by its parent 

company, except that the following are 

not included in the sum of all interests 

owned: (1) Securities that are 

guaranteed by its parent, and, if 

applicable, other 100%-owned 

subsidiaries of its parent; and (2) 

securities that guarantee securities 

issued by its parent and, if applicable, 

other 100%-owned subsidiaries of its 

parent.35 This condition was adopted so 

the risks associated with an investment 

in the parent company and its 

subsidiary would be ‘‘identical.’’ 36 A 

subsidiary issuer or guarantor with any 

third party ownership interest would 

fail to meet this condition and not be 

eligible for an exception in Rule 3–10. 

This condition would also not be met if 

a subsidiary issued securities 

convertible into its voting securities to 

someone other than the parent 

company.37

E. Full and Unconditional Guarantees 

Rule 3–10(h)(2) defines a guarantee as 

‘‘full and unconditional’’ if, when an 

issuer of a guaranteed security has failed 

to make a scheduled payment, the 

guarantor is obligated to make the 

scheduled payment immediately and, if 

the guarantor does not, any holder of the 

guaranteed security may immediately 

bring suit directly against the guarantor 

for payment of all amounts due and 

payable. There can be no conditions, 

beyond the issuer’s failure to pay, to the 

guarantor’s payment obligation.38 The 

condition that all guarantees be ‘‘full 

and unconditional’’ was adopted to 

limit the availability of Alternative 

Disclosures to situations where the 


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39See Section III.A.1.b of the 2000 Release. 

40Rule 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.’’). 

41See Rule 3–10(b) of Regulation S–X. 

42See Rule 3–10(c) of Regulation S–X. 

43See Rule 3–10(d) of Regulation S–X. 

44See Rule 3–10(e) of Regulation S–X. 

45See Rule 3–10(f) of Regulation S–X. 

46The content of the brief narrative is specified 

within each of the exceptions based on the 

applicable facts and circumstances. For example, if 

the conditions are met, Rule 3–10(b)(4) of 

Regulation S–X specifies that the narrative 

disclosure to be included in a footnote to the parent 

company’s consolidated financial statements must 

state, if true, ‘‘that the issuer is a 100%-owned 

finance subsidiary of the parent company and the 

parent company has fully and unconditionally 

guaranteed the securities.’’ It also requires the 

footnote to include ‘‘the narrative disclosures 

specified in paragraphs (i)(9) and (i)(10) of this 

section.’’ 

47Rule 3–10(h)(5) of Regulation S–X (‘‘A parent 

company has no independent assets or operations 

if each of its total assets, revenues, income from 

continuing operations before income taxes, and 

cash flows from operating activities (excluding 

amounts related to its investment in its 

consolidated subsidiaries) is less than 3% of the 

corresponding consolidated amount.’’). 

48Rule 3–10(h)(6) of Regulation S–X (‘‘A 

subsidiary is minor if each of its total assets, 

stockholders’ equity, revenues, income from 

continuing operations before income taxes, and 

cash flows from operating activities is less than 3% 

of the parent company’s corresponding 

consolidated amount.’’). 

49Rule 10–01(a) of Regulation S–X. 

50See Rule 3–10(i)(3) of Regulation S–X. 

51See Rule 3–10(i)(5) of Regulations S–X. 

Investments in the following subsidiaries are 

required to be presented under the equity method 

within Consolidating Information: non-guarantor 

subsidiaries; subsidary issuers or subsidiary 

guarantors that are not 100% owned and/or whose 

guarantee is not full and unconditional; subsidiary 

guarantors whose guarantee is not joint and several 

with the guarantees of other subsidiaries; and 

subsidiary guarantors with differences in domestic 

or foreign laws that affect the enforceability of the 

guarantees. The equity method is used primarily to 

ensure that a subsidiary guarantor does not 

consolidate, within this presentation, its own nonguarantor subsidiary. The equity method of 

accounting is described in ASC 323. Investments— 

Equity Method and Joint Ventures, for registrants 

that apply U.S. GAAP and in International 

Accounting Standards (‘‘IAS’’) 28, Investments in 

Association and Joint Ventures, for foreign private 

issuers that apply IFRS. 

52Rule 3–10(i)(2) of Regulation S–X. 

53Rule 3–10(i)(10) of Regulation S–X. 

54Rule 3–10(i)(9) of Regulation S–X. 

55The 2000 Release states that ‘‘modified 

financial information permitted by paragraphs (b)– 

(f) will be available only for guaranteed debt and 

debt-like instruments.’’ See Section III.4.b.i. of the 

2000 Release. As discussed below, we are proposing 

to state this requirement in the rule for clarity. 

56The Commission provided implementation 

guidance for certain types of securities such as 

preferred securities, trust preferred securities, and 

convertible debt or debt-like securities. See Section 

III.4.b.i and ii of the 2000 Release. 

payment obligations of the issuer and 

guarantor are essentially identical.39

F. Exceptions 

Each of the five exceptions in the 

existing rule contains conditions that, if 

satisfied, permit registrants to omit 

separate financial statements of the 

subject subsidiary issuers and 

guarantors. These five exceptions are: 

(1) A finance subsidiary 40 issues 

securities that its parent company 

guarantees; 41

(2) an operating subsidiary issues 

securities that its parent company 

guarantees; 42

(3) a subsidiary issues securities that 

its parent company and one or more 

other subsidiaries of its parent company 

guarantee; 43

(4) a parent company issues securities 

that one of its subsidiaries guarantees; 44

or 

(5) a parent company issues securities 

that more than one of its subsidiaries 

guarantees.45

In addition to the two primary 

conditions discussed above, depending 

on which exception is applicable, 

additional conditions must be satisfied, 

including providing Alternative 

Disclosures in the footnotes to the 

parent company’s consolidated financial 

statements. In most cases, the 

Alternative Disclosures consist of 

Consolidating Information. However, 

there are three situations in which the 

Alternative Disclosures consist of a brief 

narrative.46 These three situations are: 

• The subsidiary is a finance 

subsidiary, and the parent company is 

the only guarantor of the securities; 

• the parent company of the 

subsidiary issuer has no independent 

assets or operations,47 the parent 

company guarantees the securities, no 

subsidiary of the parent company 

guarantees the securities, and any 

subsidiaries of the parent company 

other than the issuer are minor; 48 and 

• the parent company issuer has no 

independent assets or operations and all 

of the parent company’s subsidiaries, 

other than minor subsidiaries, guarantee 

the securities. 

G. Consolidating Information 

When the brief narrative disclosure is 

not permitted, Rule 3–10 requires the 

inclusion of Consolidating Information 

in the financial statements. 

Consolidating Information is detailed 

financial information consisting of a 

columnar footnote presentation of each 

category of parent and subsidiaries as 

issuer, co-issuers, guarantor(s), or nonguarantor(s) that sums to the 

consolidated amounts. The presentation 

must include all major captions of the 

balance sheet, income statement, and 

cash flow statement that are required to 

be shown separately in interim financial 

statements prepared under 17 CFR 

210.10–1 (‘‘Article 10’’ of Regulation 

S–X’’).49 In order to distinguish the 

assets, liabilities, operations, and cash 

flows of the entities that are legally 

obligated to make payments under the 

guarantee from those that are not, the 

columnar presentation must show: (1) A 

parent company’s investments in all 

consolidated subsidiaries based upon its 

proportionate share of their net assets; 50

and (2) subsidiary issuer and guarantor 

investments in certain consolidated 

subsidiaries using the equity method of 

accounting.51

Consolidating Information must be 

provided as of, and for, the same 

periods as the parent company’s 

consolidated financial statements and 

must be audited for the same periods 

that the parent company financial 

statements are required to be audited.52

In addition to requiring disclosures 

about restricted net assets,53 as well as 

certain types of restrictions on the 

ability of the parent company or any 

guarantor to obtain funds from their 

subsidiaries,54 the instructions specify 

that the disclosure may not omit 

information about each guarantor that 

would be material for investors to 

evaluate the sufficiency of the 

guarantee, and that the disclosure must 

include sufficient information so as to 

make the financial information 

presented not misleading. 

H. Securities to Which Rule 3–10 

Applies 

The exceptions to the general rule in 

existing Rules 3–10(b) through (f) are 

available only to issuers and guarantors 

of debt securities.55 In the 2000 Release, 

the Commission explained the 

circumstances under which a 

guaranteed security should be 

considered ‘‘debt or debt-like’’ and 

described certain characteristics of such 

a security. Generally, the substance of 

the security’s obligation will dictate 

eligibility for Rule 3–10 rather than the 

form or title of the security. The 

characteristics that identify a guaranteed 

security as debt or debt-like are: (1) The 

issuer has a contractual obligation to 

pay a fixed sum at a fixed time; and (2) 

where the obligation to make such 

payments is cumulative, a set amount of 

interest must be paid.56

I. Recently-Acquired Subsidiary Issuers 

and Guarantors 

If a parent company acquires a new 

subsidiary issuer or guarantor that 

otherwise qualifies for one of the 


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57Rule 3–10(g)(1) of Regulation S–X. 58Rule 3–10(g)(1)(ii) of Regulation S–X. 59 In certain circumstances, pre-acquisition 

financial statements of a recently-acquired 

subsidiary that were previously provided by a 

parent company may not meet the requirements of 

Rule 3–10(g). For example, a parent company may 

provide on Form 8–K pre-acquisition financial 

statements of a subsidiary required by 17 CFR 

210.3–05 (‘‘Rule 3–05 of Regulation S–X’’) that may 

be audited in accordance with U.S. generally 

accepted auditing standards or audited by an 

auditor not registered with the PCAOB. If the parent 

company later files a registration statement for the 

offer and sale of its securities that are guaranteed 

by that same recently acquired subsidiary, those 

previously filed pre-acquisition financial statements 

would not meet the requirements of Rule 3–10(g). 

The parent company would then be required to file 

pre-acquisition financial statements of that recently 

acquired subsidiary guarantor audited in 

accordance with the standards of the PCAOB by an 

auditor registered with the PCAOB, or request prefiling relief from the staff. 

60See Section III.C.1 of the 2000 Release and Rule 

3–10(a). 

61See 15 U.S.C. 78o(d). 

62See discussion in Section II.A, ‘‘Background.’’ 

63See letter from DT. 

64See letter from Davis Polk. 

exceptions in Rules 3–10(c) through (f), 

the parent company may be required to 

provide one year of audited preacquisition financial statements of the 

newly-acquired issuer or guarantor and, 

if applicable, unaudited interim 

financial statements. This requirement 

is triggered when: (1) A parent company 

acquires the new subsidiary during or 

subsequent to one of the periods for 

which financial statements are 

presented in a Securities Act 

registration statement filed in 

connection with the offer and sale of the 

debt securities; (2) the subsidiary is 

deemed significant; and (3) the 

subsidiary is not reflected in the audited 

consolidated results of the parent 

company for at least nine months of the 

most recent fiscal year.57 A subsidiary is 

significant if its net book value or 

purchase price, whichever is greater, is 

20 percent or more of the principal 

amount of the securities being 

registered.58 The financial statements of 

the recently-acquired subsidiary must 

conform to the requirements of 

Regulation S–X because, as an issuer of 

a security or provider of a guaranty, it 

is an issuer. These include the 

requirement that an audit be performed 

in accordance with the standards of the 

Public Company Accounting Oversight 

Board (‘‘PCAOB’’) by an auditor 

registered with the PCAOB.59

J. Exchange Act Reporting Requirements 

Issuers and guarantors availing 

themselves of an exception that allows 

for the Alternative Disclosures in lieu of 

separate financial statements are exempt 

from Exchange Act reporting by 

Exchange Act Rule 12h–5. The parent 

company, however, must continue to 

provide the Alternative Disclosures for 

as long as the guaranteed securities are 

outstanding.60 This obligation continues 

even if the subsidiary issuers and 

guarantors could have suspended their 

reporting obligations under 17 CFR 

240.12h–3 (‘‘Rule 12h–3’’) or Section 

15(d) of the Exchange Act,61 had they 

chosen not to avail themselves of a Rule 

3–10 exception and reported separately 

from the parent company. 

A subsidiary issuer or guarantor that 

initially meets the requirements but 

subsequently ceases to satisfy Rule 12h– 

5 must begin separately reporting under 

the Exchange Act. It must present the 

financial statements required by 

Regulation S–X in a separate periodic 

report at the time the next report is due 

and may no longer rely on its parent 

company’s provision of Alternative 

Disclosures in the parent company’s 

periodic reports. 

III. Proposed Amendments to Rule 3–10 

and Partial Relocation to Rule 13–01 

A. Overarching Principle 

We believe that investors in 

guaranteed securities would be best 

served by continuing to adhere to the 

overarching principle upon which 

existing Rule 3–10 is based, namely that 

investors in guaranteed debt securities 

rely primarily on the consolidated 

financial statements of the parent 

company and supplemental details 

about the subsidiary issuers and 

guarantors when making investment 

decisions.62 Although the existing rules 

provide investors with information 

about issuers of guaranteed debt and 

guarantors of those securities, our 

experience since the adoption of these 

rules in 2000 suggests the requirements 

could be improved for the benefit of 

both investors and registrants while 

adhering to the overarching principle. In 

this regard, the existing rules impose 

certain eligibility restrictions and 

disclosure requirements that may 

require unnecessary detail, thereby 

shifting investor focus away from the 

consolidated enterprise towards 

individual entities or groups of entities 

and may pose undue compliance 

burdens for registrants. For example, a 

parent company is not eligible, under 

the existing rule, to provide the 

Alternative Disclosures if a subsidiary 

issuer or guarantor is 99% instead of 

100% owned by its parent company. As 

another example, the use of a brief 

narrative instead of Consolidating 

Information is not available if the total 

assets of either the parent company or 

non-issuer and non-guarantor 

subsidiaries of the parent company 

exceed 3% of the parent company’s 

consolidated total assets. In both cases, 

slight variations from the conditions set 

forth in the rule lead to substantially 

different disclosure outcomes despite 

the investments being substantially the 

same. More broadly, the volume of the 

Consolidating Information and level of 

detail required can undermine the 

overarching principle. Consolidating 

Information typically occupies multiple 

pages of a parent company’s financial 

statements, is composed of detailed 

information that may not be material for 

investors in making an investment 

decision, and could distract from the 

financial information of the obligated 

entities that is most likely to be 

material. In addition, according to one 

commenter, debt agreements are often 

structured to either meet or avoid the 

requirements of Rule 3–10, which may 

result in a guarantor structure that is 

less beneficial to investors.63 Another 

commenter stated that the ‘‘burdensome 

requirements’’ of the existing rule 

‘‘[lead] to issuers electing to do more 

unregistered as opposed to registered 

deals.’’ 64 We are proposing 

amendments to address the challenges 

posed by the current rules in an effort 

to improve the disclosures to investors, 

encourage more registered offerings, and 

facilitate debt structures where the 

provision of guarantees is less 

burdensome. 

B. Overview of the Proposed 

Amendments 

Under the proposed amendments, the 

rules would continue to permit the 

omission of separate financial 

statements of subsidiary issuers and 

guarantors when certain conditions are 

met and the parent company provides 

supplemental financial and nonfinancial disclosure about the subsidiary 

issuers and/or guarantors and the 

guarantees (‘‘Proposed Alternative 

Disclosures’’). Similar to the existing 

rule, proposed Rule 3–10 would provide 

the conditions that must be met in order 

to omit separate subsidiary issuer or 

guarantor financial statements. 

Proposed Rule 13–01 would specify the 

disclosure requirements for the 

accompanying Proposed Alternative 

Disclosures. The proposed amendments 

would: 

• Replace the condition that a 

subsidiary issuer or guarantor be 100% 

owned by the parent company with a 

condition that it be consolidated in the 

parent company’s consolidated financial 

statements; 

• replace Consolidating Information 

with summarized financial information, 


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49636 Federal Register / Vol. 83, No. 191 / Tuesday, October 2, 2018 / Proposed Rules 

65Rule 1–02(bb)(1) of Regulation S–X. 

as defined in 17 CFR 210.1–02,65

(‘‘Summarized Financial Information’’) 

of the issuers and guarantors (together, 

‘‘Obligor Group’’), which may be 

presented on a combined basis, and 

reduce the number of periods presented; 

• expand the qualitative disclosures 

about the guarantees and the issuers and 

guarantors; 

• eliminate quantitative thresholds 

for disclosure and require disclosure of 

additional information that would be 

material to holders of the guaranteed 

security; 

• permit the Proposed Alternative 

Disclosures to be provided outside the 

footnotes to the parent company’s 

audited annual and unaudited interim 

consolidated financial statements in the 

registration statement covering the offer 

and sale of the subject securities and 

any related prospectus, and in certain 

Exchange Act reports filed shortly 

thereafter; 

• require that the Proposed 

Alternative Disclosures be included in 

the footnotes to the parent company’s 

consolidated financial statements for 

annual and quarterly reports beginning 

with the annual report for the fiscal year 

during which the first bona fide sale of 

the subject securities is completed; 

• eliminate the requirement to 

provide pre-acquisition financial 

statements of recently-acquired 

subsidiary issuers and guarantors; and 

• require the Proposed Alternative 

Disclosures for as long as the issuers 

and guarantors have an Exchange Act 

reporting obligation with respect to the 

guaranteed securities rather than for so 

long as the guaranteed securities are 

outstanding. 

The proposed amendments would 

simplify and streamline the rule 

structure in several ways. Most 

significantly, under proposed Rules 3– 

10(a) and 3–10(a)(1) there would be only 

a single set of eligibility criteria that 

would apply to all issuer and guarantor 

structures instead of having separate 

sets of criteria in each of the five 

exceptions in existing Rules 3–10(b) 

through (f). Similarly, the requirements 

for the Proposed Alternative Disclosures 

would be included in a single location 

within proposed Rule 13–01, rather than 

spread among the multiple paragraphs 

of existing Rule 3–10. We believe these 

changes would simplify the rule 

structure and facilitate compliance. 

Request for Comment 

1. Would the proposed amendments 

to existing Rule 3–10 result in an 

increase in the number of registered 

debt offerings that include guarantees? 

Why or why not? How would increasing 

the number of registered debt offerings 

that include guarantees affect investors 

and issuers? 

2. What factors do issuers consider 

when deciding whether to engage in a 

registered debt offering or an offering in 

the private market? Do issuers structure 

registered debt offerings to not include 

guarantees because of concerns about 

compliance with existing Rule 3–10? If 

so, what are the specific concerns? Are 

issuers choosing to engage in private 

debt offerings that include guarantees? If 

so, what exemptions or safe harbors are 

issuers using? If these issuers are relying 

on 17 CFR 230.144A (‘‘Rule 144A’’), do 

these offerings typically include 

registration rights, or are they offered 

pursuant to Rule 144A without 

registration rights? Why or why not? 

3. To what type of investors are 

issuers of registered debt offerings 

selling or marketing their securities— 

Qualified Institutional Buyers (‘‘QIBs’’), 

other institutional investors, or retail 

investors? What is the typical investor 

break down in this regard? 

4. What factors do issuers consider in 

determining whether to structure a debt 

offering to include guarantees, and how 

are they considered? 

5. How do investors use the 

Alternative Disclosures under existing 

Rule 3–10? For example, how do retail 

investors, institutional investors, or 

third parties, such as financial analysts, 

use the information? How would these 

investors use the Proposed Alternative 

Disclosures? 

6. Would the proposed amendments 

to existing Rule 3–10 improve the 

disclosures provided to investors? If so, 

how? Are there other changes to the rule 

that we should consider that would 

improve disclosures to investors? If so, 

what are they and how would they 

improve disclosure? 

7. Would the proposed amendments 

to existing Rule 3–10 make the rule less 

burdensome and, thereby, encourage 

issuers to structure debt offerings to 

include guarantees? Are there other 

changes to the rule that we should 

consider that would reduce compliance 

burdens for issuers but continue to 

provide the material information 

investors need to make informed 

investment decisions? 

8. Would the proposed amendments 

to existing Rule 3–10 remove 

disclosures that investors or financial 

analysts rely on? If so, which 

disclosures? Would the removal of such 

disclosures have an effect on investor 

participation in registered debt offerings 

that include guarantees? 

9. What effects do registered debt 

offerings have on the covenants 

contained in the related indentures? Do 

private debt offerings typically contain 

more or fewer covenants in the related 

indentures? Why or why not? Would an 

issuer’s offering of debt contain more 

covenants if offered privately than if 

offered publicly? Why or why not? What 

effects would the proposed rules have 

on the covenants contained in the 

related indentures? 

10. Are there alternative approaches 

to disclosures about guarantors and 

guarantees that would benefit investors? 

If so, what are they and why? How 

would investors use the disclosures 

under these alternative approaches? 

C. Conditions To Omit the Financial 

Statements of a Subsidiary Issuer or 

Guarantor 

Under the proposed rules, the 

financial statements of a subsidiary 

issuer or guarantor could be omitted if 

the eligibility conditions contained in 

proposed Rules 3–10(a) and 3–10(a)(1) 

are met and the Proposed Alternative 

Disclosures specified in proposed Rule 

13–01 are provided in the filing, as 

required by proposed Rule 3–10(a)(2). 

As proposed, the eligibility conditions 

would be that: 

• The consolidated financial 

statements of the parent company have 

been filed; 

• the subsidiary issuer or guarantor is 

a consolidated subsidiary of the parent 

company; 

• the guaranteed security is a debt 

security; and 

• one of the following eligible issuer 

and guarantor structures is applicable: 

Æ The parent company issues the 

security or co-issues the security, jointly 

and severally, with one or more of its 

consolidated subsidiaries; or 

Æ a consolidated subsidiary issues the 

security or co-issues the security with 

one or more other consolidated 

subsidiaries of the parent company, and 

the security is guaranteed fully and 

unconditionally by the parent company. 

1. Eligibility Conditions 

a. Parent Company Financial Statements 

Condition 

Proposed Rule 3–10 would continue 

to require the filing of the parent 

company’s consolidated financial 

statements. Additionally, under the 

proposed amendments, ‘‘parent 

company’’ would still be defined as in 

the 2000 Release, with one change. The 

first two conditions would continue to 

be that the entity is: (1) An issuer or 

guarantor of the securities; and (2) an 

Exchange Act reporting company, or 

will become one as a result of the 

subject Securities Act registration 


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66See Section III.A.6. of the 2000 Release. 

67See Section III.C.1.b, ‘‘Consolidated 

Subsidiary,’’ below. 

68See Section III.A.1.a.i.(A) of the 2000 Release. 

69See id. 

70See, e.g., letters from ABA-Committees, AB– 

NYC, Chamber, Comcast, EY, and SIFMA. 

71For example, some commenters recommended 

permitting subsidiary issuers and guarantors to be 

‘‘wholly-owned’’ by the parent company as that 

term is defined in Rule 1–02(aa) of Regulation S– 

X, which states ‘‘[t]he term wholly owned 

subsidiary means a subsidiary substantially all of 

whose outstanding voting shares are owned by its 

parent and/or the parent’s other wholly owned 

subsidiaries.’’ See letters from ABA-Committees, 

AB–NYC, and EY. 

72See letter from SIFMA. 

73See letter from Comcast. 

74See letter from CalPERS. 

75See letter from SIFMA. 

76See proposed Rules 13–01(a)(3) and (4). 

77For example, a parent company that prepares 

its financial statements in accordance with U.S. 

GAAP would apply ASC 810, Consolidation, and a 

parent company that qualifies as a foreign private 

issuer and prepares its financial statements in 

accordance with IFRS would apply IFRS 10, 

Consolidated Financial Statements. 

statement. However, the third condition, 

that the entity owns, directly or 

indirectly, 100% of each subsidiary 

issuer and guarantor, would no longer 

be required for an entity to be 

considered the parent company.66

Instead, the third condition would be 

that the entity consolidates each 

subsidiary issuer and guarantor in its 

consolidated financial statements.67 For 

clarity, the definition of ‘‘parent 

company’’ would be included in 

proposed Rule 3–10(b)(1), stating that 

the parent company is the entity that 

meets the three aforementioned 

conditions. 

Consistent with the note to existing 

Rule 3–10(a)(2), the financial statements 

of an entity that is not an issuer or 

guarantor of the registered security 

could not be substituted for those of the 

parent company. For example, it would 

not be appropriate to file, in substitution 

for the financial statements of the parent 

company, financial statements of an 

entity that files Exchange Act reports 

but is not an issuer or guarantor of the 

securities being registered even if the 

financial statements of that entity are 

virtually identical to those of the parent 

company, because the security holders 

cannot enforce payment of the 

obligation against that particular entity. 

Because we have included the 

definition of parent company in 

proposed Rule 3–10(b)(1), which clearly 

states that the parent company must be 

an issuer or guarantor of the guaranteed 

security, we do not believe the note to 

existing Rule 3–10(a)(2) is necessary and 

have removed it from the proposed rule. 

Request for Comment 

11. Is the proposed definition of 

‘‘parent company’’ included in 

proposed Rule 3–10(b)(1) sufficiently 

clear? Why or why not? Are there other 

modifications to the proposed definition 

of ‘‘parent company’’ that would be 

appropriate? If so, what are they and 

why should they be included? 

12. Are there other definitions of 

‘‘parent company’’ that may differ from 

our proposed definition? If so, which 

definitions and what are the similarities 

or differences? How would any such 

differences affect issuers’ ability to 

apply our rule? Should we make any 

modifications to the proposed definition 

of ‘‘parent company’’ in light of those 

other definitions? 

13. Should the proposed rule include 

a requirement similar to the note to 

existing Rule 3–10(a)(2) that the 

financial statements of an entity that is 

not an issuer or guarantor of the 

registered security could not be 

substituted for those of the parent 

company, or does the proposed 

definition of ‘‘parent company’’ render 

such a requirement unnecessary? 

b. Consolidated Subsidiary Condition 

The 2000 Release states that the 

Commission was adopting the existing 

rule’s definition of 100% owned 

‘‘because it assures investors in the 

guaranteed securities that there is no 

competing common equity interest in 

the assets or revenues of the subsidiary. 

This allows investors to evaluate the 

creditworthiness of the parent and 

subsidiary as a single, indivisible 

business.’’ 68 The Commission 

explained that the risks associated with 

an investment in a parent company and 

its subsidiary issuers and/or guarantors 

would need to be identical to justify the 

use of the Alternative Disclosures in 

lieu of separate financial statements of 

each of those subsidiaries, and if a third 

party holds an interest in a subsidiary, 

those risks are not identical.69

A number of commenters suggested 

that existing Rule 3–10’s 100%-owned 

condition be replaced,70 suggesting 

various alternative conditions.71 One 

commenter recommended permitting 

guarantor subsidiaries to be majorityowned instead of 100% owned, 

explaining that any risks associated 

with a minority investor could be 

addressed through disclosure,72 and 

another stated that ‘‘as long as a 

registrant controls the subsidiary, a 

third party minority equity interest in 

the subsidiary’s assets and earnings 

would not affect the subsidiary’s 

creditworthiness from a debt holder’s 

perspective.’’ 73 One commenter 

recommended retaining the 

requirement.74

We continue to believe that a 

subsidiary issuer or guarantor should be 

controlled by the parent company and 

consolidated into the financial 

statements of the parent company to be 

eligible to omit its financial statements. 

However, having considered 

commenters’ suggestions and our 

experience since the adoption of the 

existing rule, it appears that the 

existence of non-controlling ownership 

interests in the subsidiary issuer or 

guarantor does not necessarily mean 

that separate financial statements are 

warranted. 

We note that the existence of noncontrolling interest holders generally 

does not alter the fundamental nature of 

the investment such that it should be 

evaluated similar to multiple 

investments in different issuers. 

Specifically, we believe that where a 

parent company is obligated as issuer or 

full and unconditional guarantor of a 

guaranteed security and it controls and 

includes the subsidiary issuer(s) and 

guarantor(s) in its consolidated financial 

statements, there is sufficient financial 

unity between the parent company and 

the related subsidiary with respect to 

the guaranteed debt security such that 

the consolidated financial statements of 

that parent company and the Proposed 

Alternative Disclosures would enable 

investors to evaluate and sufficiently 

assess the risks associated with an 

investment in such guaranteed debt 

security. In the event of default on the 

debt security, there could be 

circumstances where non-controlling 

interest holders may have the potential 

to influence certain matters affecting 

payments to holders of the guaranteed 

debt security. However, as one 

commenter suggested,75 such risks, 

when material, can be addressed 

through disclosures tailored to those 

facts and circumstances 76 rather than 

requiring separate financial statements 

of the subsidiary issuer or guarantor. 

Proposed Rule 3–10(a) would require 

the subsidiary issuer or guarantor to be 

a consolidated subsidiary of the parent 

company pursuant to the relevant 

accounting standards already in use.77

This proposed change would eliminate 

the distinction between subsidiaries in 

corporate form and those in other than 

corporate form, applying a consistent 

eligibility condition across entities. 

Also, certain subsidiary issuers and 

guarantors that are currently not eligible 

to omit their financial statements under 

existing Rule 3–10, such as consolidated 

subsidiary issuers or guarantors that 

have issued securities convertible into 


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49638 Federal Register / Vol. 83, No. 191 / Tuesday, October 2, 2018 / Proposed Rules 

78See 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. 

79Such circumstances may arise when, in 

accordance with ASC 810, Consolidation, the entity 

is a variable interest entity and the parent company 

is its primary beneficiary. 

80See Section II.H, ‘‘Securities to which Rule 3– 

10 Applies.’’ 

81See Section III.A.4 of the 2000 Release. 

82See Section III.A.4.b.i of the 2000 Release. 

their own voting shares, would be 

eligible to omit their financial 

statements. The proposed amendments 

would instead require the parent 

company to provide disclosures that 

address the material risks, if any, 

associated with non-controlling 

interests in the subsidiary issuer or 

guarantor, including any risks arising 

from securities issued by the subsidiary 

that may be convertible into voting 

shares and may cause the percentage of 

non-controlling interest to increase, and 

to separately provide Summarized 

Financial Information attributable to 

those subsidiaries. 

Specifically, proposed Rule 13– 

01(a)(3) would require, to the extent 

material, a description of any factors 

that may affect payments to holders of 

the guaranteed security, such as the 

rights of a non-controlling interest 

holder. In addition, proposed Rule 13– 

01(a)(4) would require separate 

disclosure of Summarized Financial 

Information for subsidiary issuers and 

guarantors affected by those factors. For 

example, if, through its ability to 

exercise significant influence 78 over a 

subsidiary guarantor, a non-controlling 

interest holder could materially affect 

payments to holders of the guaranteed 

security, the parent company would be 

required to disclose those factors and 

the Summarized Financial Information 

attributable to that subsidiary guarantor. 

Because this disclosure would highlight 

the material repayment risks and 

financial information associated with 

consolidated issuers and guarantors 

with non-controlling interests, it may no 

longer be necessary to categorically 

prohibit such issuers and guarantors 

from being eligible to omit their 

financial statements under proposed 

Rule 3–10. 

Request for Comment 

14. Should the proposed rule use 

consolidation of the subsidiary issuer or 

guarantor under the applicable 

accounting standards as an eligibility 

condition? If not, what relationship 

between the parent company and 

subsidiary issuer or guarantor should 

the proposed rule use and why? 

15. Would using consolidation of the 

subsidiary issuer or guarantor under the 

applicable accounting standards as an 

eligibility condition allow investors or 

financial analysts to adequately 

understand the credit risk of such 

subsidiary issuer or guarantor? Would 

the proposed use of consolidation allow 

investors or financial analysts to 

adequately understand these credit risks 

in lieu of the subsidiary issuer or 

guarantor’s financial statements? Why 

or why not? 

16. Should the proposed condition 

that each issuer and guarantor be a 

consolidated subsidiary of the parent 

company be limited such that it would 

not be available to certain types of 

entities? If so, what entities and why? 

For example, should an entity be 

ineligible if it is consolidated in the 

parent company’s financial statements 

for reasons other than the parent 

company holding the majority of voting 

interests? 79

17. Should a consolidated subsidiary 

that has issued and outstanding debt 

that is convertible into its own voting 

shares not be eligible to omit its 

financial statements under the proposed 

rule? Why or why not? Should a 

consolidated subsidiary that has issued 

and outstanding debt that is convertible 

into its own voting shares, which, upon 

conversion, would result in the parent 

company losing control of that 

subsidiary, not be eligible to omit its 

financial statements under the proposed 

rule? Why or why not? Should a 

consolidated subsidiary that has issued 

and outstanding debt that is convertible 

into its own voting shares, which, upon 

conversation, would result in the parent 

company owning less than a particular 

percentage of the voting shares of that 

subsidiary, not be eligible to omit its 

financial statements under the proposed 

rule? If so, what should that percentage 

be and why? 

18. Would any entities that meet the 

100%-owned condition under existing 

Rule 3–10 not meet the proposed 

condition that an issuer or guarantor be 

a consolidated subsidiary of the parent 

company? If so, what are they and why 

would they not meet this condition? 

c. Debt or Debt-Like Securities 

Condition 

As discussed above,80 the exceptions 

in existing Rules 3–10(b) through (f) are 

available only to issuers and guarantors 

of debt securities. We continue to 

believe the exceptions provided in Rule 

3–10 should only be available for 

guaranteed debt and guaranteed 

preferred securities that have payment 

terms that are substantially the same as 

debt. In order to provide clarity, 

proposed Rule 3–10(a)(1) would state 

explicitly that the guaranteed security 

must be ‘‘debt or debt-like.’’ 

For additional clarity, proposed Rule 

3–10(b)(2) would specify when a 

guaranteed security would be 

considered ‘‘debt or debt-like.’’ 

Consistent with the guidance provided 

in the 2000 Release,81 a guaranteed 

security would be considered ‘‘debt or 

debt-like’’ under the proposed rule if: 

• The issuer has a contractual 

obligation to pay a fixed sum at a fixed 

time; and 

• where the obligation to make such 

payments is cumulative, a set amount of 

interest must be paid. 

As is currently the case, the substance 

of the security’s obligation will 

determine the availability of relief under 

Rule 3–10 rather than the form or title 

of the security. Accordingly, the 

proposed rule would clarify consistent 

with the 2000 Release,82 that: 

• Neither the form of the security nor 

its title will determine whether a 

security is debt or debt-like. Instead, the 

substance of the obligation created by 

the security will be determinative; and 

• The phrase ‘‘set amount of interest’’ 

is not intended to mean ‘‘fixed amount 

of interest. ’’ Floating and adjustable 

rate securities, as well as indexed 

securities, may meet the criteria 

specified in paragraph (b)(2)(ii) as long 

as the payment obligation is set in the 

debt instrument and can be determined 

from objective indices or other factors 

that are outside the discretion of the 

obligor. 

Request for Comment 

19. Should the proposed rule 

expressly state that the guaranteed 

security must be ‘‘debt or debt-like’’ and 

include a definition of that term? Why 

or why not? 

20. Should we modify the proposed 

definition of ‘‘debt or debt-like’’? If so, 

why, and how should it be modified? 

21. Should we provide any additional 

guidance or instructions to the proposed 

definition of ‘‘debt or debt-like’’? If so, 

why, and what additional guidance or 

instructions would be appropriate? 

d. Eligible Issuer and Guarantor 

Structures Condition 

Under the existing rule, an issuer and 

guarantor structure is eligible if it 

matches one of the specific issuer and 

guarantor structures in Rule 3–10(b) 

through (f). If an issuer or guarantor 

structure does not match one of those 


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83Proposed Rule 3–10(a)(1)(i). 

84Proposed Rule 3–10(a)(1)(ii). 85See Section III.A.1.b of the 2000 Release. 

specific issuer and guarantor structures, 

it is ineligible, and the subsidiary 

issuers and guarantors must file separate 

financial statements. Eligibility would 

still be based on qualifying issuer and 

guarantor structures under the proposed 

amendments to Rule 3–10. However, the 

proposed amendments would simplify 

and streamline the existing rule by 

replacing the specific issuer and 

guarantor structures permitted under 

the five exceptions in existing Rules 3– 

10(b) through (f) with a broader twocategory framework. Under this 

framework, an issuer and guarantor 

structure would be eligible if: 

• The parent company issues the 

security or co-issues the security, jointly 

and severally, with one or more of its 

consolidated subsidiaries;83 or 

• a consolidated subsidiary issues the 

security, or co-issues it with one or 

more other consolidated subsidiaries of 

the parent company, and the security is 

guaranteed fully and unconditionally by 

the parent company.84

In a change from the existing 

exceptions, the status of subsidiary 

guarantors would not be specified in the 

proposed categories of eligible issuer 

and guarantor structures. Although one 

or more other subsidiaries of the parent 

company may, and we expect often 

would, guarantee the security, we 

believe the eligibility of an issuer and 

guarantor structure should depend on 

the role of the parent company. 

Accordingly, as discussed further in 

Section III.C.1.d.ii, ‘‘Role of Subsidiary 

Guarantors’’ below, separate financial 

statements of consolidated subsidiary 

guarantors may be omitted for each 

issuer and guarantor structure that is 

eligible under the proposed rule if the 

other conditions of proposed Rule 3–10 

are met. 

i. Role of Parent Company 

Under the proposed amendments, the 

parent company’s role as issuer, coissuer, or full and unconditional 

guarantor with respect to the guaranteed 

security would determine whether the 

issuer and guarantor structure is 

eligible. Below we further describe 

conditions that a parent company must 

meet under the proposed rule. 

(A) Parent Company Obligation Is Not 

Limited or Conditional 

Because the parent company’s 

consolidated financial statements serve 

as the primary source of information for 

investors, we believe the parent 

company’s obligation as either issuer or 

guarantor of the guaranteed security 

should not be conditional or limited. If 

the parent company’s obligation was 

limited or conditional, focusing on the 

parent company’s financial statements 

may not be sufficient for investors to 

evaluate the investment. For example, if 

a subsidiary issued securities 

guaranteed by its parent company, but 

that parent company’s obligation under 

the guarantee’s terms was less than the 

subsidiary’s obligation, the parent 

company’s financial statements 

supplemented with the Proposed 

Alternative Disclosures would not be 

sufficient. Instead, the separate financial 

statements of the subsidiary issuer 

would likely be material for investors to 

make an informed investment decision. 

Therefore, under the proposed 

amendments, the ability to provide the 

Proposed Alternative Disclosures in lieu 

of separate subsidiary issuer and 

guarantor financial statements would 

only be available when the parent 

company’s obligation is not limited or 

conditional. 

Request for Comment 

22. Should the eligibility of an issuer 

and guarantor structure under the 

proposed rule require the parent 

company’s obligation not to be limited 

or conditional? Why or why not? 

23. Are there circumstances where the 

parent company’s consolidated financial 

statements are not the primary source of 

information for investors in these 

situations? If so, what are those 

circumstances, and what other sources 

of information would be material in 

making an investment decision? 

24. Should the eligibility of an issuer 

and guarantor structure continue to 

depend on the status of subsidiary 

guarantors? If so, in what way? If not, 

why not? 

(B) Parent Company as Issuer or CoIssuer 

Under the first category of eligible 

issuer and guarantor structures in 

proposed Rule 3–10(a)(1)(i), the parent 

company must issue the security or coissue the security, jointly and severally, 

with one or more of its consolidated 

subsidiaries. When acting as the sole 

issuer, the parent company would be 

fully and unconditionally obligated for 

the full amount of any scheduled 

payments when they come due. Also, 

the parent company would be permitted 

to co-issue a security with one or more 

of its consolidated subsidiaries, but all 

co-issuers would be required to be 

jointly and severally liable under the 

guaranteed security. This would 

obligate each of the parent company and 

its subsidiary co-issuers to all legal 

responsibilities of an issuer, including 

making scheduled payments on the debt 

security in full when they come due. 

Under this category of eligible issuer 

and guarantor structures, the parent 

company would control each 

consolidated co-issuer, the financial 

information of the subsidiary coissuer(s) would be reflected in the 

consolidated financial statements of the 

parent company, and the parent 

company would be fully and 

unconditionally obligated to make 

payments in full when due under the 

guaranteed security. As such, we believe 

the parent company’s consolidated 

financial statements would serve as the 

primary source of information for 

investors in these circumstances and, if 

all other eligibility conditions of the 

proposed rule were satisfied, that 

separate financial statements of the 

subsidiary co-issuers would be 

unnecessary. Supplemental information 

about the subsidiary co-issuer(s) would 

be included in the Proposed Alternative 

Disclosures. 

Request for Comment 

25. Should this first category of 

eligible issuer and guarantor structures 

under the proposed rule require the 

parent company to issue or co-issue the 

security, jointly and severally, with one 

or more of its consolidated subsidiaries? 

Why or why not? 

26. Are there other conditions that 

should be included in this first 

permissible category of eligible issuer 

and guarantor structures? If so, what are 

they and why would they be 

appropriate? 

27. If the parent company co-issues 

the guaranteed security with one or 

more of its consolidated subsidiaries, is 

separate financial information about 

issuer entities material to an investment 

decision? If so, why? 

(C) Parent Company as Full and 

Unconditional Guarantor 

Under the second category of eligible 

issuer and guarantor structures in 

proposed Rule 3–10(a)(1)(ii), a debt 

security issued by a parent company’s 

consolidated subsidiary, or co-issued by 

more than one of the parent company’s 

consolidated subsidiaries, must be fully 

and unconditionally guaranteed by that 

parent company. For purposes of the 

proposed rule, whether the parent 

company’s guarantee is ‘‘full and 

unconditional’’ would be determined in 

the same manner as in existing Rule 3– 

10(h)(2) and the 2000 Release 85 and 

would be included in proposed Rule 3– 

10(b)(3). Under this category of eligible 

issuer and guarantor structures, the 


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49640 Federal Register / Vol. 83, No. 191 / Tuesday, October 2, 2018 / Proposed Rules 

86See Section III.C.1.d, ‘‘Eligible Issuer and 

Guarantor Structures Condition.’’ 

87Where there are multiple subsidiary guarantors, 

and the guarantee of one or more subsidiaries is not 

joint and several with other subsidiary guarantors, 

or as applicable, with the parent company’s 

guarantee, note 4 to existing Rule 3–10(d) and note 

3 to existing Rule 3–10(f) permit the use of 

Consolidating Information in lieu of providing 

separate financial statements of that subsidiary 

guarantor so long as each subsidiary whose 

guarantee is not joint and several is included in a 

separate column of the Consolidating Information. 

88See letter from SIFMA. 

89See letter from CalPERS. 

90See Section III.A.1.b of the 2000 Release. 

91Each of existing Rules 3–10(d)(3) and 3–10(f)(3) 

specify that all guarantees must be joint and several 

as a condition to permit the omission of the 

separate financial statements of subsidiary 

guarantors. However, if all other conditions of the 

applicable exception paragraph are met, Note 4 to 

existing Rule 3–10(d) and Note 3 to existing Rule 

3–10(f) permit the omission of the separate financial 

statements of a subsidiary guarantor whose 

guarantee is not joint and several so long as the 

Consolidating Information includes a separate 

column for each such subsidiary guarantor. 

92See discussion in Section III.C.2.b, ‘‘NonFinancial Disclosures.’’ 93See discussion in Section III.C.2.a.ii, 

‘‘Presentation on a Combined Basis.’’ 

parent company would control each 

consolidated subsidiary issuer, the 

financial information of the subsidiary 

issuer(s) would be reflected in the 

consolidated financial statements of the 

parent company, and the parent 

company would be fully and 

unconditionally obligated to make 

payments in full when due under the 

guaranteed security. In these 

circumstances, we believe the parent 

company’s financial statements would 

serve as the primary source of 

information for investors and, if all 

other eligibility conditions of the 

proposed rule were satisfied, that 

separate financial statements of the 

subsidiary issuers would be 

unnecessary. Supplemental information 

about the subsidiary issuer(s) or coissuer(s) would be included in the 

Proposed Alternative Disclosures. 

Request for Comment 

28. Should this second category of 

eligible issuer and guarantor structures 

under the proposed rule require parent 

company to fully and unconditionally 

guarantee the debt security that is either 

issued by that parent company’s 

consolidated subsidiary, or co-issued by 

more than one of that parent company’s 

consolidated subsidiaries? Why or why 

not? 

29. Are there other conditions that 

should be included in this second 

permissible category of eligible issuer 

and guarantor structures? If so, what are 

they and why would they be 

appropriate? 

30. Should we retain the existing 

definition of ‘‘full and unconditional’’? 

Why or why not? 

ii. Role of Subsidiary Guarantors 

As noted above,86 one or more 

consolidated subsidiaries of the parent 

company could, and we expect often 

would, guarantee the securities in either 

of the two proposed eligible categories 

of issuer and guarantor structures. 

Existing Rule 3–10(b) through (f) specify 

the permissible roles of subsidiary 

guarantors in an issuer and guarantor 

structure and also impose certain 

conditions, such as the guarantees being 

full and unconditional and, where there 

are multiple guarantees, being joint and 

several.87 A few commenters 

specifically addressed the conditions 

that subsidiary guarantees be ‘‘full and 

unconditional’’ and ‘‘joint and several.’’ 

One commenter recommended the 

elimination of these conditions. 

According to this commenter, investors 

place less reliance on a guarantee that 

is not full and unconditional as a source 

of credit, and accordingly, financial 

statements of such a guarantor are even 

less important to an investor and should 

not be required.88 Instead, the 

commenter recommended requiring 

separate disclosure of those subsidiaries 

providing lesser guarantees. Another 

commenter stated that the existing 

condition should remain unchanged.89

The 2000 Release stated that the 

Commission was adopting the definition 

of ‘‘full and unconditional,’’ which was 

applicable to the guarantees of both 

subsidiaries and the parent company, 

with the intention of limiting the 

availability of the Alternative 

Disclosures to those situations where 

the payment obligations of the issuer 

and guarantor are essentially 

identical.90 We continue to believe it is 

necessary for the guarantee of a parent 

company to be full and unconditional in 

order to rely on its consolidated 

financial statements as the primary 

source of information for investors. 

However, our experience since adoption 

of the existing rule in 2000 suggests that 

limitations or conditions on a subsidiary 

guarantee should not preclude the use 

of the Proposed Alternative Disclosures 

when the consolidated subsidiary 

guarantor is controlled by the parent 

company and the subsidiary guarantor’s 

financial information is included in the 

parent company’s consolidated financial 

statements. Instead, similar to existing 

Rule 3–10’s approach to subsidiary 

guarantees that are not joint and 

several,91 we believe such limitations 

and conditions on a subsidiary’s 

guarantee could be highlighted for 

investors through incremental financial 

and non-financial disclosure in the 

Proposed Alternative Disclosures rather 

than requiring separate financial 

statements of the subsidiary guarantor. 

Under the proposed rule, because the 

role of the parent company determines 

whether an issuer and guarantor 

structure is eligible, the role of 

subsidiary guarantors would be 

irrelevant for determining overall 

eligibility. As a result, the subsidiary 

guarantors’ role in the issuer and 

guarantor structure would not need to 

be specified and the aforementioned 

conditions (the guarantees being full 

and unconditional and, where there are 

multiple guarantees, being joint and 

several) would no longer be imposed on 

subsidiary guarantors. Regardless, as 

stated in proposed Rule 3–10(a), if a 

subsidiary guarantor is consolidated in 

its parent company’s consolidated 

financial statements, and the other 

conditions of proposed Rule 3–10 are 

met, including providing the disclosures 

about that subsidiary and its guarantee 

as specified in proposed Rule 13–01, the 

subsidiary’s financial statements could 

be omitted. 

The role of subsidiary guarantors and 

their guarantees would affect the 

required disclosure under the proposed 

rule. For example, the subsidiary 

guarantors would be required to be 

identified pursuant to proposed Rule 

13–01(a)(1), and if the guarantees of 

those subsidiaries were not full and 

unconditional, disclosure of the 

limitations and conditions would be 

required by proposed Rule 13–01(a)(2), 

to the extent material.92 Furthermore, 

proposed Rule 13–01(a)(4) would 

require separate disclosure of 

Summarized Financial Information 

applicable to subsidiary guarantors 

whose guarantees were not full and 

unconditional, to the extent material.93

Request for Comment 

31. Would the proposed changes 

improve the disclosures for investors? 

Why or why not? 

32. Proposed Rule 3–10(a)(1)(ii) 

specifies only that the parent company 

guarantee must be full and 

unconditional. Should the requirement 

that a guarantee be full and 

unconditional also extend to subsidiary 

guarantors? Why or why not? 

33. Where there is more than one 

subsidiary guarantor, or when the 

parent company and one or more of its 

subsidiaries guarantees the security, 

should all guarantees be joint and 

several to be eligible to omit separate 

financial statements of subsidiary 

guarantors? Why or why not? 


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94See U.S. Sec. & Exch. Comm’n, Div. of Corp. 

Fin., Financial Reporting Manual Section 2510.5, 

https://www.sec.gov/divisions/corpfin/cffinancial

reportingmanual.pdf (last updated Dec. 1, 2017). 

These circumstances include, for example, when: 

(1) the subsidiary is sold or sells all of its assets; 

(2) the subsidiary is declared ‘‘unrestricted’’ for 

covenant purposes; (3) the subsidiary’s guarantee of 

other indebtedness is terminated or released; (4) the 

requirements for legal defeasance or covenant 

defeasance or to discharge the indenture have been 

satisfied; (5) the rating on the parent’s debt 

securities is changed to investment grade; or (6) the 

parent’s debt securities are converted or exchanged 

into equity securities. The staff guidance also 

indicates that subsidiary guarantees with such 

release provisions should not be characterized as 

full and unconditional without disclosure 

describing any qualifications to the subsidiary 

guarantees (e.g., the circumstances in which they 

could be released). If the proposed changes 

described herein are adopted, this staff 

interpretation would no longer be applicable. 

95See, e.g., letters from ABA-Committees, AB– 

NYC, and EY. 

96See Section III.C.1.d.ii, ‘‘Role of Subsidiary 

Guarantors.’’ 

97See discussion in Section III.C.2.b, ‘‘NonFinancial Disclosures.’’ 

98See discussion in Section III.C.2.a.ii, 

‘‘Presentation on a Combined Basis.’’ 

99See Section III.A.6 of the 2000 Release. 

(A) Subsidiary Guarantee Release 

Provisions 

One of the conditions a subsidiary 

guarantor must meet under the existing 

rule is that its guarantee must be full 

and unconditional. A subsidiary’s 

guarantee may have the characteristics 

of a full and unconditional guarantee at 

its inception except that there may be 

contractual provisions permitting the 

subsidiary to be released from that 

guarantee under certain circumstances. 

Such release provisions could cause the 

subsidiary’s guarantee to fail to meet the 

requirement that the guarantee be full 

and unconditional because the potential 

elimination of the guarantee is a 

condition beyond the issuer’s failure to 

pay. The staff has previously provided 

guidance that, under certain 

circumstances, a subsidiary whose 

guarantee could be released should be 

able to rely on existing Rule 3–10 so 

long as all other required conditions of 

the rule are met.94 Several commenters 

recommended codifying this staff 

guidance into our rules.95 As noted 

above,96 because the nature of the 

guarantee of a subsidiary guarantor does 

not affect whether the issuer and 

guarantor structure is eligible under the 

proposed rule, a subsidiary guarantee 

would no longer be required to be full 

and unconditional. As such, the 

existence of subsidiary guarantee release 

provisions would not prevent that 

subsidiary guarantor from omitting its 

financial statements. However, to the 

extent material, such release provisions 

would be required to be disclosed 

pursuant to proposed Rule 13– 

01(a)(2) 97 and separate disclosure of 

Summarized Financial Information 

applicable to that subsidiary guarantor 

would be required by proposed Rule 

13–01(a)(4).98

Request for Comment 

34. Should the proposed rule specify 

that subsidiary guarantees must be full 

and unconditional except that certain 

subsidiary release provisions would be 

expressly permitted? If so, why? In this 

regard, which release provisions should 

be permitted in the proposed rule and 

why would they be appropriate? 

iii. Treatment of Currently Eligible 

Issuer and Guarantor Structures Under 

Proposed Rule 3–10 

The proposed amendments are not 

intended to reduce the types of entities 

or structures that would be able to rely 

on proposed Rule 3–10. We expect 

issuer and guarantor structures that are 

currently eligible under existing Rule 3– 

10 to be eligible under the two proposed 

categories of eligible issuer and 

guarantor structures. As shown in the 

table below, issuer and guarantor 

structures that currently fall under 

existing Rules 3–10(b), (c), or (d) would 

be eligible to omit their financial 

statements under the eligible categories 

in proposed Rules 3–10(a)(1)(i) or (ii), 

depending on the role of the parent 

company as either co-issuer or full and 

unconditional guarantor of the 

guaranteed security. Issuer and 

guarantor structures that currently fall 

under existing Rules 3–10(e) or (f), 

wherein the parent company is the sole 

issuer of the guaranteed security, would 

be able to rely on the first category in 

proposed Rule 3–10(a)(1)(i). We discuss 

the proposed amendments in greater 

detail below. 

Existing Rule Proposed Rule 

Rules 3–10(b), 3–10(c), and 3–10(d) ....................................................... Rule 3–10(a)(1)(i), if the subsidiary co-issued the security, jointly and 

severally, with its parent. 

Rule 3–10(a)(1)(ii), if the subsidiary issued the security that is fully and 

unconditionally guaranteed by its parent. 

Rules 3–10(e) and 3–10(f) ....................................................................... Rule 3–10(a)(1)(i). 

(A) Finance Subsidiary Issuer of 

Securities Guaranteed by Its Parent 

Company 

Existing Rule 3–10(b) applies when a 

‘‘finance subsidiary,’’ as that term is 

defined in existing Rule 3–10(h)(7), 

issues securities guaranteed by its 

parent company. This exception was 

included to address situations where a 

parent company directs one of its 

subsidiaries to issue debt securities that 

the parent company guarantees, and that 

subsidiary ‘‘has no assets, operations, 

revenues, or cash flows other than those 

related to the issuance, administration, 

and repayment of the security and any 

other securities guaranteed by its 

parent.’’ 99 In such cases, the 

Commission has determined that 

detailed financial information about the 

finance subsidiary is unlikely to be 

material to an investment decision. 

Instead, an investor would look to the 

consolidated financial statements of the 

parent company that guaranteed the 

debt to evaluate the investment in the 

guaranteed security and generally not 

need additional information other than 

a brief narrative describing the 

arrangement. 

Because the proposed amendments to 

Rule 3–10 do not focus on the role and 

nature of the subsidiary as a condition 

to eligibility, the proposed amendments 

would no longer require a subsidiary 

issuer or guarantor to be designated as 

a ‘‘finance subsidiary’’ in any particular 

circumstances. Likewise, the proposed 

amendments would remove the 

definition of ‘‘finance subsidiary’’ from 

the existing rule, since it is not 

otherwise used in Regulation S–X. 

However, a finance subsidiary used to 

issue a debt security guaranteed by the 

parent company, would be addressed by 

proposed Rule 3–10(a)(1)(ii) or, if the 

security were to be co-issued, jointly 

and severally, with its parent, proposed 

Rule 3–10(a)(1)(i) would apply. We 

believe eliminating the provisions that 

apply only to finance subsidiaries, 

together with the other proposed 

changes, would simplify the rules while 


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100See discussion and example within Section 

III.C.2.c, ‘‘When Disclosure is Required.’’ 

101See Sections III.C.1.d.ii, ‘‘Role of Subsidiary 

Guarantors.’’ 

102See Section III.C1.d.ii, ‘‘Role of Subsidiary 

Guarantors.’’ 103Upon request, pursuant to its delegated 

authority under 17 CFR 210.3–13 (‘‘Rule 3–13 of 

Regulation S–X’’), the staff has permitted the 

omission of separate subsidiary issuer and 

guarantor financial statements for issuer and 

guarantor structures that included more than one 

subsidiary co-issuer, provided the other conditions 

of existing Rule 3–10 were met. 

104This requirement is specified in proposed 

Rule 3–10(a)(2). 

ensuring that they remain appropriately 

available for finance subsidiary 

arrangements. Furthermore, we 

generally expect detailed financial 

disclosures about those subsidiaries 

would not be material, given the nature 

and amounts of those subsidiaries’ 

assets and operations.100 While a parent 

company would be permitted to omit 

immaterial detailed financial 

disclosures, all other disclosures 

required by proposed Rule 13–01, such 

as the non-financial disclosures 

specified in proposed Rule 13–01(a)(1) 

though (3), would be required, to the 

extent material. 

Request for Comment 

35. Should we eliminate the ‘‘finance 

subsidiary’’ exception as proposed? 

Would the proposed elimination of the 

‘‘finance subsidiary’’ exception under 

existing Rule 3–10(b) result in 

supplemental financial information 

about the finance subsidiary and its 

parent company being required under 

the proposed rule where it would not be 

required under the existing rule? If so, 

in what circumstances? Would such 

financial information be material to 

investors? Why or why not? 

(B) Obligated Parent Company and 

Single Obligated Subsidiary 

Existing Rule 3–10(c) applies when an 

‘‘operating subsidiary’’ issues securities 

guaranteed by its parent company. 

Existing Rule 3–10(h)(8) defines an 

‘‘operating subsidiary’’ to differentiate it 

from a ‘‘finance subsidiary.’’ Since the 

proposed amendments would remove 

the ‘‘finance subsidiary’’ distinction and 

definition, proposed Rule 3–10 likewise 

would no longer need to refer to or 

define ‘‘operating subsidiary.’’ The 

operating subsidiary structure of 

existing Rule 3–10(c) would be covered 

in the issuer and guarantor structure in 

proposed Rule 3–10(a)(1)(ii) if the 

security were to be issued by the 

subsidiary or proposed Rule 3– 

10(a)(1)(i) if the security were to be coissued, jointly and severally, with its 

parent company as contemplated in 

existing Note 3 to Rule 3–10(c). 

Existing Rule 3–10(e) applies to a 

single subsidiary guarantor of securities 

issued by the parent company of that 

subsidiary. This structure would be 

included in the issuer and guarantor 

structure in proposed Rule 3–10(a)(1)(i). 

As discussed above,101 the requirement 

in the existing rule that the subsidiary 

guarantor’s guarantee be full and 

unconditional would not be a condition 

of eligibility under the proposed rule, 

but disclosure of any material 

limitations or conditions to the 

subsidiary guarantee would be required 

pursuant to proposed Rule 13–01(a)(2). 

(C) Obligated Parent Company and 

Multiple Obligated Subsidiaries 

Existing Rule 3–10(d) applies to a 

subsidiary that issues securities 

guaranteed by its parent company and 

one or more other subsidiaries of that 

parent company. Existing Rule 3–10(f) 

applies to multiple subsidiary 

guarantors of securities issued by the 

parent company of those subsidiaries. 

Both of these existing exceptions 

involve more than one of the parent 

company’s subsidiaries that are 

obligated as guarantor or issuer of the 

guaranteed security, and require that all 

guarantees be joint and several as well 

as full and unconditional. For issuer 

and guarantor structures currently 

included in Rule 3–10(d), proposed 

Rule 3–10(a)(1)(ii) would apply if the 

guaranteed security were issued by a 

subsidiary and proposed Rule 3– 

10(a)(1)(i) would apply if the guaranteed 

security were co-issued, jointly and 

severally, with its parent company as 

contemplated in existing Note 3 to Rule 

3–10(d). Proposed Rule 3–10(a)(1)(i) 

would apply to parent company issuer 

and subsidiary guarantor structures 

currently included in Rule 3–10(f). 

As discussed above,102 while 

subsidiaries’ guarantees would no 

longer be required to be full and 

unconditional or joint and several, and 

would not affect whether an issuer and 

guarantor structure is eligible under the 

proposed rule, the terms and conditions 

of the subsidiary guarantee, including 

any limitations and conditions, would 

be required to be disclosed as part of 

proposed Rule 13–01(a)(2), to the extent 

material. 

Finally, under existing Rule 3–10, 

issuer and guarantor structures that 

include more than one subsidiary coissuer do not explicitly fall into the 

existing exceptions. Currently, under 

those circumstances, a registrant would 

generally seek pre-filing relief from the 

Commission staff.103 Multiple 

subsidiary co-issuers should not change 

the analysis as to what financial 

statement disclosures should be 

provided to investors, because, 

consistent with the other proposed 

eligible issuer and guarantor structures, 

the parent company controls each 

consolidated co-issuer, the financial 

information of the subsidiary co-issuers 

would be reflected in the consolidated 

financial statements of the parent 

company, and the parent company 

would be fully and unconditionally 

obligated to make payments in full 

when due under the guaranteed 

security. Therefore, proposed Rule 3– 

10(a)(1)(i) would apply to such 

structures if the subsidiaries co-issued 

the guaranteed securities jointly and 

severally with the parent company. 

Proposed Rule 3–10(a)(1)(ii) would 

apply if the parent company is a full 

and unconditional guarantor of 

securities co-issued by the subsidiaries. 

Request for Comment 

36. Would any issuer and guarantor 

structures that are currently eligible 

under existing Rule 3–10 no longer be 

eligible under the proposed 

amendments? If so, what specific 

structures would not be eligible and 

why? 

37. Should any issuer and guarantor 

structures that would be eligible under 

the proposed categories be disallowed? 

Should any issuer and guarantor 

structures that are ineligible under the 

proposed categories be allowed? If so, 

which ones and why? 

2. Disclosure Requirements 

Under existing Rule 3–10, one of the 

conditions to omitting separate financial 

statements of a subsidiary issuer or 

guarantor is providing the Alternative 

Disclosures in the footnotes to the 

parent company’s consolidated financial 

statements. We are proposing to retain 

the requirement to provide Alternative 

Disclosures, with modifications, as we 

believe the disclosures are an important 

supplement to the consolidated parent 

company disclosures. If the eligibility 

conditions in proposed Rule 3–10(a) 

and (a)(1) are satisfied, a parent 

company must include the Proposed 

Alternative Disclosures specified in 

proposed Rule 13–01 in the relevant 

filing, but could omit the separate 

financial statements of subsidiary 

issuers and guarantors.104 The proposed 

amendments would streamline and 

simplify the rule by including the 

Proposed Alternative Disclosures in a 

single location within proposed Rule 

13–01 rather than having such 

requirements in multiple paragraphs. 


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105See letters from ABA-Committees, Anuradha, 

BDO, Cahill, CAQ, DT, EY, FedEx, GM, Grant, 

Headwaters, KPMG, Medtronic, and Noble-UK. 

106See letters from ABA-Committees, Davis Polk, 

EY, PwC, and SIFMA. 

107The majority of private debt offerings are 

conducted using Rule 144A, and 99% of Rule 144A 

offerings are debt offerings. Additionally, although 

most Regulation D offerings are equity offerings, a 

significant number include debt securities. See 

Access to Capital and Market Liquidity Report, at 

p. 38; Scott Bauguess et al., U.S. Sec. & Exch. 

Comm’n, Div. of Econ. & Risk Analysis, Capital 

Raising in the U.S.: An Analysis of the Market for 

Unregistered Securities Offerings, 2009–2014 (Oct. 

2015), https://www.sec.gov/dera/staff-papers/whitepapers/30oct15_white_unregistered_offering.html. 

108See, e.g., letters from ABA-Committees, Cahill, 

and Davis Polk. 

109See letter from Cahill. 

110See letter from Davis Polk. 

111See Section III.A.3.a of the 2000 Release. 

112 In the 2000 Release, the Commission stated 

that SAB 53 ‘‘did not contemplate more complex 

guarantee structures where investors must assess 

the subsidiary’s financial condition more 

completely and independently of its parent 

company and other subsidiaries of its parent 

company,’’ and also stated that ‘‘summarized 

financial information is inadequate for this purpose. 

For example, although cash flow information is 

significant in assessing creditworthiness, 

summarized financial information includes no cash 

flow information.’’ See id. 

113 In discussing the use of the summarized 

financial information in SAB 53 to address 

disclosures involving multiple guarantors, the 

Commission, in the 2000 Release, stated ‘‘[m]any 

structures presented to the staff involved a 

subsidiary issuer, a parent company guarantor, 

multiple subsidiary guarantors, and multiple 

subsidiaries that are not guarantors. Other 

structures involved more than 100 subsidiary 

guarantors. [SAB 53 disclosures in such structures 

would have included]. . .more than 100 sets of 

summarized financial information. Not only would 

that disclosure have been burdensome for the 

registrant to provide, it is unlikely to have been 

useful to investors.’’ See Section III.A.3.a of the 

2000 Release. Other reasons cited by the 

Commission for requiring Consolidating 

Information in the 2000 Release are discussed in 

Sections III.C.2.a.i, ‘‘Level of Detail,’’ and III.C.2.a.ii, 

‘‘Presentation on a Combined Basis,’’ below. 114See Section III.C.2.a.i, ‘‘Level of Detail.’’ 

The proposed amendments are 

described below. 

a. Financial Disclosures 

The Consolidating Information 

currently required by existing Rule 3–10 

provides highly-detailed financial 

information about individual issuers 

and guarantors or groups of issuers and 

guarantors within the consolidated 

parent company, as well as nonguarantor subsidiaries. 

Several commenters cited various 

challenges registrants face in preparing 

Consolidating Information, such as the 

complexities of the disclosures; that 

registrants’ books and records often are 

not maintained on a basis that facilitates 

the preparation of the disclosures; that 

extensive manual processes are often 

necessary; and the difficulty, time, and 

costs to prepare the disclosures.105 A 

number of commenters 106 suggested 

aligning the disclosure requirements of 

Rule 3–10 with disclosure practices of 

issuers and guarantors in the private 

debt markets that comply with 

Securities Act Rule 144A.107 Some 

commenters stated that the type of 

information included in debt offerings 

under Rule 144A, which is less detailed 

than what is required by Consolidating 

Information, provides all the material 

information necessary for investors to 

make informed investment decisions.108

For example, one commenter stated that 

the typical offering memorandum in a 

Rule 144A offering includes revenues, 

operating income (or a similar metric) 

when available, assets and liabilities of 

the issuers and guarantors as a 

consolidated group, and the nonguarantor subsidiaries as a consolidated 

group.109 Another commenter stated 

that it was ‘‘not aware of a single Rule 

144A offering that has ever included 

[Rule 3–10]. . .financial statements that 

were not otherwise already available’’ 

and that the Consolidating Information 

is ‘‘routinely omitted in unregistered 

offerings.’’ 110

Prior to the adoption of existing Rule 

3–10 in 2000, under Staff Accounting 

Bulletin No. 53 (1983) (‘‘SAB 53’’), 

subsidiary issuers were ‘‘permitted to 

include summarized financial 

information,’’ 111 which was presented 

for each subsidiary issuer or guarantor 

and did not exclude the financial 

information of non-guarantor 

subsidiaries consolidated by those 

subsidiary issuers and guarantors. In 

discussing its reasons in the 2000 

Release for requiring Consolidating 

Information instead of summarized 

financial information, the Commission 

highlighted that the summarized 

financial information in SAB 53 did not 

allow for the more complete and 

independent assessment of a 

subsidiary’s financial condition that 

may be necessary in the case of ‘‘more 

complex’’ guarantee structures.112

Additionally, the Commission noted 

that SAB 53 disclosures could result in 

a high number of sets of summarized 

financial information, which would be 

burdensome for the parent company and 

would not likely be useful to 

investors.113

In considering changes to the existing 

Rule 3–10 disclosure requirements, we 

have sought to improve the disclosure 

provided to investors by focusing on the 

material information needed to make an 

informed investment decision while 

reducing the cost and burdens for 

registrants in providing the information. 

Our experience since the adoption of 

the existing Rule 3–10 in 2000 suggests 

that the level of information required by 

Consolidating Information, although 

detailed, could be better focused on 

what is material to an investment 

decision. Additionally, we believe that 

many of the reasons for requiring 

Consolidating Information instead of 

summarized financial information 

highlighted by the Commission in the 

2000 Release could be addressed 

without requiring the use of 

Consolidating Information, thereby 

addressing the concerns noted above 

regarding the burdens associated with 

issuers’ preparation of Consolidating 

Information. 

Accordingly, as discussed below,114

the financial disclosure requirements in 

proposed Rule 13–01 are tailored to the 

type of material information, in addition 

to the parent company’s consolidated 

financial statements, that we believe 

investors in registered offerings need to 

make informed investment decisions 

about guaranteed debt securities. In 

seeking to identify the material 

information investors need, we have 

considered commenters’ suggestion that 

we look to the disclosures provided in 

the Rule 144A debt markets. In this 

regard, we note that the proposed 

disclosures would be more detailed than 

that typically provided in exempt 

offerings, in which investors have the 

ability to request additional information 

from potential issuers when they deem 

it necessary, such as additional financial 

information about the issuers and 

guarantors or qualitative disclosures 

pertaining to the issuer and guarantor 

structure. Under the proposed revisions, 

registrants would: 

• Be required to provide Summarized 

Financial Information rather than 

Consolidating Information; 

• be required to provide disclosure 

about the Obligor Group without 

financial information of non-obligated 

entities (financial information of each 

issuer and guarantor could be combined 

into a single column); and 

• be permitted to reduce the number 

of periods presented. 

As a result of the proposed revisions, 

the instructions for preparing 

Consolidating Information in existing 

Rule 3–10(i) would be eliminated. 

i. Level of Detail 

Unless a brief narrative is permitted, 

existing Rule 3–10 requires 

Consolidating Information, which 

includes all major captions of the 

balance sheet, income statement, and 

cash flow statement that Article 10 of 

Regulation S–X requires to be shown 


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115See letters from BDO, CAQ, DT, EY, Grant, 

and KPMG. 

116See Section III.A.3.a of the 2000 Release. 

117See also letter from BDO (‘‘In some cases, the 

value of the alternative disclosure may be 

overshadowed by its multi-column voluminous 

nature.’’). 

118See letters from ABA-Committees, Cahill, 

Davis Polk, and PwC. 119See, e.g., letter from GM (‘‘There are many 

challenges when preparing the Consolidating 

Information, in particular the consolidating 

statement of cash flows. Our underlying books and 

records are not based on a guarantor/non-guarantor 

structure, and due to a centralized cash 

management function numerous intercompany 

transactions exist. These factors complicate the 

preparation of Consolidating Information prepared 

‘as if’ the registrant was a stand-alone entity. These 

intercompany transactions require extensive 

analysis and manual reclassification adjustments to 

permit the preparation of the Consolidating 

Information, resulting in excessive complexity and 

effort relative to the limited benefits of providing 

this information to investors.’’). See also letters 

from ABA-Committees, CAQ, Grant, KPMG, and 

PwC. 

120See, e.g., letters from BDO and EY. 

121See, e.g., letters from CAQ and KPMG. 

122This commenter suggested the Commission 

consider summarized financial information related 

only to: (1) The issuers separately and the combined 

guarantor subsidiaries separately; (2) the issuers 

and guarantors on a combined basis; or (3) the 

guarantor subsidiaries. See letter from DT. 

123See, e.g., letters from CalPERS and CFA. 

124See Section III.A.3.a of the 2000 Release. 

separately in interim financial 

statements. As noted above, a number of 

commenters recommended reducing the 

level of detail in financial disclosures by 

replacing the Consolidating Information 

with summarized financial information 

in the notes to the parent company’s 

financial statements.115

The Commission stated in the 2000 

Release that Consolidating Information 

‘‘provides the same level of detail about 

the financial position, results of 

operations, and cash flows of subsidiary 

issuers and subsidiary guarantors that 

investors are accustomed to obtaining in 

interim financial statements of a 

registrant.’’ 116 In our experience, this 

level of detail about subsidiary issuers 

and guarantors occupies multiple pages 

of a parent company’s financial 

statements, potentially obscuring 

important information contained 

therein.117 We believe the required 

supplemental financial information 

about issuers and guarantors should 

instead be focused on the information 

that is most likely to be material to an 

investment decision. If additional line 

items beyond those specifically required 

are material to an investment decision, 

they would be required to be disclosed 

as well. Proposed Rule 13–01(a)(4) 

would therefore require Summarized 

Financial Information, which would 

include select balance sheet and income 

statement line items. Disclosure of 

additional line items of financial 

information beyond what is specified in 

proposed Rule 13–01(a)(4) would be 

required by proposed Rule 13–01(a)(5), 

to the extent they are material to an 

investment decision. For example, if a 

material amount of reported revenues of 

the obligated entities are derived from 

transactions with related parties, such 

as other non-issuer and non-guarantor 

subsidiaries of the parent company, 

disclosure of such related party 

revenues would be required. This 

Summarized Financial Information and 

any additional disclosures that would 

be required based on materiality would 

supplement the parent company’s 

consolidated financial statements and 

would simplify compliance and reduce 

costs for preparers, while providing 

investors with more streamlined and 

easier to understand financial 

information that is material to an 

investment decision. 

While investors are provided cash 

flow information at the parent company 

consolidated level, supplemental cash 

flow information about subsidiary 

issuers and guarantors is not typically 

included in disclosures provided in the 

Rule 144A debt markets.118 This leads 

us to believe that investors in a 

registered offering look primarily to a 

parent company’s consolidated cash 

flow information to assess 

creditworthiness where the parent is the 

primary obligor or its guarantor 

obligation is full and unconditional. 

Based on this observation, and the 

difficulties and significant costs 

associated with the preparation of cash 

flow information for inclusion in 

Consolidating Information highlighted 

by several commenters,119 supplemental 

cash flow information would not be a 

required disclosure under the proposed 

rule. 

Request for Comment 

38. Should the Proposed Alternative 

Disclosures require Summarized 

Financial Information rather than 

Consolidating Information? Would the 

Summarized Financial Information, 

along with the other disclosures 

required by proposed Rule 13–01, 

provide the financial information 

investors need to make an informed 

investment decision with respect to the 

guaranteed security? 

39. How would issuers and investors 

be affected by requiring Summarized 

Financial Information? Are there 

particular items in Consolidating 

Information that investors need to make 

informed investment decisions that 

would not be provided separately 

through Summarized Financial 

Information? Is there any such financial 

information that underwriters would 

still require? If so, what would be the 

effect on the costs associated with the 

offering? 

40. Would additional line items of 

financial information beyond what 

would be required by Summarized 

Financial Information help investors 

make informed investment decisions? If 

so, what line items and why? For 

example, should the proposed rule 

specifically require supplemental 

summarized cash flow information 

resulting from operating, financing, and 

investing activities? Would issuers face 

challenges in providing such 

information? 

41. Do investors need summarized 

cash flow information about issuers and 

guarantors in addition to the parent 

company’s consolidated cash flow 

statements to make informed investment 

decisions about guaranteed securities? If 

so, how is it used? If not, why not? 

ii. Presentation on a Combined Basis 

Consolidating Information 

distinguishes the assets, liabilities, 

operations, and cash flows of each 

category of parent and subsidiaries as 

issuer, guarantor, or non-guarantor. 

Comments varied with respect to 

whether and how the financial 

information of the entities in the issuers 

and guarantors should be grouped. 

Some commenters suggested permitting 

disclosure of financial information of 

either the Obligor Group or the nonobligated entities as groups,120 other 

commenters recommended requiring 

disclosure of both groups separately,121

and another commenter suggested 

several possible groupings.122 Other 

commenters stated that investors use the 

existing Rule 3–10 disclosures to 

evaluate separately the likelihood of 

payment by the issuer and 

guarantors.123

The Commission observed in the 2000 

Release that there were ‘‘complex 

guarantee structures where investors 

must assess the subsidiary’s financial 

condition more completely and 

independently of its parent company 

and other subsidiaries of its parent 

company.’’ 124 The Commission also 

stated that it was ‘‘requiring 

[Consolidating Information] because it 

clearly distinguishes the assets, 

liabilities, revenues, expenses, and cash 

flows of the entities that are legally 

obligated under the indenture from 

those that are not’’ and ‘‘[i]t also 

facilitates analysis of trends affecting 

subsidiary issuers and subsidiary 

guarantors and relationships among the 

various components of a consolidated 


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125See id. 

126See, e.g., letters from BDO and EY. 

127See Rule 3–10(i)(3) of Regulation S–X. 

128See Rule 3–10(i)(5) of Regulation S–X. 

129This proposed amendment may result in 

decreased comparability in the combined 

Summarized Financial Information of the Obligor 

Group between parent companies that elect to use 

different methods of excluding the financial 

information of their non-issuer and non-guarantor 

subsidiaries. In proposing this change, we 

considered the costs to the parent company of 

requiring the use of a specific method of accounting 

for non-issuer and non-guarantor subsidiaries to 

remove their financial information from the 

combined Obligor Group, particularly if that parent 

company’s systems are not designed to readily 

produce such information. See, e.g., letters from 

CAQ, EY, Grant, KPMG, and PwC (highlighting the 

challenges of this requirement under the existing 

rule). We expect any decrease of comparability to 

be limited, as most line items required to be 

disclosed in Summarized Financial Information 

would be unaffected by the use of different methods 

for this purpose (e.g., current assets, current 

liabilities, net sales or gross revenues and gross 

profit). 

130See Section III.C.2.a.ii, ‘‘Presentation on a 

Combined Basis.’’ 

organization.’’ 125 We continue to 

believe it is important to clearly 

distinguish in the supplemental 

financial information the entities 

obligated under the guaranteed security 

from those that are not obligated. Along 

with some commenters, however, we 

believe investors focus largely on 

whether payment will be made in full 

on the dates specified in the guaranteed 

security, rather than whether payment 

comes from an issuer or one or more 

guarantors in the same consolidated 

group.126 We therefore believe that it is 

appropriate for our disclosure rules to 

focus on the obligated entities as a 

group, and that the parent company 

should be able to provide financial 

disclosures that convey information 

about the Obligor Group on a combined, 

rather than disaggregated, basis. 

Accordingly, the proposed rule would 

permit the parent company to present 

the Summarized Financial Information 

of the parent company issuer or 

guarantor, each consolidated subsidiary 

issuer, and each consolidated subsidiary 

guarantor, on a combined basis. 

Proposed Rule 13–01(a)(4) would 

require intercompany transactions 

between issuers and guarantors 

presented on a combined basis to be 

eliminated. 

We recognize that there may be 

circumstances in which separate 

financial information about certain 

issuers and guarantors is material to an 

investment decision. Accordingly, when 

information provided in response to 

proposed Rule 13–01 is applicable to 

one or more, but not all, issuers and 

guarantors, proposed Rule 13–01(a)(4) 

would require, to the extent it is 

material, separate disclosure of 

Summarized Financial Information for 

the issuers and guarantors to which the 

information applies. For example, if a 

subsidiary’s guarantee were limited to a 

particular dollar amount, disclosure of 

that limitation would be required by 

proposed Rule 13–01(a)(2). In that case, 

separate disclosure of the Summarized 

Financial Information specified in 

proposed Rule 13–01(a)(4) would be 

required for that subsidiary guarantor, if 

material. 

Because non-guarantor subsidiaries 

are not obligated to make payments as 

either issuer or guarantor, we do not 

believe separate supplemental 

disclosure of their financial information 

as required under the existing rule is 

likely to be material to an investment 

decision. As such, the proposed rule 

would no longer require separate 

disclosure of the financial information 

of non-guarantor subsidiaries. 

In order to present the assets, 

liabilities, and operations of the Obligor 

Group accurately, it is necessary to 

exclude the financial information of 

subsidiaries not obligated under the 

guaranteed security. Within 

Consolidating Information under the 

existing rule, a parent company should 

present investments in all subsidiaries 

based upon their proportionate share of 

the subsidiary’s net assets,127 and 

subsidiary issuer or guarantor columns 

should present investments in certain 

subsidiaries, including but not limited 

to non-guarantor subsidiaries, under the 

equity method of accounting.128 This 

presentation avoids presenting the 

financial information of a non-issuer or 

non-guarantor subsidiary as though it 

were an issuer or guarantor. We 

continue to believe that the financial 

information of non-issuer and nonguarantor subsidiaries should be 

excluded from the Summarized 

Financial Information of the Obligor 

Group, even if those non-issuer and 

non-guarantor subsidiaries would be 

consolidated by an issuer or guarantor. 

We have included a corresponding 

requirement in proposed Rule 13– 

01(a)(4). However, the proposed rule 

would allow the parent company to 

determine which method best meets the 

objective of excluding the financial 

information of non-issuer and nonguarantor subsidiaries from the 

Proposed Alternative Disclosures, so 

long as the selected method is disclosed 

and used for all non-issuer and nonguarantor subsidiaries for all classes of 

guaranteed securities for which the 

disclosure is required, and is reasonable 

in the circumstances.129 For example, 

the parent company could exclude the 

assets, liabilities, and operations of nonissuer and non-guarantor subsidiaries by 

using the equity method of accounting 

for those subsidiaries. 

As discussed above,130 separate 

disclosure of the Summarized Financial 

Information of one or more subsidiary 

issuers or guarantors may be necessary 

under the proposed rule. In this case, 

the same method of excluding a nonissuer’s or non-guarantor’s financial 

information from the Summarized 

Financial Information of the Obligor 

Group would also be required for the 

subsidiary issuers or guarantors whose 

financial information is presented 

separately. For example, if a 

subsidiary’s guarantee is limited and its 

Summarized Financial Information is 

presented separately from that of the 

combined Obligor Group, that 

subsidiary guarantor’s financial 

information should be excluded from 

the Obligor Group information 

consistent with the method selected for 

excluding the financial information of 

non-issuer and non-guarantor 

subsidiaries from the Obligor Group 

information. 

Request for Comment 

42. Should we permit the financial 

disclosure of the Obligor Group to be 

combined within the proposed 

Summarized Financial Information? 

Why or why not? If not, what groupings 

of issuers and guarantors should be 

required or permitted, and why? How 

would this impact the information for 

investment decisions? Are there specific 

circumstances where separate 

information should be required? 

43. Does presentation of the financial 

information of non-guarantor 

subsidiaries provide investors with 

information they need to make informed 

investment decisions? Do investors use 

the financial information of nonobligated entities as part of their 

investment analyses? For example, do 

investors consider ratios or any similar 

derivation of the information from the 

non-obligated entities? If so, how is it 

used and in what circumstances? 

Should Summarized Financial 

Information of the non-obligated entities 

also be provided? Why or why not? 

44. Should we require a specific 

method of accounting (e.g., the equity 

method) to be used to exclude the 

financial information of non-obligated 

subsidiaries from the Summarized 

Financial Information of the Obligor 

Group instead of permitting the parent 

company to choose? If so, what method 

should we require, and why? If not, 

why? If we do not prescribe a specific 


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49646 Federal Register / Vol. 83, No. 191 / Tuesday, October 2, 2018 / Proposed Rules 

131See letters from Medtronic and PwC. 132See letters from BDO, CAQ, CFA, Comcast, 

DT, EY, GM, Grant, KPMG, and Medtronic. In 

making this suggestion, several of these commenters 

made reference to Rule 10–01(a)(5) of Regulation S– 

X, which allows registrants to apply judgment and 

omit details of accounts which have not changed 

significantly in amount or composition since the 

end of the most recently completed fiscal year. See 

Rule 10–01(a)(5) of Regulation S–X. 

133 17 CFR 249.308a. 

134Existing Rules 3–10(i)(8)(i)–(iii) requires 

disclosure, if true, that each subsidiary issuer or 

subsidiary guarantor is 100% owned by the parent 

company, that all guarantees are full and 

unconditional, and where there is more than one 

guarantor, that all guarantees are joint and several. 

135Rule 3–10(i)(10) of Regulation S–X. 

136Rule 3–10(i)(9) of Regulation S–X. 

137See discussion within Section III.C.2.c, ‘‘When 

Disclosure is Required.’’ 

138Existing Rule 3–10(i)(11)(i) specifies that the 

parent company ‘‘[m]ay not omit any financial and 

narrative information about each guarantor if the 

information would be material for investors to 

evaluate the sufficiency of the guarantee,’’ and 

existing Rule 3–10(i)(11)(ii) states that the 

disclosure ‘‘[s]hall include sufficient information so 

as to make the financial information presented not 

misleading.’’ 

139See discussion within Section III.C.2.c, ‘‘When 

Disclosure is Required.’’ 

140See discussion within Section III.C.2.ii, 

‘‘Presentation on a Combined Basis.’’ 

method, should we limit the permissible 

methods to those concepts included 

within U.S. GAAP, or IFRS, as 

applicable? Alternatively, should we 

limit the permissible methods to 

concepts included within U.S. GAAP, or 

IFRS, as applicable, only when the 

Proposed Alternative Disclosures are 

placed in the parent company’s 

financial statements? How would 

allowing different methods affect the 

disclosures for investors? 

iii. Periods To Present 

In addition to the parent company’s 

consolidated information, the 

supplemental information included in 

the Proposed Alternative Disclosures 

would help facilitate an investor’s 

evaluation of whether the entities in the 

Obligor Group have the ability to make 

payments as required under the 

guaranteed security, including what 

assets are available to satisfy those 

obligations. We believe the required 

periods of Summarized Financial 

Information of the Obligor Group should 

be based on the most recent financial 

information. Instead of the periods 

specified in 17 CFR 210.3–01 and 

210.3–02 (‘‘Rules 3–01 and 3–02 of 

Regulation S–X’’) required by the 

existing rule, the proposed rule would 

require Summarized Financial 

Information only as of, and for, the most 

recently completed fiscal year and yearto-date interim period (‘‘interim 

period’’), if applicable. When used in 

conjunction with the parent company’s 

consolidated financial statements, we 

believe the most recent full fiscal year 

and interim period should provide 

investors the additional information that 

is material to an investment decision in 

the guaranteed security and would 

eliminate unnecessary compliance costs 

for registrants. 

Commenters recommended limiting 

disclosure to the current year, citing 

challenges recasting prior period 

information for circumstances such as 

legal-entity mergers and discontinued 

operations.131 A number of commenters 

stated that interim reporting of the 

Proposed Alternative Disclosures 

should only be required if material 

changes have occurred since the most 

recent annual period that is required to 

be presented.132 However, we believe 

that the most recent interim period 

should be provided so that investors can 

make decisions based on the most 

recent information available. 

Lastly, because Item 1 of Part I of 

Form 10–Q 133 requires a registrant to 

provide the information required by 

Rule 10–01 of Regulation S–X, we are 

proposing to add Rule 10–01(b)(9) to 

require compliance with Rules 3–10 and 

13–01. 

Request for Comment 

45. What periods of presentation are 

material for investors when evaluating 

the credit risk of the Obligor Group? 

46. Should the required periods of 

Summarized Financial Information of 

the Obligor Group be based on the most 

recent financial information? Why or 

why not? If so, what periods should be 

considered ‘‘most recent,’’ and why? 

47. Should we require additional 

periods of Summarized Financial 

Information beyond the most recent 

fiscal year and interim period? Why or 

why not? If yes, which periods and 

why? 

48. Rather than requiring disclosure of 

the most recent interim period, should 

the proposed rule focus on significant 

changes similar to Rule 10–01(a)(5) of 

Regulation S–X, which allows 

registrants to apply judgment and omit 

details of accounts that have not 

changed significantly in amount or 

composition since the end of the most 

recently completed fiscal year? Why or 

why not? 

b. Non-Financial Disclosures 

When Consolidating Information is 

presented, the existing rule requires 

limited non-financial disclosures about 

the issuers and guarantors and the 

guarantees,134 restricted net assets,135

and certain types of restrictions on the 

ability of the parent company or any 

guarantor to obtain funds from their 

subsidiaries.136 Although the Request 

for Comment asked if there is different 

or additional information that investors 

need about guarantors and issuers of 

guaranteed securities, we received no 

comments on non-financial disclosures. 

In addition to proposing amendments 

to existing Rule 3–10 for financial 

disclosures, we are also proposing 

amendments to require specific nonfinancial disclosures. We are proposing 

these amendments to enhance the 

information provided about subsidiary 

issuers and guarantors, particularly in 

light of our proposal to require 

Summarized Financial Information for 

these subsidiaries. Proposed Rules 13– 

01(a)(1) through (3) would require 

certain disclosures, to the extent 

material,137 about the issuers and 

guarantors, the terms and conditions of 

the guarantees, and how the issuer and 

guarantor structure and other factors 

may affect payments to holders of the 

guaranteed securities. Although a parent 

company must provide narrative 

disclosure under the existing 

requirements, we believe the proposed 

requirements would result in enhanced 

narrative disclosures that would 

improve investor understanding of the 

issuers, guarantors, and guarantees, and 

make the financial disclosures they 

accompany easier to understand. While 

the proposed requirements are 

composed of the items we believe are 

most likely to be material to an investor, 

there may be additional facts and 

circumstances specific to particular 

issuers and guarantors that would be 

material to holders of the guaranteed 

security. In that case, similar to existing 

Rule 3–10(i)(11),138 proposed Rule 13– 

01(a)(5) would require disclosure of 

those facts and circumstances.139

Additionally, when a non-financial 

disclosure is applicable to one or more, 

but not all, issuers and guarantors, 

proposed Rule 13–01(a)(4) would 

require, to the extent it is material, 

separate disclosure of Summarized 

Financial Information for the issuers 

and guarantors to which it applies.140

Request for Comment 

49. Are the proposed non-financial 

disclosures material to an investment 

decision? Should we explicitly require 

any non-financial disclosures in 

addition to what is proposed? If so, 

what information and why? 

c. When Disclosure Is Required 

One of the conditions that must be 

met under existing Rule 3–10 to be 

eligible to omit the financial statements 

of a subsidiary issuer and guarantor is 


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Federal Register / Vol. 83, No. 191 / Tuesday, October 2, 2018 / Proposed Rules 49647 

141Rules 3–10(h)(5) and (6) specify the numerical 

thresholds that must not be exceeded for a parent 

company to have ‘‘no independent assets or 

operations,’’ and for a subsidiary to be ‘‘minor,’’ 

respectively. See additional discussion above in 

Section II.F, ‘‘Exceptions.’’ 

142See discussion of existing requirements in 

Section II.F, ‘‘Exception Paragraphs.’’ 

143See letters from ABA-Committees, AB–NYC, 

CAQ, DT, EY, FedEx, KPMG, and PwC. 

144This requirement is specified in proposed 

Rule 13–01(a). Whether a disclosure specified in 

proposed Rule 13–01 may be omitted or whether 

additional disclosure would be required by 

proposed Rule 13–01(a)(5), discussed below, 

depends on whether the disclosure would be 

material to a reasonable investor. The Supreme 

Court in TSC v. Northway held that a fact is 

material if there is ‘‘a substantial likelihood that the 

disclosure of the omitted fact would have been 

viewed by the reasonable investor as having 

significantly altered the ‘total mix’ of information 

made available.’’ See TSC Indus., Inc. v. Northway, 

Inc., 426 U.S. 438, 449 (1976). 

145For example, a parent company issuer could 

have guarantor subsidiaries as well as nonguarantor subsidiaries. If the non-guarantor 

subsidiaries are immaterial such that the combined 

Summarized Financial Information of the Obligor 

Group was not materially different from the 

corresponding amounts in the parent company’s 

consolidated financial statements, Summarized 

Financial Information could be omitted. However, 

if at a later time, non-guarantor subsidiaries become 

a larger part of the parent company’s business such 

that the combined Summarized Financial 

Information of the Obligor Group is materially 

different from the corresponding amounts in the 

parent company’s consolidated financial 

statements, the parent company would then be 

required to provide such Summarized Financial 

Information. 

146Rules 3–01 and 3–02 of Regulation S–X. 

147For example, one commenter suggested its 

recommended disclosures be provided on an 

unaudited basis, see letter from WhiteWave, 

whereas another commenter suggested requiring, on 

an audited basis, the type of information typically 

included on an unaudited basis in offering 

memoranda for Rule 144A debt offerings. See letter 

from ABA-Committees. 

providing the Alternative Disclosures. If 

certain numerical thresholds are met, 

including that the parent company has 

‘‘no independent assets or operations’’ 

and that all non-issuer and nonguarantor subsidiaries are ‘‘minor,’’ 141

the Alternative Disclosures may take the 

form of a brief narrative in lieu of 

detailed Consolidating Information, but 

some type of the Alternative Disclosures 

is always required.142 Under these 

thresholds, minor changes in 

circumstances can result in dramatically 

different disclosures being required. A 

number of commenters indicated that 

these thresholds are unnecessarily 

restrictive.143

Instead of using the existing rule’s 

numerical thresholds to determine the 

form and content of disclosure, we 

believe investors should receive all 

disclosures specified in the proposed 

rule, unless such information is 

immaterial. As such, the proposed 

amendments would eliminate the ‘‘no 

independent assets or operations’’ and 

‘‘minor’’ numerical thresholds, as well 

as the brief narrative form of Alternative 

Disclosures, and instead require 

financial and non-financial disclosures 

to the extent material to holders of the 

guaranteed security.144 For example, 

under the proposed rule, the 

Summarized Financial Information of 

the Obligor Group could be omitted if 

the parent company’s consolidated 

financial statements do not differ in any 

material respects from the Obligor 

Group.145 As another example, if a 

finance subsidiary issues securities that 

are guaranteed by its parent company, 

the Summarized Financial Information 

could be omitted because the finance 

subsidiary has no independent material 

debt-paying ability and has no material 

assets or operations other than those 

related to the issuance, administration, 

and repayment of the guaranteed 

security. While the disclosures specified 

in proposed Rule 13–01(a)(1) through 

(4) may be omitted if immaterial to 

holders of the guaranteed security, for 

clarity, proposed Rule 13–01(a)(4) 

requires the registrant to disclose a 

statement that those financial 

disclosures have been omitted and the 

reason(s) why the disclosures are not 

considered to be material. 

Existing Rules 3–10(i)(11)(i) and (ii), 

respectively, require disclosure of any 

financial and narrative information 

about each guarantor if it would be 

material for investors to evaluate the 

sufficiency of the guarantee, and 

disclosure of sufficient information to 

make the financial information 

presented not misleading. This 

disclosure is required when 

Consolidating Information is disclosed. 

While we have proposed specific 

financial and non-financial disclosures, 

there may be other information about 

the guarantees, issuers, and guarantors 

that could be material to holders of the 

guaranteed security. Accordingly, 

proposed Rule 13–01(a)(5) would 

require disclosure of any information 

that would be material to holders of the 

guaranteed security, rather than the 

sufficiency of the guarantee as stated in 

the existing rule. This requirement 

would apply in all cases, including 

when the proposed Summarized 

Financial Information is omitted in 

accordance with the proposed rule. 

Request for Comment 

50. Should we eliminate the existing 

numerical thresholds for disclosure, 

such as the parent company having ‘‘no 

independent assets or operations’’ and/ 

or that all non-issuer and non-guarantor 

subsidiaries are ‘‘minor,’’ and instead 

use a materiality standard to determine 

the appropriate level of disclosure? 

Would this cause difficulty in practice? 

If so, what are those difficulties and 

how can they be avoided? Would 

further guidance be necessary? If so, 

please explain what guidance is needed. 

Would the elimination of the numerical 

thresholds and use of a materiality 

standard result in a loss of material 

information that investors currently use 

to analyze these securities? If so, what 

material information would be lost and 

would it be material information 

necessary for an investor’s investment 

decision? Would this principles-based 

approach result in different levels of 

disclosure provided by issuers who, for 

example, may be in similar industries or 

have similar operations? If so, how 

would investors view such differences 

in making investment decisions? 

51. Should any additional disclosures 

be specifically required if default on the 

guaranteed security reaches a certain 

level of likelihood? If so, what type of 

disclosures and when should they be 

provided? 

52. Are the proposed rules sufficiently 

clear about what disclosures should be 

provided and when? If not, how should 

the rules be revised to ensure clarity? 

d. Location of Proposed Alternative 

Disclosures and Audit Requirement 

The primary source of financial 

information provided to investors—the 

consolidated financial statements of the 

parent company—is required to be 

audited as specified in Regulation S– 

X.146 Existing Rule 3–10 requires the 

Alternative Disclosures to be included 

in the notes to the parent company’s 

consolidated financial statements, 

thereby requiring them to be audited for 

the same periods. A few commenters 

specifically addressed whether the 

Alternative Disclosures, as revised by 

their suggestions, should be audited, 

and those recommendations were 

mixed.147

The Proposed Alternative Disclosures 

would provide incremental detail as a 

supplement to the parent company’s 

audited annual and unaudited interim 

consolidated financial statements to 

facilitate an analysis of the parts of the 

consolidated enterprise that are 

obligated to make payments as issuers 

or guarantors. We believe the 

supplemental nature of this information 

supports providing parent companies 

with the flexibility to provide the 

Proposed Alternative Disclosures inside 

or outside of the consolidated financial 

statements in registration statements 

covering the offer and sale of the 

guaranteed debt securities and any 


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49648 Federal Register / Vol. 83, No. 191 / Tuesday, October 2, 2018 / Proposed Rules 

148See 17 CFR 229.303 (Item 303 of Regulation 

S–K). 

149These proposed amendments also apply to 

foreign private issuers and issuers offering 

securities pursuant to 17 CFR 230.251 through 

230.263 (‘‘Regulation A’’) and the forms applicable 

to such entities. See Section III.D, ‘‘Application of 

Proposed Amendments to Certain Types of Issuers,’’ 

below. 

150Regardless 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. 

151On June 28, 2018, the Commission adopted 

rule and form amendments to require filers, on a 

phased in basis, to use the Inline XBRL format for 

financial statement information and risk/return 

summary information. See Inline XBRL Filing of 

Tagged Data, Release No. 33–10514 (Jun. 28, 2018). 

152Public Law 104–67, 109 Stat. 737 (1995). Since 

the PSLRA does not provide a safe harbor for 

forward-looking information located within the 

financial statements, a parent company presenting 

the Proposed Alternative Disclosures in its financial 

statements may be less likely to voluntarily 

supplement those disclosures with forward-looking 

information as compared with disclosures made 

outside the financial statements. However, a parent 

company retains the option of providing forwardlooking information outside its financial statements 

so that such information is covered by the safe 

harbor. 

related prospectus, as well as annual 

and quarterly Exchange Act periodic 

reports required to be filed during the 

fiscal year in which the first bona fide 

sale of the subject securities is 

completed. This proposed optionality 

should reduce costs and burdens for 

parent companies and reduce the 

potential for delay in offerings that 

exists under the existing rule due to the 

need to prepare audited Alternative 

Disclosures. Parent companies using 

this proposed option to provide the 

disclosures outside the consolidated 

financial statements may be able to 

register guaranteed debt offerings and go 

to market more quickly than under the 

existing rule. This may allow parent 

companies to more promptly access 

favorable market conditions. If a parent 

company elects to provide the Proposed 

Alternative Disclosures outside its 

audited financial statements, the 

disclosures would be required in 

specified prominent locations in its 

offering documents and periodic 

reports. 

Accordingly, the note to proposed 

Rule 13–01(a) would allow the parent 

company to provide the Proposed 

Alternative Disclosures in a footnote to 

its consolidated financial statements or, 

alternatively, in management’s 

discussion and analysis of financial 

condition and results of operations 

(‘‘MD&A’’),148 in its registration 

statement covering the offer and sale of 

the subject securities and any related 

prospectus, and in Exchange Act reports 

on Forms 10–K and 10–Q 149 required to 

be filed during the fiscal year in which 

the first bona fide sale of the subject 

securities is completed. If a parent 

company elects to provide the 

disclosures in its audited financial 

statements, the Proposed Alternative 

Disclosures would be required to be 

audited.150 If not otherwise included in 

the consolidated financial statements or 

in the MD&A, the parent company 

would be required to include the 

Proposed Alternative Disclosures in its 

prospectus immediately following ‘‘Risk 

Factors,’’ if any, or otherwise, 

immediately following pricing 

information described in 17 CFR 

229.503(c) (‘‘Item 503(c) of Regulation 

S–K’’). Beginning with the parent 

company’s annual report filed on Form 

10–K for the fiscal year during which 

the first bona fide sale of the subject 

securities is completed, however, the 

parent company would be required to 

provide the Proposed Alternative 

Disclosures in a footnote to its 

consolidated financial statements in its 

annual and quarterly reports. 

The increased flexibility that would 

be afforded to the parent company in 

choosing where to locate the Proposed 

Alternative Disclosures during the fiscal 

year in which the first bona fide sale of 

the subject securities is completed gives 

rise to certain disclosure location 

considerations. If the parent company 

were to elect to provide the Proposed 

Alternative Disclosures in its financial 

statements, consistent with the existing 

rule, the disclosures would be subject to 

annual audit, interim review, and 

internal control over financial reporting 

requirements. By doing so, investors 

and other users may benefit to the 

extent that they consider the 

information included in the financial 

statements more reliable because it is 

subject to these audit and other 

requirements. Also consistent with the 

existing rule, Proposed Alternative 

Disclosures located in the financial 

statements would be subject to XBRL 

tagging requirements.151 The parent 

company may incur additional costs to 

comply with these tagging requirements, 

whereas investors and other users may 

benefit from more readily-available 

information in structured formats. 

In contrast, if the parent company 

were to elect to provide the Proposed 

Alternative Disclosures outside its 

financial statements during this time 

period, it would not incur costs to 

comply with these requirements, but 

investors would not benefit from the 

enhanced reliability of information 

included in the financial statements. In 

addition, the safe harbor under the 

Private Securities Litigation Reform Act 

of 1995 (‘‘PSLRA’’) would not be 

available for the disclosures if provided 

in the financial statements, but would 

be available for disclosure provided in 

other sections of the filing, such as the 

MD&A.152 If the safe harbor is available, 

a parent company may be more likely to 

supplement its disclosures, which 

would benefit investors. When provided 

outside of the financial statements, the 

Proposed Alternative Disclosures would 

be subject to the parent company’s 

disclosure controls and procedures and 

related certification requirements. 

Request for Comment 

53. Should the proposed rule permit 

the parent company to provide the 

Proposed Alternative Disclosures 

outside its financial statements in the 

proposed circumstances described 

above? Alternatively, should the parent 

company be permitted to provide the 

Proposed Alternative Disclosures 

outside its financial statements in all 

circumstances? What are the potential 

benefits or concerns for investors and 

issuers with either approach? 

54. Would requiring the Proposed 

Alternative Disclosures to be included 

in a footnote to the parent company’s 

audited annual and unaudited interim 

financial statements beginning with its 

annual report filed on Form 10–K or 

Form 20–F for the fiscal year during 

which the first bona fide sale of the 

guaranteed securities is completed be 

useful to investors? If so, why? If not, 

why not? What are the potential benefits 

or concerns for investors and issuers 

with either approach? 

55. Would requiring the Proposed 

Alternative Disclosures to be audited or 

reviewed present costs or challenges for 

parent companies? If so, what are they? 

For example, would it cause delays in 

the offering process? 

56. Should the proposed rule specify 

where in a filing the Proposed 

Alternative Disclosures must appear if 

the parent company chooses not to 

include them in its financial statements? 

Why or why not? If yes, are the 

locations required by the note to 

proposed Rule 13–01(a) appropriate? If 

so, why? If not, why not? Where should 

the Proposed Alternative Disclosures be 

disclosed, and why is that location 

appropriate? 

57. Would issuers be more likely to 

voluntarily provide supplemental 

information in addition to the required 

Proposed Alternative Disclosures to the 

extent the PSLRA applied to such 

supplemental information? Why or why 

not? What would that additional 

supplemental information be? 


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Federal Register / Vol. 83, No. 191 / Tuesday, October 2, 2018 / Proposed Rules 49649 

153 17 CFR 230.405 (‘‘Rule 405’’) under the 

Securities Act defines an emerging growth company 

as an issuer that had total gross revenues of less 

than $1.07 billion during its most recently 

completed fiscal year. It retains that status for five 

years after its initial public offering unless its 

revenues rise above $1.07 billion, it issues more 

than $1 billion of non-convertible debt in a three 

year period, or it qualifies as a large accelerated filer 

pursuant to 17 CFR 240.12b–2 (‘‘Rule 12b–2’’) 

under the Exchange Act. 

154See letter from DT. 

155See letter from PwC. 

156See, e.g., letters from CAQ, DT, EY, Grant, 

KPMG, PwC, and SIFMA. A few commenters 

recommended rescinding the requirement 

altogether. See letters from EY and SIFMA. Several 

commenters suggested requiring disclosure about 

recently acquired issuer and guarantor subsidiaries 

to mirror what is required for other issuer and 

guarantor subsidiaries (i.e., form and content of 

Alternative Disclosures). See letters from CAQ, DT, 

Grant, KPMG, and PwC. 

157See, e.g., letters from PwC (stating that a 

‘‘company can incur significant costs and effort to 

prepare such financial statements that will never be 

required again’’) and EY (’’The requirements to 

provide separate pre-acquisition financial 

statements of recently acquired guarantors under S– 

X Rule 3–10(g) are unnecessary and potentially 

burdensome.’’). See also letters from CAQ, DT, 

Grant, and KPMG. 

158Rule 3–05 of Regulation S–X specifies 

requirements for pre-acquisition financial 

statements of an acquired or to be acquired 

significant ‘‘business.’’ Registrants determine 

whether a ‘‘business’’ has been acquired by 

applying Rule 11–01(d) of Regulation S–X, and 

whether an acquisition is significant by using the 

investment, asset, and income tests described in 

Rule 1–02(w) of Regulation S–X. If the parent 

company is a smaller reporting company, 17 CFR 

210.8–04 (‘‘Rule 8–04 of Regulation S–X’’) specifies 

requirements for pre-acquisition financial 

statements of an acquired or to be acquired 

significant business, including the tests used to 

determine if an acquisition is significant. Recentlyacquired subsidiary issuers and guarantors would 

typically be considered a ‘‘business’’ because 

separate entities, subsidiaries, or divisions are 

presumed to be businesses. The requirements of 

Rule 3–05 of Regulation S–X overlap with Rule 3– 

10(g) if a parent company files a registration 

statement in connection with the offering of 

guaranteed debt or debt-like securities and acquires 

a subsidiary issuer or guarantor. However, the 

significance test under Rule 3–10(g) measures 

significance based on the purchase price of the 

recently acquired subsidiary issuer or guarantor 

relative to the size of the offering, which often 

results in a requirement to provide financial 

statements at a far lower level of significance than 

under Rule 3–05 of Regulation S–X. The proposed 

elimination of Rule 3–10(g) would generally result 

in an investor receiving pre-acquisition financial 

statements of a recently-acquired subsidiary issuer 

or guarantor only if it exceeded the thresholds of 

significance specified in Rule 3–05 of Regulation S– 

X or 8–04 of Regulation S–X, as applicable. 159See letter from SIFMA. 

160 If the proposed removal of paragraph (b) of 

existing Rule 12h–5 is adopted, a subsidiary issuer 

or guarantor that was previously required to 

provide pre-acquisition financial statements 

pursuant to existing Rule 3–10(g) but was exempt 

from Exchange Act reporting by paragraph (b) of 

existing Rule 12h–5 would continue to be exempt 

from Exchange Act reporting through proposed 

Rule 12h–5. 

161Section 12(g) registration is triggered when an 

issuer exceeds specified asset and ownership 

thresholds with respect to a class of equity 

securities and does not apply to securities subject 

to Rule 3–10. 

58. Should the proposed rule instead 

require the Proposed Alternative 

Disclosures to be provided in the parent 

company’s financial statements in the 

subject registration statement and 

subsequent Exchange Act periodic 

reports for the fiscal year in which the 

first bona fide sale of the subject 

securities is completed, but permit the 

parent company to provide the 

Proposed Alternative Disclosures 

outside its financial statements in 

subsequent Exchange Act periodic 

reports? If so, why? If not, why not? 

Does the answer change the larger the 

parent company is? Why or why not? 

Would investors and issuers benefit 

from such a requirement? Why or why 

not? Should the Proposed Alternative 

Disclosures be required to be included 

in the parent company’s financial 

statements for a different period of time 

before the parent company is permitted 

to provide them outside its financial 

statements? If so, what time period and 

why? 

59. Should the note to proposed Rule 

13–01(a) apply differently to emerging 

growth companies? 153 Why or why not? 

For example, should there be different 

filings or periods of time if the parent 

company is an emerging growth 

company? If so, what should be 

different and why? How would 

investors and issuers be affected? 

e. Recently-Acquired Subsidiary Issuers 

and Guarantors 

Existing Rule 3–10(g) requires preacquisition audited financial statements 

of a recently acquired subsidiary issuer 

or guarantor in certain circumstances. 

One commenter noted that the 

information provided for recently 

acquired subsidiary issuers and 

guarantors is more detailed than the 

information required for the other 

subsidiary issuers and guarantors.154

Another commenter made a similar 

observation but also noted that these 

financial statements will only be 

included at the time the issuers and 

guarantors are first registering the 

guaranteed security, at which time the 

probability of the guarantee being 

invoked would usually be remote.155

Several commenters recommended 

eliminating the requirement to provide 

audited pre-acquisition financial 

statements of recently-acquired issuers 

and guarantors but differed on whether 

any other disclosure should be 

provided, and, if so, what type.156

Commenters also noted that, in 

addition to being presented with a far 

greater level of detail than is required 

for existing subsidiary issuers and 

guarantors in the Alternative 

Disclosures under existing Rule 3–10, 

these pre-acquisition audited financial 

statements are burdensome and costly 

for preparers.157 Additionally, Rule 3– 

05 of Regulation S–X already requires 

pre-acquisition audited financial 

statements of an acquired business to be 

provided if it exceeds specified 

thresholds of significance,158 which one 

commenter indicated is sufficient for 

investors.159

Based on these observations, and our 

belief that existing requirements under 

Rule 3–05 of Regulation S–X provide 

sufficient information in this context, 

we do not believe the pre-acquisition 

financial statements of recentlyacquired subsidiary issuers and 

guarantors required by existing Rule 3– 

10(g) are necessary. We are therefore 

proposing to delete existing Rule 3– 

10(g). Although we are not proposing to 

require specific disclosures about 

recently-acquired subsidiary issuers and 

guarantors in lieu of pre-acquisition 

financial statements, information about 

these recently-acquired subsidiaries 

would be required if material to an 

investment decision in the guaranteed 

security pursuant to proposed Rule 13– 

01(a)(5). 

Due to the proposed deletion of Rule 

3–10(g), we also propose a conforming 

change to remove paragraph (b) of Rule 

12h–5.160

Request for Comment 

60. Should we eliminate the existing 

requirement to provide pre-acquisition 

financial statements of recentlyacquired subsidiary issuers and 

guarantors? Why or why not? 

Alternatively, should the proposed rule 

require some other type of disclosure 

about recently-acquired subsidiary 

issuers and guarantors instead of preacquisition financial statements? If so, 

what type of disclosure and in what 

instances should it be required? For 

example, should disclosure of preacquisition financial information about 

recently-acquired subsidiary issuers and 

guarantors mirror that of existing 

subsidiary issuers and guarantors? 

f. Continuous Reporting Obligation 

An issuer of securities is required to 

file Exchange Act reports with the 

Commission under Section 13(a), with 

respect to any class of securities 

registered pursuant to Sections 12(b) or 

12(g), or for any class of securities for 

which it has a reporting obligation 

under Section 15(d) of the Exchange 

Act.161 Section 12(b) registration is 

required only for so long as the class of 

securities is listed for trading on a 


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162Accordingly, Section 12(b) reporting 

obligations are terminated when, for example, the 

class no longer qualifies for exchange listing or the 

registrant determines to no longer list the securities 

on a national securities exchange. 

163 15 U.S.C. 78 j(a)(3). 

164 15 U.S.C. 78o(d)(1). 

165As that term is defined in Section 10 of the 

Home Owners’ Loan Act, 12 U.S.C. 1461. 

166As that term is defined in Section 2 of the 

Bank Holding Company Act of 1956, 12 U.S.C. 

1841. 

167The automatic statutory suspension of an 

issuer’s Section 15(d) reporting obligation is not 

available as to any fiscal year in which the issuer’s 

Securities Act registration statement becomes 

effective or is required to be updated pursuant to 

Section 10(a)(3) of the Securities Act. 

168Rule 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. 

169See 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.’’). 

170See letters from ABA-Committees, BDO, CAQ, 

Chamber, DT, EY, KPMG, PwC, SIFMA, and 

Simpson. 

171See letters from ABA-Committees, DT, EY, 

PwC, SIFMA, and Simpson (noting that a 

continuous reporting obligation appears 

inconsistent with the reporting obligation of a 

registrant that provides separate financial 

statements because that registrant may stop 

providing the separate financial statements, even if 

the debt is outstanding). 

172See letter from SIFMA. 

173See letters from DT and Simpson. 

174See letter from Simpson. 

175See Section III.C.3. of the 2000 Release. 

176Additionally, a subsidiary issuer or guarantor 

should consider promptly filing a Form 8–K or a 

Form 6–K to report this change in circumstance. 

national securities exchange.162 An 

issuer incurs a Section 15(d) reporting 

obligation for each class of securities 

that is the subject of a Securities Act 

registration statement that becomes 

effective or is required to be updated 

under Securities Act Section 10(a)(3).163

Section 15(d)(1) 164 provides that if, at 

the beginning of any subsequent fiscal 

year, the securities of any class to which 

the registration statement relates are 

held of record by fewer than 300 

persons, or in the case of a bank, a 

savings and loan holding company,165

or bank holding company,166 by fewer 

than 1,200 persons, the registrant’s 

Section 15(d) reporting obligation is 

automatically suspended with respect to 

that class.167 Rule 12h–3 permits 

registrants to suspend a Section 15(d) 

reporting obligation at any time during 

a fiscal year provided the conditions of 

the rule are met.168

The Commission explained in the 

2000 Release that the parent company 

must continue to provide the 

Alternative Disclosures in its periodic 

reports for as long as the subject 

securities are outstanding.169 This 

disclosure requirement continues to 

apply to the parent company even if the 

reporting obligation of its subsidiary 

issuer or guarantor with respect to the 

subsidiary’s guaranteed securities or 

subsidiary’s guarantees could be 

suspended under either Section 15(d) or 

Rule 12h–3 of the Exchange Act. 

A number of commenters indicated 

that a parent company should be able to 

cease providing the Alternative 

Disclosures for its subsidiary issuers 

and guarantors at the same time that a 

subsidiary’s reporting obligation under 

Section 15(d) of the Exchange Act with 

respect to the subject security could be 

suspended.170 Some of these 

commenters noted that requiring a 

parent company to continue providing 

the Alternative Disclosures once its 

subsidiary issuers’ and guarantors’ 

obligations to file reports could be 

suspended under Section 15(d) or Rule 

12h–3 is inconsistent with other 

reporting rules.171 One commenter 

stated, the ‘‘disparate treatment is 

illogical, and should be harmonized by 

expressly allowing registrants to cease 

providing the information called for by 

the Rule 3–10 accommodations when 

the [reporting obligation related to the] 

guaranteed security is [suspended] 

pursuant to Section 15(d) of the 

Exchange Act.’’ 172 Additionally, some 

commenters 173 stated that this 

requirement unnecessarily burdens 

registrants and ‘‘acts as a disincentive 

for registrants to engage in public debt 

offerings as opposed to offerings under 

Rule l44A or pursuant to other 

Securities Act exceptions.’’ 174

We are proposing that a parent 

company be permitted to cease 

providing the Proposed Alternative 

Disclosures if the corresponding 

subsidiary issuer’s or guarantor’s 

Section 15(d) obligation is suspended 

automatically by operation of Section 

15(d)(1) or through compliance with 

Rule 12h–3. To implement this change, 

the proposed rule would eliminate the 

statement in existing Rule 3–10(a) that 

‘‘[e]very issuer of a registered security 

that is guaranteed and every guarantor 

of a registered security must file the 

financial statements required for a 

registrant by Regulation S–X.’’ As 

proposed, if a subsidiary issuer or 

guarantor is required to file financial 

statements required by Regulation S–X 

with respect to the guarantee or 

guaranteed security, the subsidiary may 

omit such financial statements if it 

complies with conditions set forth in 

proposed Rule 3–10. The parent 

company would be able to cease 

providing the Proposed Alternative 

Disclosures for a subsidiary issuer or 

guarantor that is not required to file 

financial statements required by 

Regulation S–X with respect to the 

guarantee or guaranteed security. 

As described above, Section 12(b) 

registration is required for so long as a 

class of securities is listed for trading on 

a national securities exchange. As a 

continued condition of eligibility to 

omit the financial statements of a 

subsidiary issuer or guarantor, a parent 

company must continue providing the 

Proposed Alternative Disclosures for so 

long as the subsidiary issuer or 

guarantor has a Section 12(b) reporting 

obligation with respect to the guarantee 

or guaranteed security. If the subsidiary 

issuer’s or guarantor’s reporting 

obligation with respect to the guarantee 

or guaranteed security is terminated 

under Section 12(b), the parent may 

cease providing the Alternative 

Disclosures once the subsidiary issuer’s 

and guarantor’s Section 15(d) obligation 

is suspended automatically by operation 

of Section 15(d)(1) or through 

compliance with Rule 12h–3. 

Under the proposed rule, which is 

consistent with the 2000 Release,175 if a 

subsidiary issuer or guarantor with an 

Exchange Act reporting obligation for 

the guaranteed securities would initially 

be eligible to omit its financial 

statements, because it would meet the 

requirements of proposed Rule 3–10 and 

could rely on proposed Rule 12h–5, but 

later ceased to satisfy those 

requirements (e.g., it ceases to be a 

consolidated subsidiary of the parent 

company), that subsidiary would then 

be required to begin filing Exchange Act 

reports for the period during which it 

ceased to satisfy the requirements of 

proposed Rule 3–10.176 Also, the 

subsidiary would be required to present 

the financial statements that are 

required by Regulation S–X at the time 

a report is due, and would not be able 

to present the Proposed Alternative 

Disclosures that proposed Rule 3–10 

would have allowed it to present for 

historical periods. 


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177See 17 CFR 230.405, 240.3b–4 (defining 

‘‘foreign private issuer’’). 

178See 17 CFR 230.405, 240.12b–2 (defining 

‘‘smaller reporting company’’). 

179Rule 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. 

Request for Comment 

61. Would the proposed changes to 

Rule 3–10(a) achieve the intended result 

of permitting a parent company to cease 

providing the Proposed Alternative 

Disclosures if each subsidiary issuer’s 

and guarantor’s reporting obligation is 

suspended automatically by operation 

of Section 15(d)(1) or through 

compliance with Rule 12h–3? If not, 

why, and what changes are necessary to 

achieve that result? 

62. We expect that the proposed 

changes to both eligibility to provide the 

Proposed Alternative Disclosures and 

the content of the Proposed Alternative 

Disclosures would reduce the burden on 

a parent company’s periodic reporting. 

In light of these proposed changes, 

should we continue to require the 

parent company to provide the 

Proposed Alternative Disclosures in its 

periodic reports for as long as the 

subject securities are outstanding? Why 

or why not? 

63. If the proposed amendments are 

adopted, should there be a phase-in 

period for parent companies that 

provide the Alternative Disclosures 

under existing Rule 3–10 in reliance on 

Rule 12h–5? If so, why would such a 

phase-in be needed? How long should 

that phase-in period be? Should it begin 

with the beginning of the first fiscal year 

after adoption of the proposals? Should 

we permit early adoption? If so, why or 

why not? 

64. Should the proposed rule include 

a requirement to provide current 

notification to investors when a 

subsidiary issuer or guarantor fails to 

meet the conditions of proposed Rule 3– 

10 and must begin reporting pursuant to 

the Exchange Act? If so, what should 

that requirement be? If not, why not? 

D. Application of Proposed 

Amendments to Certain Types of Issuers 

Rule 3–10’s requirements apply to 

several categories of issuers, including 

foreign private issuers,177 smaller 

reporting companies (‘‘SRCs’’),178 and 

issuers offering securities pursuant to 

Regulation A. The proposed 

amendments also would apply to these 

types of issuers, because, for the reasons 

discussed above, we believe investors 

would benefit from the simplified and 

improved disclosures that would result 

from the proposed amendments and the 

cost of providing the disclosures would 

be reduced for these types of issuers. In 

certain circumstances, Rule 3–10 also 

applies to the financial information of 

third parties provided by issuers of 

asset-backed securities (‘‘ABS’’). We 

also believe the proposed amendments 

should be extended to the financial 

information of such third parties for the 

reasons discussed above. 

Request for Comment 

65. Should the proposed changes to 

Rule 3–10 also apply to these types of 

issuers? If so, why? If not, why not? Do 

investors in guaranteed securities issued 

by these types of issuers require 

additional, different, or less information 

to make informed investment decisions 

than would be required by the proposed 

rule? If so, what information and why? 

66. How frequently do these types of 

issuers issue guaranteed securities? Is 

there a reason to believe they may offer 

them more often under the proposed 

rules? Why or why not? 

67. Are other conforming changes to 

the proposed rules necessary for them to 

apply to these types of issuers? If so, 

what changes are necessary and why? 

68. Should the proposed amendment 

that would permit the parent company 

to provide the Proposed Alternative 

Disclosures outside the footnotes to its 

audited annual and unaudited interim 

consolidated financial statements in its 

registration statement covering the offer 

and sale of the guaranteed securities and 

any related prospectus, and in Exchange 

Act annual and quarterly reports 

required to be filed during the fiscal 

year in which the first bona fide sale of 

the subject securities is completed apply 

differently to these types of issuers? 

Why or why not? For example, are there 

different filings or periods of time that 

the parent company should be 

permitted to provide the Proposed 

Alternative Disclosures outside of its 

financial statements for these types of 

issuers? As another example, should the 

proposed rule prescribe different 

locations outside the financial 

statements where the Proposed 

Alternative Disclosures should be 

provided for these types of issuers? In 

each case, what are they and why? How 

would investors and issuers be affected? 

1. Foreign Private Issuers 

Under the proposal, foreign private 

issuers would continue to be required to 

comply with Rule 3–10, and would also 

be required to comply with proposed 

Rule 13–01. As foreign private issuers 

would be required to provide the 

disclosures specified in proposed Rule 

13–01, Instruction 1 to Item 8 of Form 

20–F would be amended to specifically 

require compliance with proposed Rule 

13–01. We are also proposing 

amendments to conform Forms F–1 and 

F–3 to the streamlined structure of 

proposed Rule 3–10(a). General 

Instruction I.B of Form F–1 and the note 

to General Instruction I.A.5 of Form F– 

3 contain eligibility requirements for the 

use of these forms applicable to issuers 

and guarantors of guaranteed securities 

that are majority-owned subsidiaries. 

Rather than the current form language 

stating that Rule 3–10 specifies the 

financial statements that are required, 

we are proposing to amend these forms 

to instead state that the requirements of 

Rule 3–10 are applicable to financial 

statements for those subsidiary issuers 

or guarantors. 

Existing Rule 3–10(a)(3) includes a 

reference, solely for convenience, 

directing foreign private issuers to Item 

8.A of Form 20–F rather than having 

them go first to Rules 3–01 and 3–02 of 

Regulation S–X to determine the periods 

for which financial statements are 

required.179 We propose to simplify the 

rule by deleting this reference. 

Also, existing Rule 3–10(i)(12) 

requires a parent company that prepares 

its financial statements on a 

comprehensive basis other than U.S. 

GAAP or IFRS as issued by the 

International Accounting Standards 

Board to reconcile Consolidating 

Information to U.S. GAAP. Because of 

the supplemental nature of the Proposed 

Alternative Disclosures and the 

requirement in Item 18 of Form 20–F 

that the parent company’s consolidated 

financial statements be reconciled to 

U.S. GAAP, we do not believe 

continuing to include a requirement to 

reconcile the financial information 

included in the Proposed Alternative 

Disclosures to U.S. GAAP is necessary. 

Although the reconciliation requirement 

would be eliminated, proposed Rule 13– 

01(a)(5) would require the parent 

company to disclose any other 

quantitative or qualitative information 

that would be material to making an 

investment decision with respect to the 

guaranteed security. 

Request for Comment 

69. Should a parent company that 

prepares its financial statements on a 

comprehensive basis other than U.S. 

GAAP or IFRS as issued by the 

International Accounting Standards 

Board be required to reconcile the 

proposed financial disclosures specified 

in proposed Rule 13–01(a)(4) to U.S. 

GAAP, similar to the requirement of 

existing Rule 3–10(i)(12)? If so, why? If 

not, why not? 


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180 17 CFR 229.10(f). 

181 17 CFR 230.251–230.263. 

182 17 CFR 239.90. 

183 17 CFR 239.91. 

184 17 CFR 239.92. 

185Forms 1–A and 1–K also specify the audit 

requirements applicable to financial statements of 

other entities, which includes those of subsidiary 

issuers and guarantors of an issuer offering 

guaranteed securities pursuant to Regulation A. We 

are not proposing any changes to these audit 

requirements for circumstances where the separate 

financial statements of subsidiary issuers and 

guarantors are filed. 

186 17 CFR 229.1100 through 229.1125. 

187These 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)). 

188Rule 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. 

2. Smaller Reporting Companies 

Note 3 to Rule 8–01 of Regulation S– 

X requires compliance with existing 

Rule 3–10 if the subsidiary of an SRC 

issues securities guaranteed by the SRC 

or the subsidiary guarantees securities 

issued by the SRC, except that the 

periods presented are those required by 

17 CFR 210.8–02 (‘‘Rule 8–02 of 

Regulation S–X’’). Because the 

subsidiary issuer or guarantor is itself a 

registrant, it is required to file financial 

statements meeting the requirements of 

Regulation S–X. Such financial 

statements may be prepared in 

accordance with 17 CFR 210.8–01 

through 210.8–08 (Article 8 of 

Regulation S–X) so long as the 

subsidiary issuer or guarantor qualifies 

as an SRC.180 Consistent with the 

existing rule, if the conditions of 

proposed Rule 3–10 are satisfied, the 

subsidiary issuer’s or guarantor’s 

financial statements may be omitted. 

While the substance of this requirement 

would not change, we are proposing 

amendments to Note 3 to Rule 8–01 to 

conform it to the streamlined structure 

of proposed Rule 3–10(a). Rather than 

stating that the subsidiary issuer or 

guarantor of the SRC issuer or guarantor 

must present financial statements as 

required by existing Rule 3–10, Note 3 

to Rule 8–01 would instead state that 

the requirements of proposed Rule 3–10 

are applicable to financial statements of 

the subsidiary issuer or guarantor. In 

addition, we are proposing to add a 

sentence to Note 3 to Rule 8–01 to 

require an SRC to provide the 

disclosures specified in proposed Rule 

13–01. Lastly, because Item 1 of Part I 

of Form 10–Q permits an SRC to 

provide the information required by 

Rule 8–03 of Regulation S–X if it does 

not provide the information required by 

Rule 10–01, we are proposing to add 

Rule 8–03(b)(7) to require compliance 

with Rules 3–10 and 13–01. 

3. Offerings Pursuant to Regulation A 

In connection with offerings made 

pursuant to Regulation A,181 Forms 1– 

A,182 1–K,183 and 1–SA 184 direct an 

entity (‘‘Regulation A Issuer’’) to present 

financial statements of a subsidiary that 

issues securities guaranteed by the 

parent company or guarantees securities 

issued by the parent company as 

required by Rule 3–10 for the same 

periods as the Regulation A Issuer’s 

financial statements,185 because under 

these circumstances such subsidiary 

issuers or guarantors would themselves 

be Regulation A Issuers. Consistent with 

existing requirements, if the conditions 

of proposed Rule 3–10 are satisfied, the 

subsidiary issuer’s or guarantor’s 

financial statements may be omitted. 

While the substance of this requirement 

would not change, we are proposing 

amendments to Forms 1–A, 1–K, and 1– 

SA to conform the requirements to the 

streamlined structure of proposed Rule 

3–10(a). Rather than stating that the 

subsidiary issuer or guarantor of the 

parent company must present financial 

statements as required by existing Rule 

3–10, Forms 1–A, 1–K, and 1–SA would 

instead state that the requirements of 

proposed Rule 3–10 are applicable to 

financial statements of the subsidiary 

issuer or guarantor. Additionally, the 

proposed amendments would modify 

each form to require the disclosures 

specified in proposed Rule 13–01 and 

specify the location of the disclosures, 

similar to the proposed note to Rule 13– 

01(a) but consistent with the 

requirements of Regulation A. However, 

if a parent company elects to provide 

the disclosures in its audited financial 

statements, the Proposed Alternative 

Disclosures would be required to be 

audited. 

4. Issuers of Asset-Backed Securities— 

Third Party Financial Statements 

The disclosure items for issuers of 

ABS, set forth in Regulation AB,186

specify circumstances when an ABS 

issuer must provide financial 

information for certain third parties 187

in its filings. For example, under 

Regulation AB, financial information 

about significant obligors of pool assets 

and guarantors of those pool assets may 

be required. In lieu of providing the 

financial information of certain 

unrelated significant obligors, if certain 

conditions are met, Item 1100(c)(2) of 

Regulation AB permits the ABS issuer to 

reference the significant obligor’s 

Exchange Act reports (or, for certain 

circumstances, its parent’s Exchange 

Act reports) on file with the 

Commission. One of these conditions is 

that the significant obligor meets one of 

the categories of eligible significant 

obligors specified in Item 1100(c)(2)(ii) 

of Regulation AB. Of these eligible 

categories, two relate to pool assets 

guaranteed by a parent or subsidiary of 

the significant obligor, as outlined in 

Items 1100(c)(2)(ii)(C) and (D). For these 

two categories, Item 1100(c)(2)(ii) 

permits an ABS issuer to reference 

Exchange Act reports containing the 

parent’s consolidated financial 

statements if the information 

requirements of Rule 3–10 of Regulation 

S–X and certain other conditions are 

satisfied. 

We are proposing conforming 

amendments to Items 1100(c)(2)(ii)(C) 

and (D) of Regulation AB because we are 

proposing to relocate the disclosure 

requirements associated with issuers 

and guarantors of guaranteed securities 

to proposed Rule 13–01. Thus, rather 

than refer to the information 

requirements of Rule 3–10, Items 

1100(c)(2)(ii)(C) and (D) would instead 

state that disclosures specified in 

proposed Rule 13–01 must be provided 

in the reports to be referenced and that 

financial statements of the subsidiary 

third party or subsidiary guarantor, as 

applicable, may be omitted if the 

requirements of proposed Rule 3–10 are 

satisfied. The function of the eligible 

categories in Items 1100(c)(2)(ii)(C) and 

(D) would not change under the 

proposed revisions. 

Additionally, we are proposing 

conforming amendments to Items 1112, 

1114, and 1115 of Regulation AB and 

Item 504 of Regulation S–K because the 

citations to Regulation S–X in those 

item requirements refer to Regulation S– 

X as encompassing ‘‘210.1–01 through 

210.12–29.’’ Those citations would be 

updated to include proposed Rules 13– 

01 and 13–02 of Regulation S–X. 

IV. Rule 3–16 of Regulation S–X 

Rule 3–16 contains requirements for 

affiliates whose securities are pledged as 

collateral for securities registered or 

being registered. Existing Rule 3–16 

requires a registrant to provide separate 

annual and interim 188 financial 

statements for each affiliate whose 


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189Rule 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. 

190Rule 1–02(b) of Regulation S–X. 

191Rule 3–16(b) of Regulation S–X. 

192See Separate Financial Statements Required 

by Regulation S–X, Release No. 33–6359 (Nov. 6, 

1981) [46 FR 56171 (Nov. 16, 1981)]. 

193 Generally, in the event of default, the holders 

of debt without the benefit of a pledge of collateral 

are comparatively disadvantaged. In the event of 

default, a holder of a debt security can make claims 

for payment directly against the issuer. Unpledged 

assets of an issuer’s subsidiaries would generally 

only be indirectly accessible to the holder through 

bankruptcy proceedings, subordinate to direct 

claims against those subsidiaries or their assets. A 

debt security that is secured by a pledge of 

collateral typically allows a holder to make direct 

claims to that collateral in the event of default. 

194Rule 4–08(b) of Regulation S–X requires 

disclosure of the approximate amounts of assets 

mortgaged, pledged, or otherwise subject to lien and 

a brief identification of the obligations 

collateralized. 

195See, e.g., letters from ABA-Committees, Cahill, 

Chamber, Davis Polk, DT, and EY. 

196See, e.g., letters from Covenant, Davis Polk, 

KPMG, and PwC. 

197See letter from Davis Polk. 

198Similar to the proposed disclosures for issuers 

and guarantors of guaranteed securities discussed 

above, the note to proposed Rule 13–02(a) would 

allow the registrant to provide the disclosures 

required by this section in a footnote to its 

consolidated financial statements or alternatively, 

in MD&A in its registration statement covering the 

offer and sale of the subject securities and any 

related prospectus, and in Exchange Act reports on 

Form 10–K, Form 20–F, and Form 10–Q required 

to be filed during the fiscal year in which the first 

bona fide sale of the subject securities is completed. 

If not otherwise included in the consolidated 

financial statements or in MD&A, the registrant 

would be required to include the disclosures in its 

prospectus immediately following ‘‘Risk Factors,’’ if 

any, or otherwise, immediately following pricing 

information described in Item 503(c) of Regulation 

S–K. The registrant, however, would be required to 

provide the disclosures in a footnote to its 

Continued 

securities constitute a ‘‘substantial 

portion’’ of the collateral for any class 

of securities registered or being 

registered as if the affiliate were a 

separate registrant (‘‘Rule 3–16 

Financial Statements’’).189 Rule 1–02(b) 

of Regulation S–X defines an ‘‘affiliate’’ 

by stating that an ‘‘affiliate of, or a 

person affiliated with, a specific person 

is a person that directly, or indirectly 

through one or more intermediaries, 

controls, or is controlled by, or is under 

common control with, the person 

specified’’ (emphasis in original).190 In 

practice, affiliates whose securities 

collateralize a registered security are 

almost always consolidated subsidiaries 

of that registrant. 

Whether an affiliate’s portion of the 

collateral is a ‘‘substantial portion’’ is 

determined by comparing the highest 

amount among the aggregate principal 

amount, par value, book value, or 

market value of the affiliate’s securities 

to the principal amount of the securities 

registered or being registered. If the 

highest of those values equals or 

exceeds 20 percent of the principal 

amount of the securities registered or 

being registered for any fiscal year 

presented by the registrant, Rule 3–16 

Financial Statements are required.191

The requirements in existing Rule 3– 

16 have remained unchanged for many 

years,192 and we are proposing changes 

to improve the disclosures required by 

the rule. 

V. Proposed Amendments to Rule 3–16 

and Relocation to Rule 13–02 

A. Overarching Principle 

Our proposed amendments to Rule 3– 

10 are based on the principle that 

investors in guaranteed securities rely 

primarily on the consolidated financial 

statements of the parent company as 

supplemented by details about the 

subsidiary issuers and guarantors when 

making investment decisions. Similarly, 

we believe that the consolidated 

financial statements of the registrant are 

the most relevant information for 

investors when making investment 

decisions about that registrant’s 

securities that are collateralized by 

securities of its affiliate(s). The pledge of 

collateral is a residual equity interest 

that could potentially be foreclosed 

upon only in the event of default and 

almost always relates to an affiliate 

whose financial information is already 

included in the registrant’s consolidated 

financial statements.193 While we 

believe information about the affiliate(s) 

whose securities are pledged as 

collateral is material for an investor to 

consider potential outcomes in the 

event of foreclosure, we believe that 

separate financial statements of each 

such affiliate are not material in most 

situations. Rather, we believe the nature 

and extent of disclosures about the 

affiliate(s) and the related collateral 

arrangement should be consistent with 

the supplemental nature of the 

information and better balanced with 

the cost of providing such disclosures. 

B. Overview of the Proposed Changes 

Although affiliates whose securities 

are pledged as collateral are not 

registrants with respect to the 

collateralized security, and are not 

generally subject to the related reporting 

requirements, existing Rule 3–16 

requires financial statements as if the 

affiliates were registrants. This 

requirement is more onerous than those 

that apply to other forms of credit 

enhancements, such as the Alternative 

Disclosures permitted under existing 

Rule 3–10 or the disclosures required by 

17 CFR 210.4–08(b) (‘‘Rule 4–08(b) of 

Regulation S–X’’) for assets that are 

pledged.194 Additionally, while the 

importance of the collateral to an 

investor may vary widely from situation 

to situation, the existing rule requires 

full, audited financial statements for the 

affiliate in all circumstances when the 

‘‘substantial portion’’ threshold is met, 

but no disclosure if the threshold is not 

met. For example, Rule 3–16 Financial 

Statements may be required if a 

registrant issues a small amount of debt 

securities, even though an affiliate may 

be only a small percentage of the 

registrant’s assets and operations, but 

may not be required if a registrant issues 

a substantial amount of debt securities, 

even though an affiliate constitutes a 

large percentage of a registrant’s assets 

and operations. 

A number of commenters stated that 

debt offerings are often structured to 

avoid or limit Rule 3–16 disclosures by 

reducing the amount of collateral an 

investor might receive in the event of 

default, resulting in reduced collateral 

packages, or are otherwise structured as 

unregistered offerings.195 Other 

commenters indicated that debt 

agreements may be structured to 

specifically release an affiliate’s 

securities from collateral if and when 

their inclusion would trigger the 

requirements of existing Rule 3–16.196

Another commenter indicated that the 

requirements of existing Rule 3–16 often 

make it uneconomical to secure 

publicly-offered bonds with pledges of 

stock.197

We are proposing to replace the 

existing requirement—that a registrant 

provide separate financial statements for 

each affiliate whose securities are 

pledged as collateral—with a 

requirement that a registrant provide 

financial and non-financial disclosures 

about the affiliate(s) and the collateral 

arrangement as a supplement to the 

registrant’s consolidated financial 

statements. The supplemental nature of 

this information, similar to the proposed 

disclosures for issuers and guarantors of 

guaranteed securities discussed above, 

supports providing registrants with the 

flexibility to provide the proposed 

disclosures inside or outside the 

registrant’s audited annual and 

unaudited interim financial statements 

in registration statements covering the 

offer and sale of the collateralized 

securities and any related prospectus, as 

well as annual and quarterly Exchange 

Act periodic reports required to be filed 

during the fiscal year in which the first 

bona fide sale of the subject securities 

is completed.198 Accordingly, the 


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consolidated financial statements in its annual and 

quarterly reports beginning with its annual report 

filed on Form 10–K or Form 20–F for the fiscal year 

during which the first bona fide sale of the subject 

securities is completed. If the registrant elects to 

provide the proposed disclosures in its financial 

statements, the disclosures would be subject to 

annual audit, interim review, internal control over 

financial reporting, and XBRL tagging requirements. 

See Section III.C.2.d, ‘‘Location of Proposed 

Alternative Disclosures and Audit Requirement.’’ 

These proposed amendments would also apply to 

foreign private issuers and issuers offering 

securities pursuant to Regulation A and the forms 

applicable to such entities. See Section V.F, 

‘‘Application of Proposed Amendments to Certain 

Types of Issuers,’’ below. 

199This commenter supported requiring financial 

statements as though the affiliate were a registrant, 

despite the fact that the collateral pledge is not 

considered a separate security. See letter from 

CalPERS. 

200This commenter stated that it is not aware of 

a single Rule 144A offering that has included Rule 

3–16 financial statements that were not otherwise 

already available. See letter from Davis Polk. 

201See, e.g., letters from BDO, CAQ, Chamber, 

Covenant, DT, EY, KPMG, and PwC. 

202See, e.g., letters from ABA-Committees, BDO, 

Chamber, and EY. 

disclosure requirements in Rule 3–16 

would be amended and relocated to 

proposed Rule 13–02. 

Additionally, instead of requiring 

disclosure only when the pledged 

securities meet or exceed a numerical 

threshold relative to the securities 

registered or being registered under the 

existing rule’s ‘‘substantial portion’’ test, 

the proposed amendments would 

require disclosure unless they are 

immaterial to holders of the 

collateralized security. Further, the 

proposed changes would require 

disclosure of any additional information 

about the collateral arrangement and 

each affiliate whose security is pledged 

as collateral that would be material to 

holders of the collateralized securities. 

We believe these proposed disclosures 

would enable an investor to evaluate the 

potential outcomes in the event of 

foreclosure, would reduce costs and 

burdens on registrants, and may 

facilitate the use of debt structures that 

include pledges of affiliate securities, 

resulting in improved collateral 

packages being available to investors. 

The proposed disclosure requirements 

are discussed further below. 

Request for Comment 

70. Should the proposed amendments 

to Rule 3–16 be based on the approach 

described above? If so, why? If not, what 

approach should be used and why? 

71. Would the proposed amendments 

to existing Rule 3–16 result in an 

increase in the number of registered 

debt offerings that include pledges of 

affiliate securities as collateral? Why or 

why not? How would increasing the 

number of registered debt offerings that 

include pledges of affiliate securities 

affect investors and issuers? 

72. Do issuers structure registered 

debt offerings to not include pledges of 

affiliate securities as collateral because 

of concerns about compliance with 

existing Rule 3–16? If so, what are the 

specific concerns? Are issuers choosing 

to engage in private debt offerings that 

include pledges of affiliate securities as 

collateral? 

73. What factors do issuers consider 

in determining whether to structure a 

debt offering to include pledges of 

affiliate securities as collateral, and how 

are they considered? 

74. How do investors use the Rule 3– 

16 Financial Statements? For example, 

how do retail investors, institutional 

investors, or third parties, such as 

financial analysts, use the information? 

How would these investors use the 

proposed disclosures specified in 

proposed Rule 13–02? 

75. Would the proposed amendments 

to existing Rule 3–16 improve the 

disclosures provided to investors? If so, 

how? Are there other changes to the rule 

that we should consider that would 

improve disclosures to investors? If so, 

what are they and how would they 

improve disclosure? 

76. Would the proposed amendments 

to existing Rule 3–16 make the rule less 

burdensome and, thereby, encourage 

issuers to structure debt offerings to 

include pledges of affiliate securities as 

collateral? Are there other changes to 

the rule that we should consider that 

would reduce compliance burdens for 

issuers but continue to provide the 

material information investors need to 

make informed investment decisions? 

77. Would the proposed amendments 

to existing Rule 3–16 result in issuers 

omitting disclosures that investors or 

financial analysts rely on? If so, which 

disclosures? Would such a change in the 

disclosures have an effect on investor 

participation in registered debt offerings 

that include pledges of affiliate 

securities as collateral? 

78. Are there alternative approaches 

to disclosures about affiliates whose 

securities are pledged as collateral that 

would benefit investors? If so, what are 

they and why? How would investors use 

the disclosures under these alternative 

approaches? How would such 

approaches impact issuers? 

79. Should the proposed rule permit 

the registrant to provide the proposed 

disclosures outside its financial 

statements in the proposed 

circumstances described? Alternatively, 

should the registrant be permitted to 

provide the proposed disclosures 

outside its financial statements in all 

circumstances? What are the potential 

benefits or concerns for investors and 

issuers with either approach? 

80. Would requiring the proposed 

disclosures to be included in a footnote 

to the registrant’s audited annual and 

unaudited interim financial statements 

beginning with its annual report filed on 

Form 10–K or Form 20–F for the fiscal 

year during which the first bona fide 

sale of the guaranteed securities is 

completed be useful to investors? If so, 

why? If not, why not? What are the 

potential benefits or concerns for 

investors and issuers with either 

approach? 

81. Would requiring the proposed 

disclosures to be audited or reviewed 

present costs or challenges for 

registrants? If so, what are they? For 

example, would it cause delays in the 

offering process? 

82. Should the proposed rule specify 

where in a filing the disclosures 

required by proposed Rule 13–02 must 

appear if the registrant chooses not to 

include them in its financial statements? 

Why or why not? If yes, are the 

locations required by the Note to 

proposed Rule 13–02(a) appropriate? If 

so, why? If not, why not? Where should 

these disclosures be located and why is 

that location appropriate? 

83. Would issuers be more likely to 

voluntarily provide supplemental 

information in addition to the required 

proposed disclosures to the extent the 

PSLRA applied to such supplemental 

information? Why or why not? 

84. Should the note to proposed Rule 

13–02(a) apply differently to emerging 

growth companies? Why or why not? 

For example, should there be different 

filings or periods of time if the registrant 

is an emerging growth company? If so, 

what should be different and why? How 

would investors and issuers be affected? 

C. Financial Disclosures 

1. Level of Detail 

Existing Rule 3–16 requires separate 

financial statements of each affiliate 

whose securities constitute a substantial 

portion of the collateral. Commenter 

recommendations for the type of 

financial disclosure that should be 

provided about such affiliates were 

varied. For example, one commenter 

expressed its support for the existing 

requirements,199 and another suggested 

elimination of the existing rule.200 A 

number of commenters recommended 

allowing disclosures other than separate 

financial statements,201 and some 

specifically suggested requiring 

summarized financial information.202

The affiliates whose securities are 

pledged as collateral are almost always 


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203As with proposed Rule 13–01(a)(4), the 

Summarized Financial Information is the 

information specified in Rule 1–02(bb)(1) of 

Regulation S–X. 

204See letter from Cahill. 

205See Section V.E, ‘‘When Disclosure is 

Required.’’ 

206See proposed Rule 13–02(a)(5). See also Rule 

3–13 of Regulation S–X. 

207See letter from PwC. 

208This commenter recommended that we permit 

the combining of the financial information of 

affiliates whose ownership percentages are 

essentially the same. See letter from EY. 

209See letter from DT. 

consolidated subsidiaries of the 

registrant, and their financial 

information is thus already reflected in 

the registrant’s consolidated financial 

statements. We therefore believe the 

required supplemental financial 

information about such affiliates should 

be focused on the information that is 

most likely to be material to an 

investment decision. As such, proposed 

Rule 13–02(a)(4) would require 

Summarized Financial Information, a 

widely understood and common set of 

requirements, for each such affiliate, 

which would include select balance 

sheet and income statement line 

items.203 Disclosure of additional line 

items of financial information beyond 

what is specified in proposed Rule 13– 

02(a)(4) would be required by proposed 

Rule 13–02(a)(5) if they are material to 

an investment decision. For example, if 

a material amount of reported revenues 

of the affiliate(s) are derived from 

transactions with related parties, such 

as other subsidiaries of the registrant 

whose securities are not pledged as 

collateral, disclosure of such related 

party revenues would be required. 

When used in conjunction with the 

consolidated financial statements of the 

registrant, we believe this supplemental 

disclosure of select balance sheet and 

income statement line items of the 

affiliate(s) whose securities are pledged 

would provide the information investors 

need to evaluate the potential outcomes 

in the event of foreclosure. We believe 

this proposed amendment also would 

significantly simplify compliance efforts 

and reduce costs for preparers. 

One commenter suggested retaining a 

financial statement requirement when 

the affiliate is not a guarantor and is 

either a non-subsidiary controlled 

affiliate of the registrant or a controlling 

affiliate of the issuer.204 We are not 

proposing to retain such a requirement 

because practice has demonstrated that 

affiliates whose securities are pledged as 

collateral are almost always 

consolidated subsidiaries of the 

registrant. In the rare circumstances 

where the affiliate is not a consolidated 

subsidiary of the registrant, proposed 

Rule 13–02(a)(5) would require the 

registrant to provide any other 

quantitative or qualitative information 

that would be material to making an 

investment decision with respect to the 

collateralized security.205 Because the 

unconsolidated affiliate’s financial 

information is not included in the 

registrant’s consolidated financial 

statements, we would expect disclosure 

beyond what is specified in proposed 

Rule 13–02(a)(1) through (4) to be 

provided in these circumstances. In this 

regard, separate financial statements of 

the unconsolidated affiliate may be 

necessary if material to an investment 

decision.206

Request for Comment 

85. Should the proposed rule require 

Summarized Financial Information 

about the affiliates whose securities are 

pledged as collateral rather than 

separate financial statements of each 

such affiliate? Why or why not? Would 

the Summarized Financial Information, 

along with the other disclosures 

required by proposed Rule 13–02, 

provide the financial information 

investors need to make an informed 

investment decision with respect to the 

collateralized security? Should the 

proposed rule require a different type of 

information be provided about such 

affiliates? How would investors use this 

information to assess the value of 

affiliate securities pledged as collateral? 

86. How would issuers and investors 

be affected by requiring Summarized 

Financial Information? Are there 

particular items in Rule 3–16 Financial 

Statements that investors need to make 

informed investment decisions that 

would not be provided separately 

through Summarized Financial 

Information? Is there any such financial 

information that underwriters would 

still require? If so, what would be the 

effect on the costs associated with the 

offering? 

87. An affiliate whose securities are 

pledged as collateral for a registrant’s 

securities is almost always a 

consolidated subsidiary of the 

registrant. Should our requirements 

specifically address the rare 

circumstances where the affiliate is not 

a consolidated subsidiary of a 

registrant? If so, what should those 

requirements be and why? For example, 

should we require separate financial 

statements of such unconsolidated 

affiliates? 

88. Would additional line items of 

financial information beyond what 

would be required by Summarized 

Financial Information help investors 

make informed investment decisions? If 

so, what line items and why? For 

example, should the proposed rule 

specifically require supplemental 

summarized cash flow information 

resulting from operating, financing, and 

investing activities? Would issuers face 

challenges in providing such 

information? 

89. Do investors need summarized 

cash flow information about affiliates 

whose securities are pledged as 

collateral in addition to the registrant’s 

consolidated cash flow statements to 

make informed investment decisions 

about collateralized securities? If so, 

how is it used? If not, why not? 

2. Presentation on a Combined Basis 

The existing test used to determine 

whether the securities of an affiliate 

constitute a ‘‘substantial portion’’ of the 

collateral for securities registered or 

being registered is required to be 

performed for each affiliate whose 

securities are pledged. The views of 

commenters were mixed regarding 

whether financial disclosures about 

affiliates whose securities are pledges 

should be combined. For example, one 

commenter recommended financial 

disclosures of each affiliate be 

required,207 another recommended that 

we permit financial information to be 

combined in certain circumstances,208

and another recommended separate or 

combined presentation.209

When the securities of more than one 

affiliate that is consolidated in the 

registrant’s financial statements are 

pledged as collateral, we believe 

disclosure of the financial information 

of such affiliates on a combined basis 

would provide investors with the 

material information they need to assess 

the value of possible recoveries from the 

pledged securities in a more clear and 

streamlined manner than if individual 

sets of financial information were 

required for each such affiliate. We note 

that the existing requirements can result 

in potentially confusing disclosure 

about the extent of collateral. For 

example, when the securities of a 

registrant’s subsidiary (‘‘Subsidiary A’’) 

are pledged as collateral and the 

securities of an entity consolidated by 

Subsidiary A (‘‘Subsidiary B’’) are also 

pledged, separate Rule 3–16 Financial 

Statements may be required for both 

Subsidiary A and Subsidiary B. In such 

a scenario, Subsidiary B’s assets, 

liabilities, operations, and cash flows 

would be included twice (i.e., in the 

financial statements of both Subsidiary 

A and Subsidiary B). We believe 

disclosure on a combined basis of all 

consolidated affiliates whose securities 

are pledged would address this 


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210Proposed Rule 13–01 prohibits combining the 

financial information of non-issuer and nonguarantor subsidiaries of issuers and guarantors 

with that of issuers and guarantors in the Proposed 

Alternative Disclosures in order to distinguish the 

financial information of entities that are legally 

obligated to pay from those that are not. Proposed 

Rule 13–02 relates to pledged residual equity 

interests in affiliates as opposed to guarantees to 

pay, and as such, no similar prohibition is 

necessary. 211See Section III.A.6 of the 2000 Release. 212See letter from DT. 

potential confusion. Furthermore, in the 

event of default by the registrant, we 

would expect an investor to make 

claims to all of the affiliate securities 

that are pledged. 

Accordingly, we believe an investor 

could more effectively and efficiently 

assess the value of possible recoveries 

from the securities pledged as collateral 

by evaluating the combined financial 

information of the group of consolidated 

affiliates whose securities are pledged as 

opposed to performing this assessment 

for each such affiliate individually. As 

such, our proposed amendments would 

permit a registrant to disclose the 

financial information of such 

consolidated affiliates on a combined 

rather than individual basis. Proposed 

Rule 13–02(a)(4) would require 

intercompany transactions between 

affiliates presented on a combined basis 

to be eliminated. Unlike the proposed 

amendments to Rule 13–01, because the 

securities pledged as collateral are an 

equity interest in that pledgor affiliate, 

the financial information of all 

subsidiaries that would be consolidated 

by that affiliate would be included in 

the Summarized Financial Information 

presented pursuant to proposed Rule 

13–02(a)(4), even if the securities of 

those subsidiaries are not pledged as 

collateral.210

We recognize that there may be 

circumstances where separate financial 

information about certain affiliates is 

material to an investment decision. 

Accordingly, when the information 

provided in response to proposed Rule 

13–02 is applicable to one or more, but 

not all, affiliates, proposed Rule 13– 

02(a)(4) would require, if it is material, 

separate disclosure of Summarized 

Financial Information for the affiliates 

to which it is applicable. For example, 

if securities of one, but not all, of the 

affiliates that are pledged as collateral 

are subject to a contractual or statutory 

delay from being transferred to the 

holder of the collateralized security in 

the event of default, disclosure of these 

facts and circumstances would be 

required by proposed Rule 13–02(a)(2). 

In that case, proposed Rule 13–02(a)(4) 

would require separate disclosure of the 

Summarized Financial Information 

specified in proposed Rule 13–02(a)(4) 

for that affiliate, if material. 

Generally, a pledge of an affiliate’s 

securities as collateral includes all of 

the outstanding ownership interests in 

that affiliate, which are held directly or 

indirectly by the entity issuing the debt 

securities. There could be circumstances 

where either the pledge of collateral 

does not include all of the outstanding 

ownership interests in the affiliate held 

by the issuing entity, or certain 

ownership interests in the affiliate are 

held by a third party and therefore 

unpledged. In such cases, disclosure of 

these facts and circumstances would be 

required by proposed Rule 13–02(a)(5). 

If such circumstances are applicable to 

one or more, but not all, affiliates, 

proposed Rule 13–02(a)(4) would 

require, if it is material, separate 

disclosure of Summarized Financial 

Information for the affiliates to which it 

is applicable. 

Request for Comment 

90. Is separate financial information 

of each affiliate whose securities are 

pledged as collateral material 

information necessary for an investor to 

assess the value of the collateral? If so, 

why? If not, why not? How would 

providing the information of each such 

affiliate on a combined basis affect this 

assessment? Are there specific 

circumstances where separate 

information should be required? 

91. Should we permit the financial 

disclosure of the consolidated affiliates 

whose securities are pledged as 

collateral to be combined within the 

proposed Summarized Financial 

Information? Why or why not? 

Alternatively, should combined 

disclosure of the proposed Summarized 

Financial Information only be permitted 

under certain circumstances? If so, 

under which circumstances should it be 

permitted and why? 

3. Periods to Present 

Proposed Rule 13–02(a)(4) would 

require the disclosure of Summarized 

Financial Information as of, and for, the 

most recently ended fiscal year and 

interim period included in the 

registrant’s consolidated financial 

statements. When used in connection 

with the registrant’s consolidated 

financial statements, we believe the 

most recent full fiscal year and interim 

period should provide investors the 

information that is material in 

evaluating possible recoveries from the 

pledged securities of affiliate(s) in the 

event of default. Under the existing rule, 

Rule 3–16 Financial Statements are not 

required in quarterly reports, such as on 

Form 10–Q.211 One commenter 

suggested that interim information may 

not be meaningful given it is currently 

only required in certain registration 

statements but not in subsequent Forms 

10–Q.212 However, we believe that the 

most recent interim period should be 

provided so that investors can make 

decisions based on the most recent 

information available. As such, the 

disclosures would be required in 

quarterly filings, such as Form 10–Q. 

Because Item 1 of Part I of Form 10–Q 

requires a registrant to provide the 

information required by Rule 10–01 of 

Regulation S–X, we are proposing to 

add Rule 10–01(b)(10) to require 

compliance with proposed Rule 13–02. 

Request for Comment 

92. What periods of presentation of 

supplemental financial information 

about affiliates whose securities are 

pledged as collateral are material for 

investors when evaluating the 

collateralized security? 

93. Should the required periods of 

supplemental financial information of 

affiliates whose securities are pledged as 

collateral be based on the most recent 

financial information? Why or why not? 

If so, what periods should be considered 

‘‘most recent,’’ and why? 

94. Should the proposed rule require 

any additional periods of Summarized 

Financial Information beyond the most 

recent fiscal year and interim period? 

Why or why not? If yes, which periods 

and why? 

95. Rather than requiring disclosure of 

the most recent interim period, should 

the proposed rule focus on significant 

changes similar to Rule 10–01(a)(5) of 

Regulation S–X, which allows 

registrants to apply judgment and omit 

details of accounts that have not 

changed significantly in amount or 

composition since the end of the most 

recently completed fiscal year? Why or 

why not? 

D. Non-Financial Disclosures 

Under the existing rule, a registrant is 

not required to provide non-financial 

disclosures about the affiliates and the 

collateral arrangement unless they 

would be included as part of the Rule 

3–16 Financial Statements. Although 

the Request for Comment asked if there 

is different or additional information 

that investors need about affiliates 

whose securities collateralize registered 

securities, we received no commentary 

on non-financial disclosures. 

In addition to proposing amendments 

to the financial information required 

about the affiliates whose securities are 

pledged as collateral, the proposed rule 


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213See discussion within Section V.E, ‘‘When 

Disclosure is Required.’’ 

214See discussion within Section V.E, ‘‘When 

Disclosure is Required.’’ 

215See discussion within Section V.C.2, 

‘‘Presentation on a Combined Basis.’’ 

216See Section IV, ‘‘Rule 3–16 of Regulation S– 

X.’’ 

217See, e.g., letters from BDO, CAQ, DT, EY, 

KPMG, and PwC. Several of these commenters 

noted that, because the denominator of the 

‘‘substantial portion of the collateral’’ test is based 

on the outstanding principal balance of the 

registered debt, the significance of the tested 

affiliates will tend to increase as the principal 

obligation is reduced. 218See letter from SIFMA. This commenter noted 

that the introduction to existing Rule 3–16(a) states 

that the rule shall apply to affiliates whose 

securities constitute a ‘‘substantial’’ portion of the 

collateral and asserted that, in other contexts, 

‘‘substantial’’ is understood to be well above 20%. 

219Rule 3–16(b) of Regulation S–X. 

220See letter from DT. 

221Whether a disclosure specified in proposed 

Rule 13–02 may be omitted or whether additional 

disclosure would be required by proposed Rule 13– 

02(a)(5), as discussed below, depends on whether 

it would be material to a reasonable investor. See 

Section III.C.2.i, ‘‘Level of Detail,’’ above. 

would also require specific nonfinancial disclosures to be provided. We 

are proposing these changes to enhance 

the material information provided about 

the affiliates whose securities are 

pledged and the pledged securities, 

particularly in light of our proposal to 

require Summarized Financial 

Information for these affiliates. 

Proposed Rules 13–02(a)(1) through (3) 

would require certain non-financial 

disclosures, to the extent material,213

about the securities pledged as 

collateral, each affiliate whose securities 

are pledged, the terms and conditions of 

the collateral arrangement, and whether 

a trading market exists for the pledged 

securities. 

We believe the proposed requirements 

would result in enhanced narrative 

disclosures that would improve investor 

understanding of the affiliates and the 

collateral arrangement(s), and make the 

financial disclosures they accompany 

easier to understand. While the 

proposed requirements comprise the 

items we believe are most likely to be 

material to an investor, there may be 

additional facts and circumstances 

specific to particular affiliates that 

would be material to holders of the 

collateralized security. In that case, 

proposed Rule 13–02(a)(5) would 

require disclosure of those facts and 

circumstances.214 Additionally, when a 

non-financial disclosure is applicable to 

one or more, but not all, affiliates, 

proposed Rule 13–02(a)(4) would 

require, if it is material, separate 

disclosure of Summarized Financial 

Information for the affiliates to which it 

is applicable.215

Request for Comment 

96. Are the proposed non-financial 

disclosures material to an investment 

decision? Should we explicitly require 

any non-financial disclosures in 

addition to what is proposed? If so, 

what information and why? 

E. When Disclosure Is Required 

As discussed above,216 existing Rule 

3–16 requires separate financial 

statements for each affiliate whose 

securities are pledged as collateral when 

those securities constitute a ‘‘substantial 

portion’’ of the collateral. If the 

numerical thresholds specified in the 

rule are not met, no disclosure is 

required. At the same time, if the 

numerical thresholds are met, Rule 3–16 

Financial Statements may be required 

even though the affiliate represents an 

insignificant portion of the registrant’s 

consolidated financial statements. 

Several commenters recommended 

revising the existing ‘‘substantial 

portion’’ test by making the 

denominator the amount of the 

collateralized securities originally 

issued, not the amount outstanding as of 

the reassessment date,217 or raising the 

threshold from 20% to 50%.218 Another 

commenter suggested considering 

whether other indicators of significance 

besides ‘‘market value’’ 219 may be 

appropriate given the challenges of 

performing the ‘‘market value’’ 

calculation as part of determining 

whether the collateral constitutes a 

‘‘substantial portion.’’ 220

Instead of revising the existing 

‘‘substantial portion’’ of collateral test, 

we propose to replace this test with one 

based on materiality, similar to the 

framework in proposed Rule 13–01.221

Under this approach, investors would 

be provided with disclosure unless it is 

immaterial, whereas under the existing 

rule, no disclosure would be provided 

unless the collateral represented a 

‘‘substantial portion.’’ We believe any 

incremental burden to registrants of 

being required to provide the 

disclosures specified in proposed Rule 

13–02 in instances where the securities 

pledged as collateral did not meet the 

‘‘substantial portion’’ numerical 

threshold under the existing rule is 

justified by the benefit of investors 

receiving the disclosures specified in 

proposed Rule 13–02 and the reduced 

costs to registrants of providing such 

proposed disclosures as compared to the 

existing Rule 3–16 Financial 

Statements. 

Proposed Rule 13–02(a) would require 

the disclosures specified in proposed 

Rule 13–02(a)(1) through (4) to the 

extent material to holders of the 

collateralized security. For example, 

under the proposed rule, if the 

Summarized Financial Information of 

the combined affiliates required by 

proposed Rule 13–02(a)(4) is not 

materially different from corresponding 

amounts in the registrant’s consolidated 

financial statements, the information 

could be omitted. As another example, 

if the securities of an affiliate pledged as 

collateral do not represent a material 

amount of collateral to an investor, the 

investor would likely not require 

detailed disclosures about that affiliate 

or the collateral arrangement because 

the collateral provides little, if any, 

credit support, and therefore such 

information could be omitted. While the 

disclosures specified in proposed Rule 

13–02(a)(1) through (4) may be omitted 

if not material to holders of the 

collateralized security, for clarity, 

proposed Rule 13–02(a)(4) requires the 

registrant to disclose a statement that 

those financial disclosures have been 

omitted and the reasons why the 

disclosures are not material. 

Conversely, there may be additional 

information about the collateral 

arrangement and affiliates beyond the 

financial disclosures specified in 

proposed Rule 13–02(a)(4) or the nonfinancial disclosures specified in 

proposed Rules 13–02(a)(1) through (3) 

that would be material to holders of the 

collateralized security. Accordingly, 

proposed Rule 13–02(a)(5) would 

require disclosure of any quantitative or 

qualitative information that would be 

material to making an investment 

decision with respect to the 

collateralized security. For example, 

additional financial information beyond 

what is required by Summarized 

Financial Information would be 

required if that information is material 

to an investor that holds the 

collateralized security. 

Request for Comment 

97. Should we eliminate the existing 

‘‘substantial portion’’ test for 

determining whether disclosure is 

necessary and instead use a materiality 

standard to determine the appropriate 

level of disclosure? Would this cause 

difficulty in practice? If so, what are 

those difficulties and how can they be 

avoided? Would further guidance be 

necessary? If so, please explain what 

guidance is needed. Would the 

elimination of the ‘‘substantial portion’’ 

test and use of a materiality standard 

result in a loss of information that 

investors currently use to analyze these 

securities? If so, what information 

would be lost and would it be material 

for an investor’s understanding or an 

investment decision? 


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222 If a Regulation A Issuer elects to provide the 

proposed disclosures in its audited financial 

statements, such disclosures would be required to 

be audited. 

98. Should the proposed rule also 

permit the financial disclosures 

specified in proposed Rule 13–02(a)(4) 

to be omitted if the amount of collateral 

pledged does not exceed a specified 

level of significance? Why or why not? 

If so, how should significance be 

determined, and what should the level 

of significance be? 

99. Should any additional disclosures 

be specifically required if default on the 

collateralized security reaches a certain 

level of likelihood? If so, what type of 

disclosure and when should it be 

provided? 

100. Are the proposed rules 

sufficiently clear about what disclosures 

should be provided and when? If not, 

how should the rules be revised to 

ensure clarity? 

F. Application of Proposed 

Amendments to Certain Types of Issuers 

Rule 3–16’s requirements apply to 

several categories of issuers, including 

foreign private issuers, SRCs, and 

issuers offering securities pursuant to 

Regulation A. The proposed 

amendments would also apply to these 

types of issuers, because, for the reasons 

discussed above, we believe investors 

would benefit from the simplified and 

improved disclosures that would result 

from the proposed amendments and the 

cost of providing the disclosures would 

be reduced for these types of issuers. 

Request for Comment 

101. Should the proposed changes to 

Rule 3–16 also apply to these types of 

issuers? If so, why? If not, why not? Do 

investors in securities that include 

pledges of affiliate securities as 

collateral issued by these types of 

issuers require additional, different, or 

less information to make informed 

investment decisions than would be 

required by the proposed rule? If so, 

what information and why? 

102. How frequently do these types of 

issuers issue securities that include 

pledges of affiliate securities as 

collateral? Is there a reason to believe 

they may offer them more often under 

the proposed rules? Why or why not? 

103. Are other conforming changes to 

the proposed rules necessary for them to 

apply to these types of issuers? If so, 

what changes are necessary and why? 

104. Should the proposed amendment 

that would permit the registrant to 

provide the proposed disclosures 

outside the footnotes to its audited 

annual and unaudited interim 

consolidated financial statements in its 

registration statement covering the offer 

and sale of the collateralized securities 

and any related prospectus, and in 

Exchange Act annual and quarterly 

reports required to be filed during the 

fiscal year in which the first bona fide 

sale of the subject securities is 

completed apply differently to these 

types of issuers? Why or why not? For 

example, are there different filings or 

periods of time that the registrant 

should be permitted to provide the 

proposed disclosures outside of its 

financial statements for these types of 

issuers? As another example, should the 

proposed rule prescribe different 

locations outside the financial 

statements where the proposed 

disclosures should be provided for these 

types of issuers? In each case, what are 

they and why? How would investors 

and issuers be affected? 

1. Foreign Private Issuers 

Foreign private issuers are required to 

comply with existing Rule 3–16, and 

would continue to be required to 

comply with the disclosures specified in 

proposed Rule 13–02. Instruction 1 to 

Item 8 of Form 20–F would be amended 

to specifically require compliance with 

proposed Rule 13–02. 

2. Smaller Reporting Companies 

Note 4 to Rule 8–01 of Regulation S– 

X requires financial statements to be 

presented as required by Rule 3–16 for 

an SRC’s affiliate whose securities 

constitute a substantial portion of the 

collateral for securities registered or 

being registered, except that the periods 

presented are those required by Rule 8– 

02 of Regulation S–X. As we are 

proposing to eliminate Rule 3–16 and 

require the disclosures specified in 

proposed Rule 13–02, SRCs would be 

required to comply with proposed Rule 

13–02. A corresponding change to Note 

4 to Rule 8–01 is therefore being 

proposed. Additionally, as proposed 

Rule 13–02(a)(4) specifies the periods of 

Summarized Financial Information that 

would be required to be presented, no 

reference in Note 4 to Rule 8–01 to the 

periods required by Rule 8–02 of 

Regulation S–X is necessary and would 

be removed. Lastly, because Item 1 of 

Part I of Form 10–Q permits a SRC to 

provide the information required by 

Rule 8–03 of Regulation S–X if it does 

not provide the information required by 

Rule 10–01, we are proposing to add 

Rule 8–03(b)(8) to require compliance 

with proposed Rule 13–02. 

3. Offerings Pursuant to Regulation A 

In connection with offerings made 

pursuant to Regulation A, Forms 1–A 

and 1–K direct a Regulation A Issuer to 

comply with Rule 3–16 for the same 

periods as the Regulation A Issuer’s 

financial statements and specifies the 

applicable audit requirements. 

Accordingly, we propose to replace the 

existing requirement in the forms that 

Regulation A Issuers comply with Rule 

3–16 with a requirement to provide the 

disclosures specified in proposed Rule 

13–02 and specify the location of the 

disclosures, similar to the proposed note 

to Rule 13–02(a) but consistent with the 

requirements of Regulation A.222

Additionally, consistent with the 

discussion above about requiring 

registrants to comply with proposed 

Rule 13–02 in filings made on Form 10– 

Q, a requirement to comply with 

proposed Rule 13–02 would be added to 

Form 1–SA. 

VI. General Request for Comment 

We request and encourage any 

interested person to submit comments 

on any aspect of the proposal, other 

matters that might have an impact on 

the amendments and any suggestions for 

additional changes. Comments are of 

greatest assistance to our rulemaking 

initiative if accompanied by supporting 

data and analysis, particularly 

quantitative information as to the costs 

and benefits, and by alternatives to the 

proposals where appropriate. Where 

alternatives to the proposals are 

suggested, please include information as 

to the costs and benefits of those 

alternatives. 

VII. Economic Analysis 

A. Introduction 

As discussed above, we are proposing 

amendments to the financial disclosure 

requirements in Rules 3–10 and 3–16 of 

Regulation S–X to improve those 

requirements for both investors and 

registrants. These proposed 

amendments may result in simplified 

disclosures that highlight information 

that is material to investment decisions. 

They may also serve to reduce existing 

regulatory burdens that otherwise 

inhibit registrants from engaging in 

registered debt offerings that are backed 

by guarantees or collateral and may 

unnecessarily restrict the set of 

investment opportunities available to 

some investors. The discussion below 

addresses the potential economic effects 

of the proposed amendments, including 

the likely benefits and costs, as well as 

the likely effects on efficiency, 

competition, and capital formation, 

measured against a baseline that 

includes both current regulatory 

requirements and current market 

practices. We also discuss the potential 

economic effects of certain alternatives 


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223 15 U.S.C. 77b(b), 78c(f), 80a–2(c), and 80b– 

2(c). 

224 15 U.S.C. 78w(a)(2). 

225See Section II for Rule 3–10 and Section IV for 

Rule 3–16. 

226While the proposed amendments would apply 

to registered investment companies, and could 

thereby affect registered investment advisers, based 

on staff experience, we believe registered 

investment companies are unlikely to engage in the 

activities addressed by the proposed amendments. 

Accordingly, we also we believe the proposed 

amendments are unlikely to affect registered 

investment advisers. 

227 17 CFR 230.144A(a)(1). 

228These 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. 

229See id. 

to the proposed amendments. 

Throughout this analysis, we draw on 

academic studies and incorporate public 

comments, where appropriate. 

We are mindful of the costs and 

benefits of our rules. Section 2(b) of the 

Securities Act, Section 3(f) of the 

Exchange Act, Section 2(c) of the 

Investment Company Act, and Section 

202(c) of the Investment Advisers Act 

require us, when engaging in 

rulemaking that requires us to consider 

or determine whether an action is 

necessary or appropriate in (or, with 

respect to the Investment Company Act, 

consistent with) the public interest, to 

consider, in addition to the protection of 

investors, whether the action will 

promote efficiency, competition, and 

capital formation.223 Additionally, 

Exchange Act Section 23(a)(2) requires 

us, when adopting rules under the 

Exchange Act, to consider, among other 

things, the impact that any new rule 

would have on competition and not to 

adopt any rule that would impose a 

burden on competition that is not 

necessary or appropriate in furtherance 

of the Exchange Act.224

B. Baseline and Affected Parties 

The existing regulatory requirements 

of Rules 3–10 and 3–16 under 

Regulation S–X have been described 

above 225 and have prompted registrants 

to adopt disclosure practices and 

business practices specifically designed 

to comply with or avoid these 

requirements. We analyze the economic 

effects of the proposed amendments by 

assessing their impact on affected 

parties as compared to the current state 

of the disclosure regime, including both 

existing disclosure requirements and 

available exemptions, where applicable. 

The parties that are likely to be affected 

by the proposed amendments include 

issuers and guarantors of guaranteed 

debt securities, issuers of debt securities 

collateralized by securities of issuers’ 

affiliate(s), and investors in each of 

these types of securities.226

1. Market Participants 

The first main group of market 

participants affected by the proposed 

amendments consists of issuers and 

guarantors of guaranteed debt securities 

and issuers of debt securities 

collateralized by securities of the 

issuer’s affiliates. These issuers would 

be affected because the disclosure called 

for by the proposed amendments would 

differ from the content and format of 

financial information currently required 

to be presented in registered debt 

offerings and in certain ongoing 

reporting. The proposed amendments 

may also alter the capital raising 

decisions of potential issuers. 

The second group of market 

participants affected by the proposed 

amendments consists of investors in 

these securities. These investors can be 

divided into three main categories: (1) 

QIBs; 227 (2) institutional investors 

(other than QIBs); and (3) noninstitutional (retail) investors. In 

addition to the change in content and 

location of the disclosed information 

presented to them, which is discussed 

below in Section VII.C.1.b, the impact 

on these investors would also depend 

on whether there is a change in the 

number of registered debt offerings by 

new issuers, issuers that previously 

offered debt securities under Rule 144A, 

or both, as a result of the proposed 

amendments. Currently, there are four 

approaches that issuers often use when 

issuing guaranteed or collateralized debt 

securities. First, issuers may offer 

registered guaranteed and/or 

collateralized debt securities and 

provide the required disclosures under 

existing Rules 3–10 and 3–16. Second, 

issuers may opt to privately offer the 

debt securities with guarantees or 

pledges of affiliate securities as 

collateral under Rule 144A with 

registration rights. This may allow 

issuers to access the capital markets 

more quickly than if they had to comply 

with existing requirements at initial 

issuance. Issuers do, however, have to 

provide the disclosures required by 

existing Rules 3–10 and 3–16 when the 

privately issued notes are exchanged for 

registered notes. Third, issuers may opt 

to privately offer securities under Rule 

144A without registration rights. Under 

this approach, issuers do not have to 

provide disclosures required by existing 

Rules 3–10 and 3–16, but issuers and 

investors are not afforded the benefits of 

registration. Fourth, issuers may 

structure a registered offering to not 

include guarantees or pledges of 

affiliated securities as collateral. Here, 

while issuers would not have to provide 

disclosures required by existing Rules 

3–10 and 3–16, they may incur a higher 

cost of capital than if they had 

structured their debt agreements with 

these credit enhancements. 

Only QIBs can participate in Rule 

144A offerings; retail and institutional 

investors are unable to participate in 

such offerings. Furthermore, 

collateralized debt offerings are often 

structured to avoid or limit Rule 3–16 

disclosures by reducing the amount of 

collateral investors might receive in the 

event of default, resulting in reduced 

collateral packages. Overall, investors 

may experience both a change in the 

number of investment opportunities 

available, as well as a change in the 

information presented to them in 

registered offerings. 

2. Market Conditions 

To provide context for debt securities 

offerings likely to be impacted by this 

proposal, Table 1 provides estimates of 

the number and dollar amount of all 

registered debt offerings and Rule 144A 

debt offerings per year since 2013.228

The dollar volume of registered debt 

and Rule 144A offerings appears to have 

increased in recent years, which may be 

a result of improving macroeconomic 

conditions and a low interest rate 

environment.229


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230Number of offerings does not include 

registered exchanges of debt securities previously 

issued privately with registration rights. 

231See, 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). 

232See 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. 233See, e.g., Fenn, note 232 above. 234See Section II.A, ‘‘Background.’’ 235To identify these disclosures, we searched all 

Forms 10–K, 10–Q, 20–F, 40–F, S–1, S–4, and F– 

4 and their amendments using XBRL tags most 

commonly associated with Consolidating 

Information. The amounts in the table represent the 

number of annual, quarterly, and periodic filings 

including amendments that are unique for the 

covered period in each calendar year from 2013– 

2017. 

236See letter from EY. The commenter identified 

494 registrants that provided Consolidating 

Information by searching for keywords on Form 10– 

K filings only. If we limit our search to Form 10– 

K filings in 2013, we reach a similar number, which 

we believe provides validity to our methodology. 

237As described in Section II.F, ‘‘Exceptions,’’ the 

brief narrative form of Alternative Disclosures is 

available for three situations. One of these 

situations is when a parent company uses a finance 

subsidiary to issue securities that the parent 

company guarantees, which in our experience is 

limited and generally for convenience purposes. As 

several commenters noted, the other situations 

permitting the brief narrative form of Alternative 

Disclosures require additional restrictive conditions 

to be met, which greatly limit the circumstances in 

which they can be used. See, e.g., letters from ABACommittees, AB–NYC, CAQ, DT, EY, FedEx, 

KPMG, and PwC. Based on our experience, we 

believe there are fewer instances of the brief 

narrative form of Alternative Disclosures than 

Consolidating Information. 

238These 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. 

TABLE 1—REGISTERED DEBT AND RULE 144A DEBT OFFERINGS FROM 2013–2017 

Year 

Registered debt Rule 144A 

Number of 

offerings 230

$ Amount 

(bil) 

Number of 

offerings 

$ Amount 

(bil) 

2013 ................................................................................................................. 1,509 1,052 969 512 

2014 ................................................................................................................. 1,597 1,113 920 530 

2015 ................................................................................................................. 1,560 1,206 808 575 

2016 ................................................................................................................. 1,639 1,329 785 526 

2017 ................................................................................................................. 1,853 1,298 995 657 

Source: DERA staff analysis. 

Studies looking at registered debt 

offerings and debt offerings made under 

Rule 144A find that the two offerings 

have distinct characteristics. Issuers 

offering debt securities under Rule 144A 

have, on average, lower credit quality 

and higher information asymmetry than 

registered debt offerings,231 conditions 

that may increase the likelihood that 

investors require guarantees and 

collateral relative to investment grade 

issuers who may not need such credit 

enhancements. This is consistent with 

studies that have found the cost of 

capital associated with debt offerings 

made under Rule 144A to be higher than 

the cost of capital in registered debt 

offerings.232 According to these studies, 

there are two main benefits of Rule 

144A offerings: (1) The speed of 

issuance, given the absence of a 

registration requirement; and (2) relative 

high liquidity, given the possibility to 

exchange the securities for registered 

securities.233

As discussed above,234 Rule 3–10 

requires that every issuer of a registered 

security that is guaranteed and every 

guarantor of a registered security file the 

financial statements required for a 

registrant by Regulation S–X, except 

under certain circumstances when 

Alternative Disclosures are permitted. 

There are two forms of Alternative 

Disclosures prescribed by the rule: (1) 

Consolidating Information; and (2) a 

brief narrative. Consolidating 

Information is the most common type of 

alternative disclosure under Rule 3–10. 

Table 2 presents data on the number of 

unique registrants and filings that 

included Consolidating Information 

under Rule 3–10 for the period 2013– 

2017; 235 the data is consistent with 

estimates provided by one 

commenter.236

TABLE 2—ESTIMATED NUMBER OF UNIQUE REGISTRANTS AND FILINGS INCLUDING CONSOLIDATING INFORMATION UNDER

RULE 3–10 

Year 

Number of 

unique 

registrants 

Number of 

total filings 10–K 10–Q 20–F 40–F S–1 S–4 F–4 

2013 .......................................... 533 1,834 431 1,339 12 0 15 34 3 

2014 .......................................... 530 1,861 461 1,360 10 0 9 21 0 

2015 .......................................... 500 1,750 437 1,288 9 0 5 11 0 

2016 .......................................... 469 1,641 417 1,199 8 0 1 16 0 

2017 .......................................... 403 1,430 369 1,043 5 1 1 11 0 

Source: DERA staff analysis of Edgar Filings. 

The second and less common form of 

Alternative Disclosures under existing 

Rule 3–10 is a brief narrative. While we 

believe the number of filings including 

the brief narrative form of Alternative 

Disclosure is smaller than the number of 

filings using Consolidating 

Information,237 we are unable to 

determine that number due to 

methodological and data extraction 

challenges.238


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239See Section IV, ‘‘Rule 3–16 of Regulation 

S–X.’’ 

240There are no XBRL tags specific to Rule 3–16. 

To identify these disclosures, we searched all 

Forms 10–K, 10–Q, 20–F, 40–F, S–1, S–3, S–4, S– 

11, F–1, F–3, F–4, 10, 1–A, 1–K, and 1–SA and their 

amendments using a text search on the word 

combination ‘‘Rule 3–16.’’ We applied different text 

search combinations and found that using ‘‘Rule 3– 

16’’ offered the most accurate search results. Even 

so, we received hundreds of false hit returns. These 

were mainly registrants mentioning ‘‘Rule 3–16’’ as 

part of a description of collateral release provisions. 

That is, if Rule 3–16 were triggered, the debt 

agreement would release the collateral that 

triggered Rule 3–16. This is consistent with one 

commenter who noted that issuers use such release 

provisions to avoid compliance with Rule 3–16. See 

letter from PwC. We manually sifted through these 

false returns to identify the positive results listed 

in Table 3. 

241One commenter noted that Rule 3–16 

application is rarely seen in practice, see letter from 

BDO, while another commenter noted that many 

deals are intentionally structured to avoid Rule 3– 

16 by using Rule 144A and not providing 

registration rights. See letter from Covenant. 

242See, e.g., letters from CAQ and KPMG. 

243See, e.g., letter from Cahill. 

As discussed above,239 under existing 

Rule 3–16, a registrant is required to 

provide Rule 3–16 Financial Statements 

for each affiliate whose securities, 

which are pledged as collateral, 

constitute a substantial portion of the 

collateral for any class of securities 

registered or being registered. Table 3 

presents data on the number of filings 

and unique registrants that included 

Rule 3–16 Financial Statements since 

2013. The number of registrants 

remained steady over this period. Due to 

the manual process by which we 

attained these estimates, there are likely 

more registrants providing Rule 3–16 

Financial Statements than are reflected 

here.240 However, based on the 

comments we received, we do not 

expect the number to be significantly 

larger.241

TABLE 3—ESTIMATED NUMBER OF UNIQUE REGISTRANTS AND FILINGS INCLUDING RULE 3–16 FINANCIAL STATEMENTS

Year 

Number of 

unique 

registrants 

Number of 

total filings 10–K 20–F 

2013 ................................................................................................................. 7 7 6 1 

2014 ................................................................................................................. 7 7 6 1 

2015 ................................................................................................................. 7 7 6 1 

2016 ................................................................................................................. 7 7 6 1 

2017 ................................................................................................................. 7 7 6 1 

Source: DERA staff analysis of EDGAR filings. 

Request for Comment 

105. Are there reliable sources of 

information or robust means of 

estimating the proportion of Rule 144A 

offerings that do not include registration 

rights versus those that do include 

registration rights? If so, please describe 

these sources and methods. 

106. What is the current level of 

participation of non-QIB and retail 

investors in registered offerings of 

corporate debt? Are there reliable 

sources of information or robust means 

of estimating the proportion of 

registered versus unregistered debt 

offerings held by different investor types 

such as QIBs and non-QIBs? If so, please 

describe these sources and methods. 

107. How do investors and other 

market participants currently use the 

information required to be disclosed by 

Rules 3–10 and 3–16? Are these 

disclosures generally consumed directly 

by investors? Is information derived 

from these disclosures made available to 

investors by financial analysts or other 

third party service providers? 

C. Anticipated Economic Effects 

In this section we discuss the 

anticipated economic benefits and costs 

of the proposed amendments to Rules 

3–10 and 3–16. 

1. Proposed Amendments to Rule 3–10 

and Partial Relocation to Rule 13–01 

We received a number of comments 

indicating that the existing requirements 

often lead registered debt agreements to 

be structured in such a way as to avoid 

compliance with Rule 3–10,242 thereby 

depriving certain investors of the 

opportunity to invest in guaranteed 

securities. Similarly, others noted that 

issuers who have not previously issued 

guaranteed debt securities often are 

deterred by the associated compliance 

costs and prefer instead to issue 

securities privately through Rule 

144A.243 In light of these comments, we 

expect the proposed amendments to 

benefit issuers and investors. For 

example, as a result of the overall 

reduced burdens associated with the 

proposed amendments, investors may 

benefit from access to more registered 

offerings that are structured to include 

guarantees and, accordingly, the 

additional protections that come with 

Section 11 liability for disclosures made 

in those offerings. Also, an increase in 

the overall use of guarantees could 

reduce structural subordination issues 

that arise. Typically, all of a parent 

company’s subsidiaries support the 

parent company’s debt-paying ability. 

However, in the event of default, the 

holders of debt without the benefit of 

guarantees are comparatively 

disadvantaged. In the event of default, a 

holder of a guaranteed debt security 

issued by a parent company can make 

claims for payment directly against the 

issuer and its subsidiary guarantors. The 

assets of non-guarantor subsidiaries 

typically would be accessible by the 

debtholder only indirectly through a 

bankruptcy proceeding. In such a 

proceeding, absent a guarantee, the 

claims of the debtholder would be 

structurally subordinate to the claims of 

other creditors, including trade creditors 

of the non-guarantor subsidiaries. The 

less burdensome disclosures under the 

proposed amendments may lead to 

greater use of guarantees to address 

these structural subordination issues, 

which could result in more efficient risk 

sharing within corporate groups and 

potentially a lower cost of capital for 

registrants. 

Furthermore, the less burdensome 

disclosures may lead issuers to register 

the initial offerings of guaranteed 

securities rather than opting to issue 

them under Rule 144A with registration 

rights. Issuers may be able to comply 

with the proposed rule and access the 

capital markets more quickly than under 

the existing Rule 3–10 requirements. 

These issuers would not incur costs 

associated with exchanging the 

privately issued debt securities for 

registered guaranteed debt securities. 

a. Eligibility Conditions To Omit 

Financial Statements of Subsidiary 

Issuer or Guarantor 

As detailed in Section III.C.1.b, 

‘‘Consolidated Subsidiary,’’ we propose 

to replace one of the conditions that 

must be met to be eligible to omit the 

separate financial statements of a 

subsidiary issuer or guarantor—that the 


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244Commenters highlighted the significant time 

and cost associated with preparing the Alternative 

Disclosures. See, e.g., letters from Cahill, FedEx, 

and Noble-UK. Noble-UK estimated that 

compliance with Rule 3–10 requires the equivalent 

of approximately two full time employees across its 

organization. FedEx estimated that compliance 

requires approximately 280 hours per year. Based 

on this commenter’s estimate of compliance hours, 

estimated compliance costs under the existing rule 

amount to $97,000 per year (calculated as 280 hours 

× Compliance Attorney at $348 per hour = $97,440 

per year). The per hour figure for a Compliance 

Attorney is taken from SIFMA’s 2013 Management 

& Professional Earnings in the Securities Industry, 

modified by Commission staff to account for an 

1800-hour work-year and multiplied by 5.35 to 

account for bonuses, firm size, employee benefits 

and overhead and adjusted for inflation. See Sec. 

Indus. and Fin. Mkts. Ass’n (SIFMA), Management 

& Professional Earnings in the Securities Industry 

(2013), https://www.sifma.org/resources/research/ 

management-and-professional-earnings-in-thesecurities-industry-2013. For purposes of the 

Paperwork Reduction Act of 1995 (‘‘PRA’’), 44 

U.S.C. 3501 et seq., we estimate that the proposed 

amendments to Rule 3–10 would result in an 

overall reduction of 30 burden hours for each form 

affected by the proposed amendments. See Section 

VIII.B.1, ‘‘Rule 3–10,’’ below. 

245See discussion and references within Section 

VII.B.2, ‘‘Market Conditions.’’ 

246See, e.g., letters from ABA-Committees, AB– 

NYC, Chamber, EY, SIFMA, and PwC. 

247See letter from SIFMA. 

248See letter from CalPERS. 

subsidiary issuer or guarantor be 100% 

owned by the parent company—with a 

condition that the subsidiary issuer or 

guarantor be consolidated in the parent 

company’s consolidated financial 

statements. This proposed change 

would permit the parent company to 

omit the separate financial statements of 

a consolidated subsidiary issuer or 

guarantor even if third parties hold noncontrolling ownership interests in that 

subsidiary issuer or guarantor. However, 

the proposed rule would require, to the 

extent material, a description of any 

factors that may affect payments to 

holders of the guaranteed security, such 

as the rights of a non-controlling interest 

holder. 

In addition to the proposed change 

from 100% owned to consolidation, we 

are proposing changes to simplify the 

Rule’s eligibility conditions. Namely, as 

discussed in Section III.C.1.d, ‘‘Eligible 

Issuer and Guarantor Structures 

Condition,’’ the proposed amendments 

would replace the five specific issuer 

and guarantor structures currently 

eligible under the existing rule with a 

broader two-category framework. Under 

these changes, separate financial 

statements of consolidated subsidiary 

guarantors may be omitted for each 

issuer and guarantor structure that is 

eligible. Additionally, unlike the 

existing rule, the nature of the 

subsidiary guarantees, including 

whether the guarantee is full and 

unconditional or joint and several, 

would no longer impact the eligibility to 

omit separate subsidiary financial 

statements and instead would only 

impact the extent of disclosure in the 

Proposed Alternative Disclosures. 

Overall, these proposed amendments 

would permit a broader scope of issuers 

and guarantors to be eligible to provide 

the Proposed Alternative Disclosures in 

lieu of separate financial statements of 

each subsidiary issuer and guarantor 

than under existing Rule 3–10. This, in 

turn, would reduce the compliance 

costs associated with preparation of 

disclosures for these registered debt 

offerings and ongoing periodic 

reporting.244 To the extent there are 

more issuers and guarantors that are 

eligible to provide the less burdensome 

Proposed Alternative Disclosures in lieu 

of separate financial statements of each 

subsidiary issuer and guarantor under 

proposed Rule 3–10, these entities may 

be more likely to register their debt 

offerings, either at the outset or through 

an exempt offering with registration 

rights. As a result, some issuers may 

realize a lower cost of capital. Such an 

outcome would be consistent with 

previous studies that have found the 

cost of capital associated with registered 

debt offerings to be lower than that of 

private offerings made under Rule 

144A,245 although other issuer 

characteristics indicative of 

creditworthiness would remain relevant 

with respect to the cost of capital, 

regardless of offering method. 

Additionally, subsidiary issuers and 

guarantors that are currently required to 

file separate financial statements 

because they do not meet existing Rule 

3–10’s eligibility criteria would have 

reduced compliance costs to the extent 

they meet the revised eligibility criteria 

under proposed Rule 3–10 and the 

Proposed Alternative Disclosures are 

provided in lieu of their separate 

financial statements. 

Certain investors could also benefit 

from the proposed amendments to the 

eligibility conditions. If issuers opt to 

register debt offerings, rather than 

structure them as private offerings using 

Rule 144A, then new investors— 

namely, non-QIB institutional investors 

and retail investors who cannot 

participate in Rule 144A offerings— 

would be eligible to participate in the 

offerings. To the extent that the 

proposed amendments to the eligibility 

conditions encourage additional 

registered debt offerings, more 

investment opportunities would be 

made available, and a resulting increase 

in market participation would improve 

the overall competitiveness and 

efficiency of the capital markets. 

Furthermore, these debt offerings would 

benefit investors by extending to them 

the protections associated with 

registration. 

We expect little, if any, adverse effect 

on issuers and guarantors of guaranteed 

debt securities from these proposed 

amendments. We also believe the 

adverse effects on investors, if any, are 

likely to be limited. Under the existing 

rule, investors receive separate financial 

statements of subsidiary issuers and 

guarantors if these entities are not 100% 

owned by the parent company. If these 

subsidiaries are consolidated in the 

parent company’s financial statements 

and all other conditions of proposed 

Rule 3–10 are met, investors may no 

longer receive the separate financial 

statements of these subsidiary issuers 

and guarantors. In such cases, although 

investors would not receive the detailed 

information about each such subsidiary 

issuer or guarantor included in the 

separate financial statements, a parent 

company would be required to provide, 

to the extent material, financial and 

non-financial information for 

consolidated subsidiary issuers and 

guarantors with non-controlling 

interests, as well as a description of any 

factors associated with non-controlling 

interest holders that may affect 

payments to holders of the guaranteed 

security. Where all eligibility conditions 

of the proposed rule are met, we believe 

the Proposed Alternative Disclosures 

would provide the information investors 

need to make informed investment 

decisions with respect to a guaranteed 

security. 

Several commenters supported 

modifying the 100% owned condition 

in the existing rule for reasons 

consistent with the analysis above.246

One commenter recommended we 

eliminate this condition and instead 

require separate disclosure of 

subsidiaries providing lesser 

guarantees,247 whereas another 

commenter stated that the existing 

requirement should remain 

unchanged.248

b. Disclosure Requirements 

As detailed in Section III.C.2, 

‘‘Disclosure Requirements,’’ one of the 

conditions in the existing rule for 

omitting separate financial statements of 

a subsidiary issuer or guarantor is 

providing the Alternative Disclosures in 

the footnotes to the parent company’s 

consolidated financial statements. The 

proposed rule would retain the 

requirement to provide the Alternative 

Disclosures, but with modifications. We 

address below the proposed 

amendments related to the Alternative 


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249See Brian P. Miller, The Effects of Reporting 

Complexity on Small and Large Investor Trading, 

85 Acct. Rev. 2107 (2010). 

250See Haifeng You & Xiao-jun Zhang, Financial 

Reporting Complexity and Investor Underreaction 

to 10–K Information, 14 Rev. of Acct. Stud. 559 

(2009); Alastair Lawrence, Individual Investors and 

Financial Disclosure, 56 J. of Acct. & Econ. 130 

(2013). 

251See 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). 

252See, e.g., letters form BDO, Headwaters, 

Medtronic, and PwC. Headwaters noted that 

Alternative Disclosure composed approximately 

15% of the entire financial disclosure in its most 

recent Form 10–K and approximately 28% of the 

entire financial disclosure in its most recent Form 

10–Q. Medtronic indicated that it has one staff 

person on its external reporting team that spends 

over 80% of his or her time preparing Rule 3–10 

related information in support of quarterly filings. 

253A number of academic studies have explored 

the use of bright-line thresholds and ‘‘when 

material’’ disclosure standards. The majority of 

these papers highlight a preference for principlesbased ‘‘when material’’ standard. See generally, e.g., 

Eugene A. Imhoff Jr. & Jacob K. Thomas, Economic 

Continued 

Disclosures (the Proposed Alternative 

Disclosures). 

i. Financial and Non-Financial 

Disclosures 

As described in Section III.C.2.a, 

‘‘Financial Disclosures,’’ we propose to 

simplify the financial disclosures 

required by current Rule 3–10 by 

replacing Consolidating Information 

with a requirement to provide 

Summarized Financial Information. The 

level of detail currently required in 

Consolidating Information often 

contributes to multiple pages of detail in 

the parent company’s financial 

statements. The proposed Summarized 

Financial Information would focus on 

the information that is most likely to be 

material to an investment decision. If 

additional line items, beyond what is 

required in the Summarized Financial 

Information are material, they would be 

required to be disclosed. 

The proposed amendments should 

simplify the disclosures and reduce the 

cost of compliance and could engender 

further benefits. For example, academic 

literature finds that simplified financial 

statements are associated with more 

efficient price discovery,249 and that 

investors underreact more to firms with 

less readable financial disclosures.250

More generally, we believe the proposed 

amendments would provide investors 

with streamlined and easier to 

understand financial information that 

we believe is material to an investment 

decision. Thus, to the extent that the 

proposed amendments have their 

intended effect, reducing complexity 

while maintaining the material 

completeness of financial disclosures, 

we anticipate that the financial 

disclosures that result from the 

proposed amendments would improve 

price discovery, enhance the allocative 

efficiency of markets, and facilitate 

capital formation. 

We are also proposing that a parent 

company be permitted to provide 

financial disclosures about the Obligor 

Group on a combined basis rather than 

on a disaggregated basis. Additionally, if 

non-financial disclosure provided in 

response to proposed Rule 13–01 were 

applicable to one or more, but not all, 

guarantors, such as where a subsidiary’s 

guarantee is limited to a particular 

dollar amount, separate disclosure of 

Summarized Financial Information for 

one or more issuers and guarantors 

would be required, to the extent 

material. 

To the extent that investors are 

indifferent about whether payment 

under the guaranteed security comes 

from the issuer or one or more 

guarantors in the same consolidated 

group, or both, the disclosure resulting 

from the proposed amendments would 

not adversely impact investment 

decisions and could offer investors more 

readable, streamlined financial 

information. To the extent that 

increased readability without loss of 

material information would facilitate 

investor evaluation of whether the 

entities in the Obligor Group have the 

ability to make payments as required 

under the guaranteed security, the 

proposed amendments would promote 

the efficiency of security prices and 

investor portfolios. Consistent with 

potential benefits from these changes, a 

growing body of academic literature 

finds that financial statement readability 

affects the information environment and 

that more readable statements are 

associated with lower cost of debt 

capital and reduced bond rating agency 

disagreement.251

The proposed rule also requires that 

Summarized Financial Information be 

provided only for the most recently 

completed fiscal year and year-to-date 

interim period, if applicable, included 

in the parent company’s consolidated 

financial statements, rather than for the 

additional periods specified under 

existing Rules 3–01 and 3–02 of 

Regulation S–X. This is intended to 

preserve information that is material to 

an investment decision while reducing 

compliance costs for registrants. This 

proposed change is consistent with 

commenter views. The commenters that 

discussed the number of annual periods 

for disclosure recommended limiting 

disclosure to the current year, citing 

challenges recasting prior period 

information for circumstances such as 

legal entity mergers and discontinued 

operations. Others cited significant costs 

to issuers from requiring additional 

periods.252

In addition, we are proposing to 

require non-financial disclosures to 

supplement the proposed financial 

disclosures with additional information 

that may be material to an investment 

decision. This would include material 

information about how payments to 

holders of guaranteed securities may be 

affected by such things as the issuer and 

guarantor structure, the terms and 

conditions of the guarantees, the impact 

of non-controlling ownership interests, 

or other factors specific to the offering. 

These proposed amendments should 

enhance the information provided to 

investors about the investment without 

imposing significant burdens on 

registrants. Overall, this should lead to 

greater transparency and reduce 

information asymmetries between 

issuers and investors. 

Despite being unable to estimate the 

number of filings that provide brief 

narrative disclosures under the existing 

Alternative Disclosure, we do not expect 

parent companies to incur significant 

costs to provide the Proposed 

Alternative Disclosures. For example, 

where Alternative Disclosures under the 

current rule would constitute only a 

brief narrative, we generally believe 

separate financial disclosures about the 

issuers and guarantors of the guaranteed 

securities likely would not be material 

and therefore could be omitted under 

the proposed amendments. Finally, as 

with any change to reporting format and 

presentation of information, the 

recommended proposals may lead 

companies and investors to incur costs 

to adjust to the new disclosures. As 

further discussed below, we do not 

expect such costs to be substantial. 

ii. When Disclosure Is Required 

As explained in Section III.C.2.c, 

‘‘When Disclosure is Required,’’ we 

propose eliminating the numerical 

thresholds of existing Rule 3–10 that are 

used to determine the form and content 

of disclosure. Instead, all proposed 

disclosures would be required unless 

such information would not be material 

to holders of the guaranteed security. 

While numerical thresholds may be 

easier to apply than a materiality 

standard that requires judgment, this 

change would allow for a more 

principles-based disclosure approach 

that is more tailored to the specific 

circumstances and the needs of 

investors.253 Allowing the parent 


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Consequences of Accounting Standards: The Lease 

Disclosure Rule Change, 10 J. of Acct. & Econ. 277 

(1988) (providing evidence that management 

modifies existing lease agreements to avoid crossing 

bright-line threshold for lease capitalization). 

254See Usha Rodrigues & Mike Stegemoller, An 

Inconsistency in SEC Disclosure Requirements? The 

Case of the ‘‘Insignificant’’ Private Target, 13 J. of 

Corp. Fin. 251 (2007) (providing evidence, in the 

context of mergers and acquisitions, that bright-line 

thresholds can deviate from investor preferences). 

255See 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. 

256See letters from ABA-Committees, AB–NYC, 

CAQ, DT, EY, FedEx, KPMG, and PwC. 

257One commenter noted that supplemental 

information typically included in offering 

memoranda for Rule 144A debt offerings, including 

revenues, operating income, assets and liabilities of 

the non-guarantor group, is provided on an 

unaudited basis. See letter from ABA-Committees. 

If QIBs currently do not require such supplemental 

disclosures to be audited in 144A debt offerings, the 

costs outlined above would not be expected to 

apply to this group of investors. 

258For 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). 

company to omit immaterial 

information would lower the costs of 

disclosure relative to existing 

requirements and may help focus 

investor attention on decision-relevant 

information. However, this change 

could also increase the risk that a parent 

company would omit, potentially 

inadvertently, value-relevant 

information. In such instances, investors 

may make suboptimal investment 

decisions. Omitting material 

information, however, would subject 

issuers and guarantors to increased 

litigation risk, providing incentive for 

issuers to make careful determinations 

on the form and content of disclosures. 

In certain settings, there is academic 

evidence that allowing issuers to make 

principles-based disclosure decisions 

using a materiality criterion is 

consistent with investor preferences.254

However, there is also evidence of 

investor benefits from rules-based 

reporting standards.255 While the 

proposed amendments could result in 

reduced comparability across registrants 

and transactions, using a principlesbased standard could benefit investors 

by allowing registrants to tailor their 

disclosure to provide material 

information to them. The proposed 

amendment also accords with a number 

of commenters who indicated that 

existing thresholds are overly 

restrictive.256

iii. Location of Proposed Alternative 

Disclosures and Audit Requirement 

The proposed amendments would 

allow the parent company the choice of 

whether to provide the Proposed 

Alternative Disclosures in the financial 

statement footnotes or elsewhere in the 

registration statement covering the offer 

and sale of the guaranteed debt and any 

related prospectus, as well as annual 

and quarterly Exchange Act periodic 

reports required to be filed during the 

fiscal year in which the first bona fide 

sale of the subject securities is 

completed. If the parent company were 

to provide the Proposed Alternative 

Disclosures in its financial statements in 

its registration statement and in certain 

Exchange Act periodic reports required 

to be filed during fiscal year in which 

the first bona fide sale of the subject 

securities is completed, consistent with 

the existing rule, the disclosures would 

be subject to annual audit, interim 

review, and internal control over 

financial reporting requirements. 

Investors may perceive this choice of 

placement to mean the disclosures are 

more reliable than if they were not in 

the financial statements at the time of 

registration. 

In contrast, if the parent company 

were to provide the Proposed 

Alternative Disclosures outside its 

financial statements in its registration 

statement and in certain Exchange Act 

periodic reports required to be filed 

during the fiscal year in which the first 

bona fide sale of the subject securities 

is completed, lower compliance costs 

would likely result with respect to these 

filings. While we generally would 

expect lower compliance costs, 

disclosures outside the financial 

statements may result in certain costs to 

parent companies, such as legal costs or 

due diligence activities (e.g., comfort 

letters). Additionally, this proposed 

optionality may reduce the potential for 

delay in offerings that exists under the 

current rule due to the need to prepare 

audited Alternative Disclosures. Parent 

companies using this proposed option 

to provide the disclosures outside the 

consolidated financial statements may 

be able to register guaranteed debt 

offerings and go to market more quickly 

than under the existing rule. This may 

allow parent companies to more 

promptly access favorable market 

conditions. Although these disclosures 

are supplemental in nature, investors 

may nevertheless be adversely impacted 

as these disclosures would not 

immediately benefit from the enhanced 

accuracy and reliability associated with 

information that is included in the 

financial statements at registration. To 

the extent that investors prefer these 

initial disclosures to be included in the 

parent company’s financial statements, 

their willingness to invest may be 

influenced or they may discount the 

information provided in the unaudited 

portion of the disclosure, potentially 

reducing the amount of information 

incorporated into security prices and 

increasing the issuer’s cost of capital.257

Additionally, the amount of 

information that investors receive in the 

registration statement and in certain 

Exchange Act periodic reports required 

to be filed during the fiscal year in 

which the first bona fide sale of the 

subject securities is completed could be 

affected by the choice of placement. The 

safe harbor for forward-looking 

information under PSLRA is not 

available for disclosures provided in the 

financial statements. A parent company 

providing the Proposed Alternative 

Disclosures outside its financial 

statements may be more likely to 

voluntarily supplement those required 

disclosures with forward-looking 

information, as compared to a parent 

company that provides the Proposed 

Alternative Disclosures in its financial 

statements. Such supplemental forwardlooking information, if provided, could 

benefit investors. The relocation of 

disclosures may also affect the 

prominence of the disclosures. Some 

academic research provides indirect 

evidence that users may treat 

information differently depending on 

the location of the disclosure.258

If a parent company provides the 

Proposed Alternative Disclosures in its 

financial statements, consistent with the 

existing rule, such disclosures would be 

subject to XBRL requirements. Because 

the machine-readable nature of XBRL 

disclosures facilitates aggregation, 

comparison, and large-scale analysis of 

reported information through automated 

means, investors stand to benefit from 

enhanced analysis capabilities, 

particularly in the comparison of 

disclosures across issuers and time 

periods. The parent company may incur 


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259Some commenters also noted the 

inconsistency in that information required for 

recently acquired subsidiary issuers and guarantors 

is more detailed than information required for other 

subsidiary issuers and guarantors. See, e.g., letters 

from DT and PwC. 260See Lawrence, note 250 above. 

261See letters from DT and Simpson. 262See letter from Simpson. 263See letters from ABA-Committees, DT, EY, 

PwC, SIFMA, and Simpson. 264See letters from DT and Simpson. 

265See letters from ABA-Committees, Cahill, 

Chamber, Covenant, Davis, DT, and EY. 

additional costs to comply with these 

tagging requirements. In contrast, 

Proposed Alternative Disclosures 

provided outside the financial 

statements would not be subject to 

XBRL tagging requirements. Investors 

would not benefit from the enhanced 

analysis capabilities and the parent 

company would not incur the related 

costs to comply with the tagging 

requirements. In general, we believe the 

incremental cost of tagging the Proposed 

Alternative Disclosures in XBRL, and 

hence the incremental cost savings of 

not having to tag the proposed 

Alternative Disclosures likely would be 

relatively low, as issuers already would 

have software or processes in place for 

tagging financial statement information. 

Finally, while a parent company is 

afforded a choice of where to locate 

disclosures in its registration statement 

and in certain Exchange Act periodic 

reports required to be filed during fiscal 

year in which the first bona fide sale of 

the subject securities is completed, 

beginning with its annual report filed on 

Form 10–K or Form 20–F for the fiscal 

year during which the first bona fide 

sale of the subject securities is 

completed, the parent company would 

be required to locate the disclosures 

within the footnotes to its consolidated 

financial statements, which are subject 

to applicable annual audit, interim 

review, and internal control over 

financial reporting. Because this 

requirement would be consistent with 

existing location requirements, we do 

not anticipate economic effects from 

this requirement as compared to the 

current state except, as discussed above 

that there may be decreases in costs 

attributable to the more simplified and 

streamlined proposed disclosures. 

iv. Recently Acquired Subsidiary Issuers 

and Guarantors 

We are proposing to delete the 

requirement to provide pre-acquisition 

audited financial statements of a 

recently acquired subsidiary issuer or 

guarantors. The existing requirement for 

pre-acquisition financial statements of 

recently-acquired subsidiary issuers or 

guarantors calls for far greater detail 

than what is required for any other 

subsidiary issuer and guarantor.259 As 

discussed in Section III.C.2.e, 

‘‘Recently-Acquired Subsidiary Issuers 

and Guarantors,’’ we believe Rule 3–05 

of Regulation S–X, which requires 

audited pre-acquisition financial 

statements of an acquired business to be 

provided if the acquired subsidiary 

exceeds specified thresholds of 

significance, provides sufficient 

information in this context such that the 

pre-acquisition financial statements of 

recently-acquired subsidiary issuers and 

guarantors required by existing Rule 3– 

10(g) are unnecessary. 

In addition, the trigger for preacquisition financial statements of a 

recently-acquired subsidiary issuer or 

guarantor under existing Rule 3–10(g) is 

based on the significance of the 

acquired subsidiary compared to the 

size of the offering. This may lead 

issuers to provide audited financial 

statements of a recently-acquired 

subsidiary that is small relative to its 

consolidated parent company. The 

proposed changes would address these 

circumstances. 

We believe the proposed amendment 

would reduce the compliance burden 

for preparers without reducing material 

information for investors, since material 

information about recently acquired 

subsidiaries would be required by Rule 

3–05 of Regulation S–X and proposed 

Rule 13–01(a)(5). Furthermore, to the 

extent that investors find the 

information provided under the existing 

requirement redundant, as it overlaps 

with Rule 3–05 of Regulation S–X, 

eliminating the existing requirement 

would streamline disclosures. Academic 

research suggests that individuals invest 

more in firms with more concise 

financial disclosures.260 Thus, to the 

extent that the proposed amendments 

alleviate duplication and do not affect 

the completeness of financial 

disclosures, the resulting disclosures 

could result in improved price 

discovery, enhance the allocative 

efficiency of the market, and facilitate 

capital formation. 

v. Continuous Reporting Obligation 

As discussed in Section III.C.2.f, 

‘‘Continuous Reporting Obligation,’’ we 

are proposing that a parent company be 

permitted to cease providing the 

Proposed Alternative Disclosures in its 

ongoing reporting if the corresponding 

subsidiary issuer’s or guarantor’s 

reporting obligation under Section 13 

and/or Section 15(d) of the Exchange 

Act with respect to the guaranteed 

securities is terminated or suspended. 

This amendment would reduce 

compliance costs without loss of 

material information for investors. To 

the extent that the existing requirements 

impose unnecessary burdens by 

requiring a parent company to continue 

providing the Alternative Disclosures 

beyond when the subsidiary would have 

to report with respect to the guaranteed 

securities,261 or otherwise deter issuers 

and guarantors from engaging in public 

debt offerings to avoid such reporting 

obligations,262 this amendment would 

remove such inefficiencies. Commenters 

generally supported the proposed 

amendment, noting inconsistencies 

between the existing requirement and 

other reporting rules,263 and suggesting 

that it likely deters registration of debt 

offerings.264

2. Proposed Amendments to Rule 3–16 

and Relocation to Rule 13–02 

As discussed in detail in Section V.B, 

‘‘Overview of the Proposed Changes,’’ 

although affiliates whose securities are 

pledged as collateral are not registrants 

with respect to the collateralized 

security, Rule 3–16, when triggered, 

requires financial statements as if such 

affiliates were registrants. We are 

proposing to replace the existing 

requirement to provide separate 

financial statements for each affiliate 

whose securities are pledged as 

collateral with financial and nonfinancial disclosures about the 

affiliate(s) and the collateral 

arrangement, where material, as a 

supplement to the consolidated 

financial statements of the registrant 

that issues the collateralized security. 

Debt agreements are often structured 

to avoid the requirements of Rule 3–16 

by either structuring the debt agreement 

to release any pledge of affiliate 

securities as collateral if and when such 

pledge triggers the requirements under 

Rule 3–16, or by not including pledges 

of affiliate securities as collateral 

altogether.265 In such circumstances, 

investors may demand a higher interest 

rate from issuers to compensate for the 

absence of collateral, potentially 

increasing the cost of capital to issuers. 

The proposed amendments would 

reduce the burden of having to provide 

separate financial statements of affiliates 

under the existing rule and provide 

issuers with the flexibility to structure 

their debt agreements with pledges of 

affiliate securities. If, as a result of the 

proposed amendments, debt agreements 

are no longer structured to avoid Rule 

3–16 requirements, investors would 

obtain the benefit of both the collateral 

and the related disclosures, all of which 

would be subject to Section 11 liability. 

This flexibility may also permit issuers 


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266 In the rare circumstances where the affiliate is 

not a consolidated subsidiary of the registrant, 

proposed Rule 13–02(a)(5) would require the 

registrant to provide any other quantitative or 

qualitative information that would be material to 

making an investment decision with respect to the 

collateralized security. In this regard, separate 

financial statements of the unconsolidated affiliate 

may be necessary if material to an investment 

decision. See additional discussion in Section 

V.C.1, ‘‘Level of Detail.’’ 

267For purposes of the PRA, we estimate that the 

proposed amendments to Rule 3–16 would result in 

an overall reduction of 30 burden hours for each 

form (other than Form 10–Q) affected by the 

proposed amendments. See Section VIII.B.2, ‘‘Rule 

3–16,’’ below. 

268For purposes of the PRA, we estimate that the 

proposed amendments to Rule 3–16 would result in 

an increase of 70 burden hours per Form 10–Q 

filing. See Section VIII.B.2, ‘‘Rule 3–16,’’ below. 

269The content of the proposed non-financial 

disclosures consists of basic information about the 

collateral arrangement and the entities involved. 

We do not expect such information, which is 

generally available from debt agreements, would 

impose a significant burden on a registrant to 

prepare. 

270See 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. 

to attract investors that prefer to invest 

in obligations where collateral is fully 

available and not subject to the release 

mechanisms designed to avoid Rule 3– 

16 requirements. By appealing to a 

broader range of investors and providing 

more attractive collateral arrangements, 

registrants may be able to obtain a lower 

cost of capital. 

As discussed above for the Proposed 

Amendments to Rule 3–10, Proposed 

Rule 13–02 would provide flexibility to 

place the proposed disclosures within 

the notes to the financial statements or 

in specified prominent locations outside 

the financial statements in registration 

statements covering the offer and sale of 

the collateralized debt securities and 

any related prospectus, as well as 

annual and quarterly Exchange Act 

periodic reports required to be filed 

during the fiscal year in which the first 

bona fide sale of the subject securities 

is completed. For registrants that 

include the proposed disclosures in 

their financial statements, such 

information would be subject to 

applicable annual audit, interim review, 

and internal control over financial 

reporting requirements. Investors may 

perceive this choice of placement as 

making the disclosure more reliable 

than if it were placed outside of the 

financial statements. To the extent that 

investors prefer these disclosures to be 

located in the registrant’s financial 

statements, this choice may influence 

their willingness to invest. Registrants 

could attempt to influence such 

willingness by including the proposed 

disclosures in their financial statements. 

Also consistent with the proposed 

amendments to Rule 3–10, the registrant 

would, however, be required to provide 

the proposed disclosures in a footnote to 

its consolidated financial statements in 

its annual and quarterly reports 

beginning with its annual report filed 

for the fiscal year during which the first 

bona fide sale of the subject securities 

is completed. This requirement would 

be consistent with existing location 

requirements, and we do not anticipate 

economic effects as compared to the 

current state. 

Finally, as with any change to 

reporting format and presentation of 

information, the proposed amendments 

may lead companies and investors to 

incur costs to adjust to the new 

disclosures, as further discussed below. 

a. Financial Disclosures 

i. Level of Detail 

As discussed in Section V.C.1, ‘‘Level 

of Detail,’’ affiliates whose securities are 

pledged as collateral are almost always 

consolidated subsidiaries of the 

registrant,266 and their financial 

information is thus already reflected in 

the registrant’s consolidated financial 

statements. We propose to require 

Summarized Financial Information for 

each such affiliate and disclosure of 

additional financial information if 

material to holders of the collateralized 

security. For registrants, this would 

reduce compliance costs by reducing 

the amount of information needed to be 

prepared and disclosed.267 For 

investors, we do not anticipate 

significant costs since material 

information would still be required to 

be provided. The simplified disclosures 

would highlight material information 

needed to make informed investment 

decisions and therefore would enable 

investors to process information more 

efficiently and make more informed 

investment decisions. 

ii. Presentation on a Combined Basis 

We are proposing to permit a 

registrant to provide the Summarized 

Financial Information of consolidated 

affiliates that are pledged as collateral 

on a combined rather than individual 

basis. Additional disclosure specific to 

an affiliate would be required, if 

material. As with the effects of the 

proposed amendments to Rule 3–10 

discussed above, we believe the 

simplified disclosures in the proposed 

amendments to Rule 3–16 would both 

lower compliance costs for issuers and 

provide investors with more 

streamlined and concise disclosures that 

would promote more efficient decisionmaking by investors. We do not 

anticipate significant costs to investors 

since material information would still 

be required to be provided. 

iii. Periods to Present 

The proposed amendments would 

require the disclosure of Summarized 

Financial Information for the most 

recently ended fiscal year and year-todate interim period included in the 

registrant’s consolidated financial 

statements. Rule 3–16 financial 

statements are not currently required in 

quarterly reports, and as such, 

registrants would incur costs to provide 

this additional interim disclosure.268

We believe the proposed amendments 

would benefit investors by providing 

them with the most recent information 

to ensure informed investment 

decisions. 

b. Non-Financial Disclosures 

We are proposing to require nonfinancial information about affiliates 

whose securities are pledged as 

collateral and the collateral 

arrangements, to the extent material. 

While we did not receive comments on 

non-financial disclosures, we do not 

believe this proposed amendment 

would impose undue costs for issuers, 

as the majority of the information 

required to be disclosed under the 

proposed amendments should be 

readily available or attainable.269 We 

believe investors would benefit because 

the proposed amendment would 

supplement the financial disclosures 

with additional, material information, 

thereby rendering the combined 

financial and non-financial disclosures 

more informative for investment 

decisions. 

c. When Disclosure Is Required 

Rather than utilizing existing 

numerical thresholds, disclosure of the 

proposed financial and non-financial 

disclosures would be required if 

material to holders of the collateralized 

security. To the extent the numerical 

thresholds under the existing rule result 

in disclosure of unnecessary or 

immaterial information, investors may 

benefit from reduced search costs and 

the facilitation of more efficient 

information processing.270 Further, we 

believe that, compared to existing rule 

requirements, the proposed 

amendments to Rule 3–16 would reduce 

compliance costs for issuers and 

increase the likelihood of registration. 


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271See, e.g., letters from BDO, Cahill, Covenant, 

and PwC. 

272Rule 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.)). 

273See Section VII.C.1, ‘‘Proposed Amendments 

to Rule 3–10 and Partial Relocation to Rule 13–01.’’ 

D. Anticipated Effects on Efficiency, 

Competition, and Capital Formation 

Several commenters noted that the 

need to comply with existing disclosure 

requirements often makes issuers 

structure registered offerings to avoid 

triggering Rules 3–10 or 3–16, or avoid 

registration altogether.271 As discussed 

above, and as a general matter, we 

believe the proposed amendments 

would improve the content, format, and 

focus of required registrant disclosures. 

This should both reduce the compliance 

cost for issuers and allow more efficient 

decision-making by investors. This may 

be true particularly to the extent that the 

proposed amendments result in more 

efficient and effective dissemination of 

material information to investors and 

increase the efficiency of investor 

processing and usage of this 

information. Further, the proposed rule 

amendments may affect issuers’ 

registration choices. This, in turn, could 

broaden the investment opportunities 

available for different types of investors 

and may allow for more efficient 

matching of investors with assets that 

meet their investment objectives and 

preferences. Retail investors could 

additionally be indirectly affected 

through their investments managed by 

institutional investors, who would have 

greater access to a broader range of 

investment opportunities in the 

registered debt market. To the extent 

that the proposed amendments ease 

registration burdens for issuers, there 

could be an increase in the number of 

registered offerings. If such issuers 

would not have otherwise issued debt 

securities under Rule 144A, this would 

result in an increase in capital 

formation. If such issuers would have 

otherwise issued debt under Rule 144A, 

it is possible that a switch to a registered 

offering would lower the issuers’ cost of 

capital while also providing investors 

with the enhanced protections afforded 

by registered offerings. 

Finally, rather than be 100% owned 

by the parent company, the proposed 

amendments allow for the subsidiary 

issuer or guarantor to be consolidated in 

the parent company’s consolidated 

financial statements as one of the 

conditions that must be met in order to 

be eligible to omit separate subsidiary 

issuer and guarantor financial 

statements. To the extent that the 

proposed amendments expand the 

scope of subsidiary issuers and 

guarantors that meet Rule 3–10 

eligibility requirements, the proposed 

amendments may promote greater 

competition among issuers and 

guarantors of guaranteed debt securities. 

This may enable more registrants, 

especially those on the margins, to 

compete on better terms. However, we 

do not anticipate the overall impact on 

competition to be substantial. 

E. Consideration of Reasonable 

Alternatives 

We discuss below potential 

alternatives to the proposed 

amendments to existing Rules 3–10 and 

3–16. 

1. Alternative to Proposed Amendments 

to Existing Rule 3–10 

An alternative to the proposed 

amendments to Rule 3–10 would be to 

permit the Proposed Alternative 

Disclosures be provided if the 

subsidiary issuers and/or guarantors 

were ‘‘wholly owned’’ by the parent 

company, as defined in Rule 1–02(aa) of 

Regulation S–X.272 Using ‘‘wholly 

owned’’ as the parent company 

ownership threshold, rather than the 

existing 100% ownership requirement, 

would likely permit more subsidiary 

issuers and guarantors to use the 

Alternative Disclosures as compared to 

the existing rule, but would be less 

flexible than the proposed amendments, 

as detailed above. As a result, we 

believe the proposed amendments 

would better serve to enhance 

efficiency, competition, and capital 

formation. 

2. Alternatives Common to Proposed 

Amendments to Existing Rule 3–10 and 

Existing Rule 3–16 

One alternative to each set of 

proposed amendments would be to 

require that the Proposed Alternative 

Disclosures, or the disclosures specified 

in proposed Rule 13–02, as applicable, 

be located in the audited annual and 

unaudited interim financial statement 

footnotes of the parent company, or 

registrant, as applicable, in all filings. 

Under this alternative, the parent 

company or registrant would not have a 

choice of whether to locate the proposed 

disclosures outside its consolidated 

financial statements in registration 

statements covering the offer and sale of 

the guaranteed or collateralized debt 

securities and any related prospectus, or 

in annual and quarterly Exchange Act 

periodic reports required to be filed 

during the fiscal year in which the first 

bona fide sale of the subject securities 

is completed. On the one hand, this 

could increase investor confidence in 

the disclosed information and provide 

the benefits of XBRL tagging. On the 

other hand, the cost to a parent 

company or registrant associated with 

preparing registration statements and 

certain periodic reports would be higher 

with this alternative than if the 

disclosures were provided outside of the 

financial statements. Furthermore, the 

flexibility of going to market more 

quickly would not be available under 

this alternative. This could limit the 

incentives to pursue registered offerings 

compared to the proposed amendments, 

and those registrants that do pursue 

registered offerings may be less likely to 

issue guarantees, or pledge affiliate 

securities as collateral, given the 

additional cost associated with 

including the proposed disclosures in 

the financial statements. Additionally, a 

parent company or registrant may be 

less likely to voluntarily supplement the 

disclosures with forward-looking 

information because the safe harbor for 

forward-looking information under 

PSLRA is not available for disclosures 

provided in the financial statements. As 

discussed above,273 guarantees and 

pledges of affiliate securities as 

collateral serve, in part, to reduce 

investor risk of structural subordination. 

Overall, we believe the benefits to 

investors of enhanced access to 

registered offerings with guarantees and 

pledges of affiliate securities as 

collateral, together with the benefits of 

reduced compliance burdens for issuers, 

justify forgoing the benefits of requiring 

these disclosures to be located in the 

financial statements of the parent 

company, or registrant, as applicable, 

included in registration statements 

covering the offer and sale of the 

guaranteed or collateralized debt 

securities and any related prospectus, as 

well as annual and quarterly Exchange 

Act periodic reports required to be filed 

during the fiscal year in which the first 

bona fide sale of the subject securities 

is completed. However, we solicit 

comment on this point and the potential 

benefits and concerns for registrants and 

investors of requiring the proposed 

disclosures to be located in the notes to 

the financial statements in all filings. 

A second related alternative to each 

set of the proposed rules would be to 

allow the parent company or registrant 

to provide the Proposed Alternative 

Disclosures, or the disclosures specified 

in proposed Rule 13–02, as applicable, 

outside the financial statement footnotes 

in all filings. On the one hand, if the 


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274See note 249 and accompanying text. 

275See note 244 above. 

276 44 U.S.C. 3507(d) and 5 CFR 1320.11. 

277As noted above, while the proposed 

amendments would apply to registered investment 

companies, and could thereby affect registered 

investment advisers, based on staff experience, we 

believe registered investment companies are 

unlikely to engage in the activities addressed by the 

proposed amendments. Accordingly, we are not 

revising the burden estimates for the forms and 

reports filed by these types of entities. 

278The paperwork burdens for Regulation S–K 

and Regulation S–X are imposed through the forms 

that are subject to the requirements in these 

regulations and are reflected in the analysis of those 

forms. To avoid a PRA inventory reflecting 

duplicative burdens, and for administrative 

convenience, we estimate that the proposed 

amendments would not impose an incremental 

burden for these regulations. 

279 17 CFR 239.11. 

280 17 CFR 239.13. 

281The paperwork burdens for Form S–3 and 

Form F–3 are imposed through the forms from 

which they incorporate by reference and are 

reflected in the analysis of those forms. To avoid 

a PRA inventory reflecting duplicative burdens and 

for administrative convenience, we assign a onehour burden to each of these forms. 

282 17 CFR 239.25. 

283 17 CFR 239.18. 

284 17 CFR 239.34. 

285 17 CFR 249.210. 

286 17 CFR 249.240f. 

287 17 CFR 249.310. 

288 17 CFR 249.308. 

289The paperwork burdens for Form 8–K is 

imposed through the forms from which they 

incorporate by reference and are reflected in the 

analysis of those forms. To avoid a PRA inventory 

reflecting duplicative burdens and for 

administrative convenience, we estimate that the 

proposed amendments would not impose an 

incremental burden for this form. 

290 17 CFR 240.14a-1 through 240.14a–104. 

291 17 CFR 240.14a–101. 

292As described below, our estimates for Form 

10–K take into account the burden that would be 

incurred by including the proposed disclosure in 

the annual report directly or incorporating by 

parent company or registrant opts to 

disclose the information outside the 

financial statements, the cost to a parent 

company or registrant associated with 

preparing the information would be 

lower with this alternative than if the 

disclosures were provided in the 

financial statements. This could 

incentivize the pursuit of registered 

offerings with guarantees or collateral, 

given the flexibility and associated 

reduced costs. While we generally 

would expect lower compliance costs, 

disclosures outside the financial 

statements may result in certain costs to 

parent companies and registrants, such 

as legal costs or due diligence activities 

(e.g., comfort letters). Additionally, a 

parent company or registrant may be 

more likely to voluntarily supplement 

the disclosures with forward-looking 

information because the safe harbor for 

forward-looking information under 

PSLRA is not available for disclosures 

provided in the financial statements. On 

the other hand, allowing the parent 

company or registrant the flexibility of 

disclosing outside the financial 

statements may reduce investor 

confidence in the disclosed information, 

as this information would not be subject 

to annual audit, interim review, and 

internal control over financial reporting 

requirements. As a result, this 

alternative could reduce investor 

confidence in the disclosed information 

and may affect their willingness to 

invest. 

While we acknowledge that providing 

additional flexibility to the parent 

company or registrant in the location of 

the disclosures would likely further 

reduce the compliance burdens 

associated with registered offerings with 

guarantees or collateral, investors may 

demand a higher expected return if they 

perceive reduced reliability of the 

Proposed Alternative Disclosure. The 

potential for higher borrowing costs may 

encourage issuers to voluntarily include 

the Proposed Alternative Disclosures or 

proposed disclosures, as applicable, in 

the financial statements of the parent 

company, or registrant, as applicable. 

We solicit comment on this point and 

the potential benefits and concerns for 

registrants and investors of providing 

flexibility to locate the Proposed 

Alternative Disclosures outside the 

financial statements in all filings. 

Finally, a third alternative relevant to 

each set of proposed amendments 

would be to require Summarized 

Financial Information to be provided for 

the same periods as the parent company 

or registrant, as applicable, instead of 

the most recent annual and interim 

period as proposed. While this 

alternative would increase the amount 

of information available to investors, the 

additional information may not be 

material in making informed investment 

decisions. As discussed above,274 prior 

studies have suggested that simpler 

disclosures may benefit investors by 

reducing search costs and facilitating 

more efficient information processing. 

Moreover, including additional 

historical periods would result in higher 

costs to registrants when preparing 

registration information and ongoing 

reporting. We do not believe the 

potential benefit to investors of this 

additional historical information 

justifies the potential cost to the 

registrants. 

F. Request for Comment 

We request comment on all aspects of 

our economic analysis, including the 

potential costs and benefits of the 

proposed amendments and alternatives 

thereto, and whether the rules, if 

adopted, would promote efficiency, 

competition, and capital formation or 

have an impact on investor protection. 

Commenters are requested to provide 

empirical data, estimation 

methodologies, and other factual 

support for their views, in particular, on 

costs and benefits estimates. 

VIII. Paperwork Reduction Act 

A. Background 

Certain provisions of our rules and 

forms that would be affected by the 

proposed amendments contain 

‘‘collection of information’’ 

requirements within the meaning of the 

PRA.275 The Commission is submitting 

the proposal to the Office of 

Management and Budget (‘‘OMB’’) for 

review in accordance with the PRA.276

The hours and costs associated with 

preparing and filing the forms and 

reports constitute reporting and cost 

burdens imposed by each collection of 

information. An agency may not 

conduct or sponsor, and a person is not 

required to respond to, a collection of 

information requirement unless it 

displays a currently valid OMB control 

number. Compliance with the 

information collections is mandatory. 

Responses to the information collections 

are not kept confidential and there is no 

mandatory retention period for the 

information disclosed. The titles for the 

affected collections of information 

are: 277

• ‘‘Regulation S–K’’ (OMB Control 

No. 3235–0071); 278

• ‘‘Regulation S–X’’ (OMB Control 

No. 3235–0009); 

• ‘‘Form S–1’’ 279 (OMB Control No. 

3235–0065); 

• ‘‘Form S–3’’ 280 (OMB Control No. 

3235–0073); 281

• ‘‘Form S–4’’ 282 (OMB Control No. 

3235–0324); 

• ‘‘Form S–11’’ 283 (OBM Control No. 

3235–0067); 

• ‘‘Form F–1’’ (OMB Control No. 

3235–0258); 

• ‘‘Form F–3’’ (OMB Control No. 

3235–0256); 

• ‘‘Form F–4’’ 284 (OMB Control No. 

3235–0325); 

• ‘‘Form 10’’ 285 (OMB Control No. 

3235–0064); 

• ‘‘Form 20–F’’ (OMB Control No. 

3235–0288); 

• ‘‘Form 40–F’’ 286 (OMB Control No. 

3235–0381); 

• ‘‘Form 10–K’’ 287 (OMB Control No. 

3235–0063); 

• ‘‘Form 8–K’’ 288 (OMB Control No. 

3235–0060); 289

• ‘‘Regulation 14A’’ 290 and 

‘‘Schedule 14A’’ 291 (OMB Control No. 

3235–0059); 292


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reference from a proxy or information statement. To 

avoid a PRA inventory reflecting duplicative 

burdens, we estimate that the proposed disclosure 

would not impose an incremental burden for proxy 

statements on Schedule 14A. 

293 17 CFR 240.14c–1 through 240. 14c–7. 

294 17 CFR 240.14c–101. 

295As described below, our estimates for Form 

10–K take into account the burden that would be 

incurred by including the proposed disclosure in 

the annual report directly or incorporating by 

reference from a proxy or information statement. To 

avoid a PRA inventory reflecting duplicative 

burdens, we estimate that the proposed disclosure 

would not impose an incremental burden for 

information statements on 14C. 

296 17 CFR 239.44. 

297 17 CFR 239.45. 

298 17 CFR 239.90. 

299 17 CFR 239.91. 

300 17 CFR 239.92. 

301See, e.g., letters from ABA-Committees, 

Anuradha, BDO, Cahill, CAQ, DT, EY, FedEx, GM, 

Grant, Headwaters, KPMG, Medtronic, and NobleUK. 

302See, e.g., letters from Medtronic and PwC. 

303See Sections III.C.2.d, ‘‘Location of Proposed 

Alternative Disclosures and Audit Requirement,’’ 

and VII.C.1.b.iii, ‘‘Location of Proposed Alternative 

Disclosures and Audit Requirement.’’ 

• ‘‘Regulation 14C’’ 293 and 

‘‘Schedule 14C’’ 294 (OMB Control No. 

3235–0057); 295

• ‘‘Form 10–Q’’ (OMB Control No. 

3235–0070); 

• ‘‘Form SF–1’’ 296 (OMB Control No. 

3235–0707); 

• ‘‘Form SF–3’’ 297 (OMB Control No. 

3235–0690); 

• ‘‘Form 1–A’’ 298 (OMB Control No. 

3235–0286); 

• ‘‘Form 1–K’’ 299 (OMB Control No. 

3235–0720); and 

• ‘‘Form 1–SA’’ 300 (OMB Control No. 

3235–0721). 

The regulations, schedules, and forms 

listed above were adopted under the 

Securities Act and/or the Exchange Act. 

These regulations, schedules, and forms 

set forth the disclosure requirements for 

registration statements, periodic and 

current reports, distribution reports, and 

proxy and information statements filed 

by registrants to help investors make 

informed investment and voting 

decisions. 

We are proposing amendments to the 

disclosure requirements in Rules 3–10 

and 3–16 of Regulation S–X to better 

align those requirements with the needs 

of investors and to simplify and 

streamline the disclosure obligations of 

registrants. We are proposing to amend 

both rules and relocate part of Rule 3– 

10 and all of Rule 3–16 to proposed 

Rules 13–01 and 13–02, respectively. 

We also are proposing to make 

conforming amendments to Items 504, 

1100, 1112, 1114, and 1115 of 

Regulation S–K; Forms F–1, F–3, 1–A, 

1–K, and 1–SA under the Securities Act; 

and Rule 12h-5 and Form 20–F under 

the Exchange Act. These amendments 

are intended to provide investors with 

the information that is important given 

the specific facts and circumstances, 

make the disclosures easier to 

understand, and reduce the costs and 

burdens to registrants. 

B. Summary of the Proposed 

Amendments Impact on Collection of 

Information 

In this section, we summarize the 

proposed amendments and their general 

impact on the paperwork burdens 

associated with the forms listed above. 

In the subsequent section below, we 

provide the revised burden estimates of 

each affected form. 

1. Rule 3–10 

The proposed amendments to Rule 3– 

10 would replace the Consolidating 

Information required by existing Rule 3– 

10 with Summarized Financial 

Information of the Obligor Group. 

Several commenters noted that 

preparing and providing Consolidated 

Information is particularly challenging, 

complex, and costly.301 Among other 

things, the Proposed Alternative 

Disclosures would permit a parent 

company to: (1) Exclude the financial 

information of non-obligated entities; (2) 

reduce the number of periods to be 

presented; and (3) provide the 

information of each issuer and guarantor 

on a combined, rather than 

disaggregated, basis. These changes 

would reduce a parent company’s 

paperwork burden by permitting the 

parent company to exclude information 

unnecessary to an investment decision 

as compared to the existing rule. In 

certain circumstances, the paperwork 

burden could be reduced even further 

because registrants would not be 

required to recast prior period 

information, which commenters noted 

can be particularly challenging.302

Existing Rule 3–10 requires the 

Alternative Disclosures to be included 

in the notes to the parent company’s 

consolidated financial statements, 

thereby requiring the Alternative 

Disclosures to be audited for the same 

periods. The proposed amendments 

would revise this requirement so that 

parent companies may provide the 

Proposed Alternative Disclosures 

outside their financial statement 

footnotes in a registration statement 

covering the offer and sale of the subject 

securities and any related prospectus, 

and in Exchange Act annual and 

quarterly reports required to be filed 

during the fiscal year in which the first 

bona fide sale of the subject securities 

is completed, but require the Proposed 

Alternative Disclosures to be included 

in the footnotes to the parent company’s 

consolidated financial statements for 

annual and quarterly reports beginning 

with the annual report for the fiscal year 

during which the first bona fide sale of 

the subject securities is completed. This 

amendment could reduce the burdens 

associated with preparing the Proposed 

Alternative Disclosures because the 

information would not need to be 

immediately audited or tagged. 

However, this amendment could result 

in certain legal and due diligence costs 

(e.g., comfort letters). 

Whether a parent company would 

elect to provide the Proposed 

Alternative Disclosures outside its 

financial statement footnotes likely 

would depend on the company’s 

specific facts and circumstances and, as 

discussed above,303 we believe there 

could be reasons for companies to elect 

either option. In addition, any reduction 

in paperwork burden associated with 

such an election would be incremental, 

as the parent company would still incur 

expenses to prepare audited financial 

information. Given these considerations, 

and to avoid overestimating the overall 

paperwork burden reduction associated 

with the proposed amendments, we are 

not estimating a specific burden 

reduction for this aspect of the proposed 

amendments. However, we solicit 

comment on whether it would be 

appropriate to do so, and, if so, how we 

might estimate such a reduction. 

The existing rule also requires a 

parent company to provide the 

Alternative Disclosures as a condition to 

omitting the separate financial 

statements of a subsidiary issuer or 

guarantor. In most cases, the Alternative 

Disclosures consist of Consolidating 

Information, but the Alternative 

Disclosures may consist of a brief 

narrative if certain numerical thresholds 

are met. The proposed amendments 

would eliminate these separate 

categories of Alternative Disclosures. 

Instead, the proposed amendments 

would require a parent company to 

provide all financial and non-financial 

disclosures specified in proposed Rule 

13–01 to the extent they are material to 

a holder of the guaranteed security. The 

proposed amendments would also 

require disclosure of any additional 

information that would be material to a 

holder of the guaranteed security. 

While the proposed amendments 

would eliminate some disclosure that 

may be required by the existing rule, 

they would also require other disclosure 

that may not be required by the existing 

rule. For example, if a numerical 


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304See 17 CFR 230.408(a), 240.12b–20. 305See Section VII.B.2, ‘‘Baseline and Affected 

Parties—Market Conditions.’’ 

306We were not able to determine the number of 

filings that included the Alternative Disclosures 

with certainty because registrants are not required 

to state explicitly that the disclosures they are 

providing are meant to satisfy the requirements of 

Rule 3–10. 

threshold is met under the existing rule, 

disclosure is required even if that 

disclosure is immaterial to an 

investment decision. The proposed 

amendments would not require that 

disclosure if it was not material, which 

would reduce the parent company’s 

paperwork burden. Conversely, if a 

numerical threshold is not met under 

the existing rule, disclosure is not 

required unless that information is 

necessary to make the disclosure 

provided not misleading.304 The 

proposed amendments would require 

that disclosure in all cases, to the extent 

material, which could increase the 

parent company’s paperwork burden. 

We have estimated the number of 

filings that include Consolidating 

Information under Rule 3–10, but we are 

unable to identify accurately the issuers 

providing narrative disclosures under 

Rule 3–10 because the language of those 

disclosures varies based on facts and 

circumstances.305 However, we do not 

believe that the proposed amendments 

would affect the paperwork burden for 

filings that include the narrative 

disclosures under existing Rule 3–10 

because registrants that provide these 

narrative disclosures would be 

permitted to provide similar 

information under the proposed 

amendments. 

Further, under the proposed 

amendments, parent companies would 

no longer be required to provide the preacquisition financial statements of 

recently-acquired subsidiary issuers and 

guarantors, as is currently required by 

existing Rule 3–10(g). Disclosure may be 

required under the proposed rule, 

however, if it is material to an 

investment decision in the guaranteed 

security. This aspect of the proposed 

amendments would decrease the overall 

paperwork burden of the affected forms. 

This reduction would be mitigated 

somewhat, however, because parent 

companies would still be required to 

provide information about any recentlyacquired subsidiaries when it is 

material. 

Finally, we are proposing 

amendments to require specific nonfinancial disclosures, where material, 

about the issuers and guarantors, the 

terms and conditions of the guarantees, 

and how the issuer and guarantor 

structure and other factors may affect 

payments to holders of the guaranteed 

securities. These disclosures would 

enhance the information provided about 

subsidiary issuers and guarantors and 

would be more comprehensive than the 

similar disclosures a parent company 

must provide under existing Rule 3–10. 

These additional disclosures, therefore, 

could incrementally increase a parent 

company’s existing paperwork burden. 

Considering the various impacts to 

the existing collection of information 

requirements outlined above, we 

estimate that the proposed amendments 

to Rule 3–10 would reduce the overall 

paperwork burden for registrants. 

Moreover, some aspects of the proposed 

amendments could reduce the 

paperwork burden significantly. For 

example, Consolidating Information, 

which includes multiple columns and 

typically occupies several pages of a 

parent company’s filing, would be 

replaced with the Proposed Alternative 

Disclosures, which we expect in most 

cases would consist of one or two pages 

of disclosure in a parent company’s 

filing. Overall, therefore, we estimate 

that the proposed amendments would 

reduce the paperwork burden for 

registrants by approximately 30 hours 

for each filing that includes the 

Proposed Alternative Disclosures in lieu 

of the existing Alternative Disclosures. 

Although the proposed amendments 

would reduce the paperwork burden for 

any particular filing on an affected form 

that includes the existing Alternative 

Disclosures, not all filings on the 

affected forms include these disclosures 

because they are provided only in 

certain instances.306 Therefore, to 

estimate the overall paperwork burden 

reduction from the proposed 

amendments, we estimated the number 

of filings that include the Alternative 

Disclosures. To do so, we used a 

number of methods that varied based on 

the affected form. 

As an initial step, we examined the 

XBRL tags most commonly associated 

with Consolidating Information. Not all 

filings include XBRL tags, so we 

estimated the number of all the affected 

forms that included XBRL tags and 

extrapolated the number of affected 

forms based on the percentage of filings 

that include XBRL tags. For example, in 

Section VII.B.2, ‘‘Market Conditions,’’ 

using XBRL tags, we estimated that 

registrants filed 1,223 Form 10–Ks with 

the Alternative Disclosures in the last 

three calendar years from 2015 to 2017, 

which averages approximately 407.67 

filings per year. However, over those 

three years, only approximately 86 

percent of Forms 10–K included XBRL 

tags. For PRA purposes, therefore, we 

divided 407.67 by 0.86 to estimate that 

474 filings per year included Alternative 

Disclosures over the last three years. 

We were able to use this extrapolation 

method for Forms 10–K, 10–Q, S–1, 20– 

F, and 40–F, because the percentage of 

filings made on those forms that 

included XBRL tags was sufficient to 

make the extrapolation meaningful. The 

table below sets forth our estimates of 

the number of filings on these forms that 

included the Alternative Disclosures 

based on the XBRL tagging extrapolation 

method. 

TABLE 4—CALCULATION OF THE NUMBER OF FILINGS ON AFFECTED FORMS WITH THE ALTERNATIVE DISCLOSURES BASED

ON XBRL TAGGING EXTRAPOLATION

Number of 

responses over 

three-year period 

using XBRL data 

Annual 

average of 

responses using 

XBRL data 

Percentage 

of responses 

tagged using 

XBRL 

Annual average of 

responses 

Estimated 

average annual 

responses 

(A) (B) (C) (D) = (B) / (C) (E) 

10–K ....................................................... 1,223 407.67 .86 474.03 474 

10–Q ...................................................... 3,530 1,176.67 .94 1,251.77 1,252 

S–1 ......................................................... 7 2.33 .24 9.71 10 

20–F ....................................................... 17 5.67 .41 12.82 14 

40–F ....................................................... 1 .33 .16 8.31 8 


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307Similarly, only six percent of Form S–11, three 

percent of Form F–1, and three percent of Form 10 

filings include XBRL tags. 

308See letter from EY. 

309Letter from Cahill. 

We also searched Forms S–4, S–11, 

10, F–1, F–4, SF–1, SF–3, 1–A, 1–K, and 

1–SA using XBRL tags most commonly 

associated with Consolidating 

Information. However, this 

extrapolation method did not provide 

meaningful results because registrants 

rarely include XBRL tags for these 

affected forms. For example, only one 

percent of Form S–4 filings include 

XBRL tags.307 Therefore, to provide a 

more meaningful estimate of the number 

of these forms that include the 

Alternative Disclosures, we conducted 

separate database searches for filings of 

those forms over the last three calendar 

years using search terms similar to those 

used by a commenter.308

Based on these searches, we estimate 

that, over the last three calendar years 

from 2015 to 2017, there were on 

average 300 filings on Form S–4, 15 

filings on Form S–11, 20 filings on Form 

10, 15 filings on Form F–1, and 20 

filings on Form F–4 that included the 

Alternative Disclosures. We were unable 

to find any filings on the remaining 

affected forms that included the 

Alternative Disclosures. Therefore, we 

estimate that no filings on those forms 

included the Alternative Disclosures. 

The table below sets forth our estimates 

of the number of filings on these forms 

that included the Alternative 

Disclosures based on the other database 

searches. 

TABLE 5—CALCULATION OF THE NUMBER OF FILINGS ON AFFECTED FORMS WITH THE ALTERNATIVE DISCLOSURES BASED

ON DATABASE SEARCHES

Number of 

responses over 

three-year period 

using database 

searches 

Annual average of 

responses using 

database 

searches 

Estimated 

average annual 

responses 

(A) (B) = (A) / 3 (C) 

S–4 ............................................................................................................................. 300 100 100 

S–11 ........................................................................................................................... 15 5 5 

10 ............................................................................................................................... 20 6.67 7 

F–1 ............................................................................................................................. 15 5 5 

F–4 ............................................................................................................................. 20 6.67 7 

1–A ............................................................................................................................. 0 0 0 

1–K ............................................................................................................................. 0 0 0 

1–SA .......................................................................................................................... 0 0 0 

SF–1 .......................................................................................................................... 0 0 0 

SF–3 .......................................................................................................................... 0 0 0 

Although the proposed amendments 

to Rule 3–10 would reduce the 

paperwork burden for each individual 

affected form, the proposed 

amendments could cause the number of 

affected forms filed to change over a 

period of time. One commenter 309

stated that the high compliance costs 

associated with preparing the Rule 3–10 

financial information leads many 

companies to issue debt securities 

privately. Again, we believe that the 

proposed amendments would encourage 

potential issuers to conduct registered 

debt offerings or private offerings with 

registration rights. Therefore, we believe 

that the number of registration 

statements and periodic reports filed on 

affected forms that include the Proposed 

Alternative Disclosures would increase. 

For example, we believe the number 

of issuers and guarantors eligible to 

provide the Proposed Alternative 

Disclosures would increase in lieu of 

providing separate financial statements 

of each subsidiary issuer and guarantor 

because the proposed amendments 

would replace the 100%-owned 

condition with one requiring that the 

subsidiary issuer/guarantor be a 

consolidated subsidiary of the parent 

company pursuant to the relevant 

accounting standards it already uses and 

eliminate the requirement that 

guarantees of subsidiary guarantors be 

full and unconditional. If some of those 

eligible issuers and guarantors conduct 

registered debt offerings or private 

offerings with registration rights instead 

of conducting offerings privately and 

without registration rights, the number 

of registration statements and associated 

periodic reports filed on affected forms 

would necessarily increase when 

measured over a period of time. 

Conversely, other aspects of the 

proposed amendments would lead to a 

decrease in the number of periodic 

reports filed on affected forms when 

measured over time. For example, under 

existing Rule 3–10, if a parent company 

conducts a registered debt offering or 

private offering with registration rights 

and the subsidiary issuer or guarantor is 

not 100%-owned, but is instead 

consolidated into the parent company’s 

financial statements, or if the subsidiary 

guarantor’s guarantee is not full and 

unconditional, the subsidiary must file 

its own periodic reports. The subsidiary 

is required to file a registration 

statement for the transaction, which is 

usually combined with its parent’s 

registration statement, so the number of 

registration statements filed with the 

Proposed Alternative Disclosures would 

not decrease as a result of this aspect of 

the proposed amendments. However, 

under the proposed amendments, if that 

parent company provides the Proposed 

Alternative Disclosures, and meets the 

other conditions of proposed Rule 3–10, 

its subsidiaries would be exempt from 

periodic reporting under Rule 12h–5. 

Therefore, fewer periodic reports on 

affected forms would be filed, which 

would decrease those forms’ paperwork 

burden when measured over a period of 

time. 

As another example, existing Rule 3– 

10 requires a parent company to include 

the Alternative Disclosures of its 

subsidiary issuers and guarantors in its 

periodic reports for so long as the 

guaranteed securities are outstanding. 

The proposed amendments would 

permit the parent company to cease 

providing the Proposed Alternative 

Disclosures in its periodic reports if the 

corresponding Section 15(d) obligations 

of its subsidiary issuers and guarantors 

are suspended. Therefore, we expect 

that parent companies would provide 


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310Ten current filings on Form S–1 × 0.33 = 3.3 

filings, which rounds to 3 filings. 

311One hundred current filings on Form S–4 × 

0.33 = 33 filings. 

312Five current filings on Form S–11 × 0.33 = 

1.65 filings, which rounds to two filings. 

313Seven current filings on Form 10 × 0.33 = 2.31 

filings, which rounds to two filings. 

314Five current filings on Form F–1 × 0.33 = 1.65 

filings, which rounds to two filings. 

315Seven current filings on Form F–4 × 0.33 = 

2.31 filings, which rounds to two filings. 

316Seven current fillings on Form 20–F × .033 = 

2.31 filings, which rounds to two filings. 

317See, e.g., letters from EY, FedEx, Medtronic, 

and Noble-UK. 

318Letter from FedEx. 

319 Id. The commenter noted that it would require 

280 hours to prepare and review its Consolidating 

Information. As discussed above, the existing 

Alternative Disclosures may include either 

Consolidating Information or brief narrative 

disclosure, and we do not believe that the proposed 

amendments would affect the paperwork burden for 

filings that include the narrative disclosure under 

existing Rule 3–10 because registrants that provide 

these narrative disclosures would be permitted to 

provide similar information under the proposed 

amendments. 

the Proposed Alternative Disclosures in 

fewer filings, which would reduce the 

paperwork burden for periodic reports 

on affected forms when measured over 

a period of time. 

Overall, we believe that the decrease 

in the number of periodic reports filed 

on affected forms due to the change in 

ongoing reporting requirements would 

be largely mitigated, and perhaps offset, 

by the number of periodic reports that 

would increase due to the filing of new 

registration statements. Consequently, to 

avoid overestimating the paperwork 

reduction associated with the proposed 

amendments, we are not adjusting our 

existing estimate for the number of 

periodic reports filed on affected forms. 

However, we solicit comment on 

whether and, if so, how we should make 

an adjustment to this estimate in light 

of the proposed amendments. 

Although we believe the number of 

periodic reports filed on affected forms 

would remain steady, we estimate that 

the number of registration statements 

that include the Proposed Alternative 

Disclosures, as opposed to those that 

presently include the existing 

Alternative Disclosures, would increase. 

As discussed in Section VII.B.2, 

‘‘Market Conditions,’’ we note that 

issuers have conducted approximately 

half as many Rule 144A debt offerings 

as registered debt offerings. We do not 

believe that all the issuers that 

conducted Rule 144A would conduct 

registered debt offerings as a result of 

the proposed amendments, but we 

estimate that there would be a 33 

percent increase in registration 

statements filed based on the proposed 

amendments. Therefore, we estimate 

that there would be an additional three 

filings on Form S–1,310 33 filings on 

Form S–4,311 two filings on Form S– 

11,312 two filings on Form 10,313 two 

filings on Form F–1,314 and two filings 

on Form F–4 per year.315 Further, we 

estimated above that 14 filings on Form 

20–F included the existing Alternative 

Disclosures. We estimate that half of 

those filings were registration 

statements. Therefore, we estimate there 

would be an additional two registration 

statements filed on Form 20–F per 

year.316

Finally, to determine the paperwork 

burden for an issuer to file a registration 

statement with the Proposed Alternative 

Disclosures, we first estimated the 

number of burden hours required for an 

issuer to provide the existing 

Alternative Disclosures. A number of 

commenters provided examples of the 

burdens required to prepare and process 

the existing Alternative Disclosures,317

but only one commenter quantified the 

number of hours.318 This commenter 

indicated that it required 280 hours per 

year to prepare and review its 

Alternative Disclosures.319 We note that 

this commenter is relatively large and 

not necessarily representative of the size 

of all reporting companies. Therefore, 

for PRA purposes, we estimate that the 

existing Alternative Disclosures require 

an average of 100 burden hours to 

prepare and process. However, we 

solicit comment on the number of 

burden hours required to prepare the 

Alternative Disclosures. If the Proposed 

Alternative Disclosures would reduce 

an issuer’s burden by 30 hours, as 

compared to the issuer providing the 

existing Alternative Disclosures, we 

estimate that the Proposed Alternative 

Disclosures would require 70 hours to 

prepare and process. 

2. Rule 3–16 

Existing Rule 3–16 requires separate 

Rule 3–16 Financial Statements for each 

affiliate whose securities constitute a 

‘‘substantial portion’’ of the collateral 

for any class of registered securities as 

if the affiliate were a separate registrant. 

The proposed amendments related to 

Rule 3–16 would replace this 

requirement with a requirement for a 

registrant to provide Summarized 

Financial Information of those affiliates 

on a combined basis, pursuant to 

proposed Rule 13–02, if the affiliates are 

consolidated subsidiaries of the 

registrant. If additional line items of 

financial information are material to an 

investment decision, the registrant 

would be required to disclose that 

information as well. In addition, the 

proposed amendments would require, to 

the extent material, certain nonfinancial disclosures about the 

securities pledged as collateral, each 

affiliate whose securities are pledged, 

the terms and conditions of the 

collateral arrangement, and whether a 

trading market exists for the pledged 

securities. 

We believe that these amendments 

would reduce the paperwork burden for 

the affected forms because Summarized 

Financial Information is less detailed 

than separate financial statements and, 

therefore, is less costly and burdensome 

to prepare. Further, we believe the 

registrant’s ability to present 

Summarized Financial Information on a 

combined basis with its consolidated 

affiliates would reduce the registrant’s 

paperwork burden because the 

registrant would not be required to 

prepare and disclose each of its 

affiliates’ financial statements 

separately. However, because proposed 

Rule 13–02 requires certain financial 

information that may not otherwise be 

required in the Summarized Financial 

Information and additional nonfinancial disclosures, when material, the 

expected paperwork burden reduction 

may be somewhat mitigated. 

Existing Rule 3–16 requires the Rule 

3–16 Financial Statements of an affiliate 

to be audited for the periods required by 

Rules 3–01 and 3–02 of Regulation S– 

X. Similar to the proposed amendments 

to Rule 3–10, the proposed amendments 

related to Rule 3–16 would permit a 

registrant to provide the disclosures in 

proposed Rule 13–02 outside its 

financial statements in a registration 

statement covering the offer and sale of 

the subject securities and any related 

prospectus, and in Exchange Act annual 

and quarterly reports required to be 

filed during the fiscal year in which the 

first sale of the subject securities is 

completed, but require the proposed 

disclosures to be included in the 

footnotes to the registrant’s consolidated 

financial statements for annual and 

quarterly reports beginning with the 

annual report for the fiscal year during 

which the first bona fide sale of the 

subject securities is completed. 

Therefore, if provided outside the 

registrant’s financial statements, the 

proposed Rule 13–02 disclosures would 

not be audited or tagged, which could 

reduce the burdens associated with 

preparing this information. Whether a 

registrant would elect to provide the 

disclosures outside its financial 

statement footnotes likely would 

depend on the company’s specific facts 

and circumstances and, as discussed 


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320Sections V.B., ‘‘Overview of the Proposed 

Changes,’’ and VII.C.2 ‘‘Proposed Amendments to 

Rule 3–16 and Relocation to Rule 13–02.’’ 

321This figure corresponds to the 70 burden 

hours we estimate will be required to prepare and 

process the proposed Rule 13–02 information in 

connection with the filing of a registration 

statement. See discussion below. 

322See, e.g., letters from ABA-Committees, Cahill, 

Chamber, Covenant, Davis Polk, DT, KPMG, EY, 

and PwC. 

323We estimate that, over the last three calendar 

years, approximately 21 filings on Form 10–K 

included Rule 3–16 Financial Statements and an 

additional 15 filings on that form referenced Rule 

3–16 but did not include Rule 3–16 Financial 

Statements. Also, three filings on Form 20–F 

included Rule 3–16 Financial Statements and no 

other filings on that form referenced Form 3–16. 

Further, 25 filings on Form 10–Q, 11 filings on 

Form S–1, 35 filings on Form S–4, one filing on 

Form S–11, one filing on Form 10, and one filing 

on Form 1–A referred to Rule 3–16 but did not 

include Rule 3–16 Financial Statements. No filings 

on the other affected forms referenced the rule. 

324See, e.g., letters from Davis, KPMG, and PwC. 

325We estimated this figure by multiplying the 

average number of filings per year from the last 

three calendar years on Form S–4 that referenced 

Rule 3–16 but did not include the Rule 3–16 

Financial Statements (12 filings) by 0.33. The 

average annual number of filings on Form S–4 that 

referenced Rule 3–16 but did not include the Rule 

3–16 Financial Statements is 11.67, which rounds 

to 12. 

326We estimated this figure by multiplying the 

average number of filings per year from the last 

three calendar years on Form S–1 that referenced 

Rule 3–16 but did not include the Rule 3–16 

Financial Statements (four filings) by 0.33. The 

average annual number of filings on Form S–1 that 

referenced Rule 3–16 but did not include the Rule 

3–16 Financial Statements is 1.33, which rounds to 

one. 

327Over the last three calendar years, one filing 

on Form S–11, one filing on Form 10, and one filing 

on Form 1–A referred to Rule 3–16 but did not 

include Rule 3–16 Financial Statements. Therefore, 

we estimate that one additional filing on each of 

these forms would include the proposed Rule 13– 

02 information. Also, although there were no filings 

on Forms F–1 and F–4 that referenced Rule 3–16 

in the last three calendar years, one filing on Form 

F–1 and two filings on Form F–4 referenced Rule 

3–16 in calendar years 2013 and 2014, so we 

estimated that one additional filing on each of these 

forms would include the proposed Rule 13–02 

information. 

328Thirty-three percent of ten is 3.33, which 

rounds to three. 

above,320 we believe there could be 

reasons for companies to elect either 

option. In addition, any reduction in 

paperwork burden associated with such 

an election would be incremental, as the 

registrant would still incur expenses to 

prepare audited financial information. 

Given these considerations, and to avoid 

overestimating the overall paperwork 

burden reduction associated with the 

proposed amendments, we are not 

estimating a specific additional burden 

reduction for this aspect of the proposed 

amendments. However, we solicit 

comment on whether it would be 

appropriate to do so and, if so, how we 

might estimate such a reduction. 

The proposed amendments would 

require registrants to provide 

Summarized Financial Information of 

affiliates as of, and for, the most 

recently-ended fiscal year and interim 

period included in their consolidated 

financial statements. Under existing 

Rule 3–16, financial statements of 

affiliates are required for the periods 

specified in Rules 3–01 and 3–02 of 

Regulation S–X. This aspect of the 

proposed amendments, therefore, would 

reduce the paperwork burden for 

registrants by reducing the number of 

periods required to be presented. 

Overall, we estimate that the 

proposed amendments related to Rule 

3–16 would reduce the current 

paperwork burden by approximately 30 

hours for each affected form except for 

quarterly reports on Form 10–Q. 

Existing Rule 3–16 requires registrants 

to include interim period Rule 3–16 

Financial Statements when the financial 

statements are presented in registration 

statements, but it does not require Rule 

3–16 Financial Statements in quarterly 

reports on Form 10–Q. The proposed 

amendments related to Rule 3–16 would 

require financial information in 

quarterly reports on Form 10–Q, which 

would increase registrants’ paperwork 

burden for that form. We estimate that 

the proposed amendments related to 

Rule 3–16 would increase the current 

paperwork burden by approximately 70 

hours 321 for each affected quarterly 

report on Form 10–Q. 

As with the proposed amendments to 

Rule 3–10, although the proposed 

amendments related to Rule 3–16 would 

reduce the paperwork burden for each 

individual affected form, except for 

Form 10–Q, the proposed amendments 

could cause the number of affected 

forms filed over a period of time to 

change. A number of commenters stated 

that, due to the costs and burdens 

associated with preparing the 

information, collateralized debt 

offerings are often unregistered or 

structured to avoid or limit Rule 3–16 

disclosures.322 We believe that the 

proposed amendments would encourage 

potential issuers to conduct additional 

registered collateralized debt offerings 

because the costs of complying with 

proposed Rule 13–02 could be less than 

the costs required to comply with 

existing Rule 3–16. As the number of 

these registered offerings increases, the 

number of affected forms filed would 

also increase over a period of time. 

As discussed in Section VII.B.2, 

‘‘Market Conditions,’’ over the last three 

calendar years from 2015 to 2017, 

approximately seven filings per year 

have included Rule 3–16 Financial 

Statements, with six of those filings on 

Form 10–K and one on Form 20–F. 

However, a number of filings on affected 

forms include references to Rule 3–16 

even though they do not include Rule 

3–16 Financial Statements.323 As 

commenters indicated, indenture 

agreements frequently include 

provisions that release collateral 

requirements if their inclusion would 

trigger Rule 3–16 Financial 

Statements.324

We do not believe that all the filings 

on affected forms that reference Rule 3– 

16 but do not include Rule 3–16 

Financial Statements would include the 

proposed Rule 13–02 information, but 

we believe many would include this 

information. For PRA purposes, we 

estimate that the proposed amendments 

would result in approximately 33 

percent of the registration statements 

that reference Rule 3–16 but do not 

include Rule 3–16 Financial Statements 

providing the proposed Rule 13–02 

information. As such, we estimate that 

approximately ten additional 

registration statements would include 

the proposed Rule 13–02 information, 

with four of those filings on Form S– 

4 325 and one each on Forms S–1,326 S– 

11, 10, 1–A, F–1, and F–4.327

Further, we do not believe that all 

registrants that file additional 

registration statements with the 

proposed Rule 13–02 information would 

be new registrants, so we do not believe 

there would be an additional ten filings 

on Form 10–K. We estimate that 33 

percent of the registrants that file 

additional registration statements with 

the proposed Rule 13–02 information 

would be new registrants, so an 

additional three filings on Form 10–K 

would include the proposed Rule 13–02 

information.328 Also, we estimate that 

two additional filings on Form 20–F, 

one registration statement and one 

annual report, would include the 

proposed Rule 13–02 information. 

Estimating the number of additional 

filings on Form 10–Q requires a separate 

determination because the proposed 

amendments would require that 

proposed Rule 13–02 information be 

included in quarterly reports on Form 

10–Q. Rule 3–16 Financial Statements 

are not required in quarterly reports on 

Form 10–Q under existing Rule 3–16. 

To estimate the number of additional 

filings on Form 10–Q that would 

include the proposed Rule 13–02 

information, we look to the estimated 

number of filings on Form 10–K. For 

every Form 10–K, a registrant would be 

required to file three quarterly reports 

on Form 10–Q. Assuming that six filings 

on Form 10–K would be made each year 

with the proposed Rule 13–02 


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329This figure was determined by adding the two 

current filings on Form 10–K that include Rule 3– 

16 Financial Statements with the estimated four 

additional filings on Form 10–K that would include 

proposed Rule 13–02 information. 

330We recognize that the costs of retaining 

outside professionals may vary depending on the 

nature of the professional services, but for purposes 

of this PRA analysis, we estimate that such costs 

would be an average of $400 per hour. This estimate 

is based on consultations with several registrants, 

law firms and other persons who regularly assist 

registrants in preparing and filing reports with the 

Commission. 

information,329 we estimate that 18 

quarterly reports on Form 10–Q per year 

would be filed with the proposed Rule 

13–02 information. 

Finally, to determine the paperwork 

burden for a registrant to file a 

registration statement with the proposed 

Rule 13–02 information, we estimated 

the number of burden hours required for 

an issuer to provide the existing Rule 3– 

16 Financial Statements. Unlike for Rule 

3–10, no commenter provided an 

estimate for the cost of Rule 3–16 

Financial Statements. For PRA 

purposes, we estimate that the Rule 3– 

16 Financial Statements require an 

average of 100 burden hours, which is 

the same estimate we use for the hours 

required to prepare and process the 

Alternative Disclosures under existing 

Rule 3–10. However, we solicit 

comment on the number of burden 

hours required to prepare the Rule 3–16 

Financial Statements. If proposed Rule 

13–02 would reduce a registrant’s 

burden by 30 hours, as compared to the 

registrant providing the existing Rule 3– 

16 Financial Statements, we estimate 

that the proposed Rule 13–02 

information would require 70 hours to 

prepare and process. 

C. Burden and Cost Estimates for the 

Proposed Amendments 

Below we estimate the aggregate 

change in paperwork burden as a result 

of the proposed amendments, both in 

terms of the change to existing 

responses as well as the effect of 

additional responses. These estimates 

represent the average burden for all 

registrants, both large and small. In 

deriving our estimates, we recognize 

that the burdens will likely vary among 

individual registrants based on a 

number of factors, including the nature 

of their business. The burden estimates 

were calculated by multiplying the 

estimated number of responses by the 

estimated average amount of time it 

would take a registrant to prepare and 

review disclosure required under the 

proposed amendments. The portion of 

the burden carried by outside 

professionals is reflected as a cost, while 

the portion of the burden carried by the 

registrant internally is reflected in 

hours. 

For purposes of the PRA, we estimate 

that 75% of the burden of preparation 

of Forms 10–K, 10–Q, 1–A, and 1–K is 

carried by the registrant internally and 

that 25% of the burden of preparation 

is carried by outside professionals 

retained by the company at an average 

cost of $400 per hour.330 Additionally, 

we estimate that 25% of the burden of 

preparation for Forms 10, S–1, S–3, S– 

4, S–11, SF–3, F–1, F–3, F–4, 20–F, and 

40–F and is carried by the registrant 

internally and that 75% of the burden 

of preparation is carried by outside 

professionals retained by the company 

at an average cost of $400 per hour. 

Finally, we estimate that 85% of the 

burden of preparation of Form 1–SA is 

carried by the registrant internally and 

that 15% of the burden of preparation 

is carried by outside professionals 

retained by the company at an average 

cost of $400 per hour. 

The tables below illustrate the change 

to the total annual compliance burden 

of affected forms, in hours and in costs, 

as a result of the proposed amendments. 

TABLE 6—CALCULATIONS OF CHANGE IN BURDEN ESTIMATES OF CURRENT RESPONSES DUE TO PROPOSED AMENDMENTS

TO RULE 3–10 

Number of 

current 

affected 

responses 

Burden hour 

change per 

current 

affected 

response 

Change in 

burden hours 

for current 

affected 

responses 

Change in 

company 

hours for 

current 

affected 

responses 

Change in 

professional 

hours for 

current 

affected 

responses 

Change in 

professional 

costs for 

current 

affected 

responses 

(A) (B) (C) = (A) × (B) (D) = (C) × 

0.75, 0.25, or 

0.85 

(E) = (C) × 

0.25, 0.75, or 

0.15 

(F) = (E) × $400 

10–K ................................................. 474 (30) (14,220) (10,665) (3,555) ($1,422,000) 

10–Q ................................................ 1,252 (30) (37,560) (28,170) (9,390) (3,756,000) 

S–1 ................................................... 10 (30) (300) (75) (225) (90,000) 

20–F ................................................. 14 (30) (420) (105) (315) (126,000) 

40–F ................................................. 8 (30) (240) (60) (180) (72,000) 

S–4 ................................................... 100 (30) (3,000) (750) (2,250) (900,000) 

S–11 ................................................. 5 (30) (150) (37.5) (112.5) (45,000) 

10 ..................................................... 7 (30) (210) (52.5) (157.5) (63,000) 

F–1 ................................................... 5 (30) (150) (37.5) (112.5) (45,000) 

F–4 ................................................... 7 (30) (210) (52.5) (157.5) (63,000) 

1–A ................................................... 0 ........................ .......................... .......................... .......................... ..........................

1–K ................................................... 0 ........................ .......................... .......................... .......................... ..........................

1–SA ................................................ 0 ........................ .......................... .......................... .......................... ..........................

SF–1 ................................................. 0 ........................ .......................... .......................... .......................... ..........................

SF–3 ................................................. 0 ........................ .......................... .......................... .......................... ..........................


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TABLE 7—CALCULATIONS OF CHANGE IN BURDEN ESTIMATES OF ADDITIONAL RESPONSES DUE TO PROPOSED

AMENDMENTS TO RULE 3–10 

Number of 

additional 

affected 

responses 

Burden hour 

change per 

additional 

affected 

response 

Change in 

burden hours 

for additional 

affected 

responses 

Change in 

company 

hours for 

additional 

affected 

responses 

Change in 

professional 

hours for 

additional 

affected 

responses 

Change in 

professional 

costs for 

additional 

affected 

responses 

(A) (B) (C) = (A) × (B) (D) = (C) × 

0.75, 0.25, or 

0.85 

(E) = (C) × 

0.25, 0.75, or 

0.15 

(F) = (E) × $400 

10–K ................................................. 0 ........................ .......................... .......................... .......................... ..........................

10–Q ................................................ 0 ........................ .......................... .......................... .......................... ..........................

S–1 ................................................... 3 70 210 52.5 157.5 $63,000 

20–F ................................................. 2 70 140 35 105 42,000 

40–F ................................................. 0 ........................ .......................... .......................... .......................... ..........................

S–4 ................................................... 33 70 2,310 577.5 1,732.5 693,000 

S–11 ................................................. 2 70 140 35 105 42,000 

10 ..................................................... 2 70 140 35 105 42,000 

F–1 ................................................... 2 70 140 35 105 42,000 

F–4 ................................................... 2 70 140 35 105 42,000 

1–A ................................................... 0 ........................ .......................... .......................... .......................... ..........................

1–K ................................................... 0 ........................ .......................... .......................... .......................... ..........................

1–SA ................................................ 0 ........................ .......................... .......................... .......................... ..........................

SF–1 ................................................. 0 ........................ .......................... .......................... .......................... ..........................

SF–3 ................................................. 0 ........................ .......................... .......................... .......................... ..........................

TABLE 8—CALCULATIONS OF CHANGE IN BURDEN ESTIMATES OF CURRENT RESPONSES DUE TO PROPOSED AMENDMENTS

TO RULE 3–16 

Number of 

current 

affected 

responses 

Burden hour 

change per 

current 

affected 

response 

Change in 

burden hours 

for current 

affected 

responses 

Change in 

company 

hours for 

current 

affected 

responses 

Change in 

professional 

hours for 

current 

affected 

responses 

Change in 

professional 

costs for 

current 

affected 

responses 

(A) (B) (C) = (A) × (B) (D) = (C) × 

0.75, 0.25, or 

0.85 

(E) = (C) × 

0.25, 0.75, or 

0.15 

(F) = (E) × $400 

10–K ................................................. 7 (30) (210) (157.5) (52.5) ($21,000) 

10–Q ................................................ 0 ........................ .......................... .......................... .......................... ..........................

S–1 ................................................... 0 ........................ .......................... .......................... .......................... ..........................

20–F ................................................. 1 (30) (30) (7.5) (22.5) (9,000) 

40–F ................................................. 0 ........................ .......................... .......................... .......................... ..........................

S–4 ................................................... 0 ........................ .......................... .......................... .......................... ..........................

S–11 ................................................. 0 ........................ .......................... .......................... .......................... ..........................

10 ..................................................... 0 ........................ .......................... .......................... .......................... ..........................

F–1 ................................................... 0 ........................ .......................... .......................... .......................... ..........................

F–4 ................................................... 0 ........................ .......................... .......................... .......................... ..........................

1–A ................................................... 0 ........................ .......................... .......................... .......................... ..........................

1–K ................................................... 0 ........................ .......................... .......................... .......................... ..........................

1–SA ................................................ 0 ........................ .......................... .......................... .......................... ..........................

SF–1 ................................................. 0 ........................ .......................... .......................... .......................... ..........................

SF–3 ................................................. 0 ........................ .......................... .......................... .......................... ..........................

TABLE 9—CALCULATIONS OF CHANGE IN BURDEN ESTIMATES OF ADDITIONAL RESPONSES DUE TO PROPOSED

AMENDMENTS TO RULE 3–16 

Number of 

additional 

affected 

responses 

Burden hour 

change per 

additional 

affected 

response 

Change in 

burden hours 

for additional 

affected 

responses 

Change in 

company hours 

for additional 

affected 

responses 

Change in 

professional 

hours for 

additional 

affected 

responses 

Change in 

professional 

costs for 

additional 

affected 

responses 

(A) (B) (C) = (A) × (B) (D) = (C) × 

0.75, 0.25, or 

0.85 

(E) = (C) × 

0.25, 0.75, or 

0.15 

(F) = (E) × $400 

10–K ................................................. 3 70 210 157.5 52.5 $21,000 

10–Q ................................................ 18 70 1,260 945 315 126,000 


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331Table 6, Column (A) + Table 7, Column (A). 

332Table 8, Column (A) + Table 9, Column (A). 

333Table 6, Column (C) + Table 6, Column (C). 

334Table 8, Column (C) + Table 9, Column (C). 

335Table 6, Column (D) + Table 7, Column (D). 

336Table 8, Column (D) + Table 9, Column (D). 

337Table 6, Column (E) + Table 7, Column (E). 

338Table 8, Column (E) + Table 9, Column (E). 

339Table 6, Column (F) + Table 7, Column (F). 

340Table 8, Column (F) + Table 9, Column (F). 

TABLE 9—CALCULATIONS OF CHANGE IN BURDEN ESTIMATES OF ADDITIONAL RESPONSES DUE TO PROPOSED

AMENDMENTS TO RULE 3–16—Continued 

Number of 

additional 

affected 

responses 

Burden hour 

change per 

additional 

affected 

response 

Change in 

burden hours 

for additional 

affected 

responses 

Change in 

company hours 

for additional 

affected 

responses 

Change in 

professional 

hours for 

additional 

affected 

responses 

Change in 

professional 

costs for 

additional 

affected 

responses 

(A) (B) (C) = (A) × (B) (D) = (C) × 

0.75, 0.25, or 

0.85 

(E) = (C) × 

0.25, 0.75, or 

0.15 

(F) = (E) × $400 

S–1 ................................................... 1 70 70 17.5 52.5 21,000 

20–F ................................................. 2 70 140 35 105 42,000 

40–F ................................................. 0 ........................ .......................... .......................... .......................... ..........................

S–4 ................................................... 4 70 280 70 210 84,000 

S–11 ................................................. 1 70 70 17.5 52.5 21,000 

10 ..................................................... 1 70 70 17.5 52.5 21,000 

F–1 ................................................... 1 70 70 17.5 52.5 21,000 

F–4 ................................................... 1 70 70 17.5 52.5 21,000 

1–A ................................................... 1 70 70 52.5 17.5 7,000 

1–K ................................................... 0 ........................ .......................... .......................... .......................... ..........................

1–SA ................................................ 0 ........................ .......................... .......................... .......................... ..........................

SF–1 ................................................. 0 ........................ .......................... .......................... .......................... ..........................

SF–3 ................................................. 0 ........................ .......................... .......................... .......................... ..........................

TABLE 10—CALCULATIONS FOR INCREMENTAL PAPERWORK BURDEN UNDER THE PROPOSED AMENDMENTS TO RULES

3–10 AND 3–16 

[Current Responses + Additional Responses] 

Number of 

total affected 

responses 

under 

Proposed 

Rule 3–10 

Number of 

total affected 

responses 

under 

Proposed 

Rule 3–16 

Change in 

burden hours 

for total 

affected 

responses 

under 

Proposed 

Rule 3–10 

Change in 

burden hours 

for total 

affected 

responses 

under 

Proposed 

Rule 3–16 

Change in 

company 

hours for total 

affected 

responses 

under 

Proposed 

Rule 3–10 

Change in 

company 

hours for total 

affected 

responses 

under 

Proposed 

Rule 3–16 

Change in 

professional 

hours for total 

affected 

responses 

under 

Proposed 

Rule 3–10 

Change in 

professional 

hours for total 

affected 

responses 

under 

Proposed 

Rule 3–16 

Change in 

professional 

costs for total 

affected 

responses 

under 

Rule 3–10 

Change in 

professional 

costs for total 

affected 

responses 

under 

Rule 3–16 

(A) 331 (B) 332 (C) 333 (D) 334 (E) 335 (F) 336 (G) 337 (H) 338 (I) 339 (J) 340

10–K ...................... 474 10 (14,220) 0 (10,665) 0 (3,555) 0 ($1,422,000) $0 

10–Q ...................... 1,252 18 (37,560) 1,260 (28,170) 945 (9,390) 315 (3,756,000) 126,000 

S–1 ........................ 13 1 (90) 70 (22.5) 17.5 (67.5) 52.5 (27,000) 21,000 

20–F ...................... 16 3 (280) 110 (70) 27.5 (210) 82.5 (84,000) 33,000 

40–F ...................... 8 0 (240) ........................ (60) ........................ (180) ........................ (72,000) ........................

S–4 ........................ 133 4 (690) 280 (172.5) 70 (517.5) 210 (207,000) 84,000 

S–11 ...................... 7 1 (10) 70 (2.5) 17.5 (7.5) 52.5 (3,000) 21,000 

10 .......................... 9 1 (70) 70 (17.5) 17.5 (52.5) 52.5 (21,000) 21,000 

F–1 ........................ 7 1 (10) 70 (2.5) 17.5 (7.5) 52.5 (3,000) 21,000 

F–4 ........................ 9 1 (70) 70 (17.5) 17.5 (52.5) 52.5 (21,000) 21,000 

1–A ........................ 0 1 ........................ 70 ........................ 52.5 ........................ 17.5 ........................ 7,000 

1–K ........................ 0 0 ........................ ........................ ........................ ........................ ........................ ........................ ........................ ........................

1–SA ...................... 0 0 ........................ ........................ ........................ ........................ ........................ ........................ ........................ ........................

SF–1 ...................... 0 0 ........................ ........................ ........................ ........................ ........................ ........................ ........................ ........................

SF–3 ...................... 0 0 ........................ ........................ ........................ ........................ ........................ ........................ ........................ ........................

TABLE 11—INCREMENTAL PAPERWORK BURDEN UNDER THE PROPOSED AMENDMENTS TO RULES 3–10 AND 3–16 

Number of 

affected 

responses 

Change in 

burden hours 

of affected 

response 

Change in 

company 

hours 

Change in 

professional 

hours 

Change in 

professional 

costs 

(A) 341 (B) 342 (C) 343 (D) 344 (E) 345

10–K ..................................................................................... 484 (14,220) (10,665) (3,555) ($1,422,000) 

10–Q .................................................................................... 1,270 (36,300) (27,225) (9,075) (3,630,000) 

S–1 ....................................................................................... 14 (20) (5) (15) (6,000) 

20–F ..................................................................................... 19 (170) (42.5) (127.5) (51,000) 

40–F ..................................................................................... 8 (240) (60) (180) (72,000) 


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341Table 10, Columns (A) + (B). 

342Table 10, Columns (C) + (D). 

343Table 10, Columns (E) + (F). 

344Table 10, Columns (G) + (H). 

345Table 10, Columns (I) + (J). 

346The figures in Table 12, Columns (G), (H), and 

(I) have been rounded to the nearest whole number. 

347From Table 11, Column (A). 

348From Table 11, Column (C). 

349From Table 11, Column (F). 

TABLE 11—INCREMENTAL PAPERWORK BURDEN UNDER THE PROPOSED AMENDMENTS TO RULES 3–10 AND 3–16— 

Continued 

Number of 

affected 

responses 

Change in 

burden hours 

of affected 

response 

Change in 

company 

hours 

Change in 

professional 

hours 

Change in 

professional 

costs 

(A) 341 (B) 342 (C) 343 (D) 344 (E) 345

S–4 ....................................................................................... 137 (410) (102.5) (307.5) (123,000) 

S–11 ..................................................................................... 8 60 15 45 18,000 

10 ......................................................................................... 10 0 0 0 0 

F–1 ....................................................................................... 8 60 15 45 18,000 

F–4 ....................................................................................... 10 0 0 0 0 

1–A ....................................................................................... 1 70 52.5 17.5 7,000 

1–K ....................................................................................... 0 ........................ ........................ ........................ ........................

1–SA .................................................................................... 0 ........................ ........................ ........................ ........................

SF–1 ..................................................................................... 0 ........................ ........................ ........................ ........................

SF–3 ..................................................................................... 0 ........................ ........................ ........................ ........................

TABLE 12—REQUESTED PAPERWORK BURDEN UNDER THE PROPOSED AMENDMENTS TO RULES 3–10 AND 3–16 346

Current burden Program change Requested change in burden 

Current 

annual 

responses 

Current 

burden 

hours 

Current 

cost 

burden 

Number of 

affected 

responses 

Change in 

company 

hours 

Change in 

professional costs 

Annual 

responses 

Burden 

hours 

Cost 

burden 

(A) (B) (C) (D) 347 (E) 348 (F) 349 (G) = (A) + (D) (H) = (B) + (E) (I) = (C) + (F) 

10–K ............................................ 8,137 14,596,183 $1,950,114,190 484 (10,665) ($1,422,000) 8,621 14,585,518 $1,948,692,190 

10–Q ............................................ 22,907 3,271,578 436,240,908 1,270 (27,225) (3,630,000) 24,117 3,244,353 432,610,908 

S–1 .............................................. 901 151,143 181,371,300 14 (5) (6,000) 915 151,138 181,365,300 

20–F ............................................. 725 480,226 576,270,600 19 (42.5) (51,000) 744 480,184 576,219,600 

40–F ............................................. 160 17,197 20,636,800 8 (60) (72,000) 168 17,137 20,564,800 

S–4 .............................................. 551 565,282 678,338,304 137 (102.5) (123,000) 688 565,180 678,215,304 

S–11 ............................................ 64 12,529 15,034,368 8 15 18,000 72 12,544 15,052,368 

10 ................................................. 216 11,783 14,140,051 10 0 0 226 11,783 14,140,051 

F–1 ............................................... 63 26,980 32,375,700 8 15 18,000 71 26,995 32,393,700 

F–4 ............................................... 39 14,245 17,093,700 10 0 0 49 14,245 17,093,700 

1–A .............................................. 250 140,813 18,775,200 1 52.5 7,000 251 140,866 18,782,200 

1–K .............................................. 188 84,600 11,280,000 0 ........................ ........................ 188 84,600 11,280,000 

1–SA ............................................ 188 29,952 2,113,872 0 ........................ ........................ 188 29,952 2,113,872 

SF–1 ............................................ 6 2,076 2,491,200 0 ........................ ........................ 6 2,076 2,491,200 

SF–3 ............................................ 71 24,548 29,457,900 0 ........................ ........................ 71 24,548 29,457,900 

D. Request for Comment 

Pursuant to 44 U.S.C. 3506(c)(2)(B), 

we request comment in order to: 

• Evaluate whether the proposed 

collections of information are necessary 

for the proper performance of the 

functions of the Commission, including 

whether the information will have 

practical utility; 

• Evaluate the accuracy of our 

assumptions and estimates of the 

burden of the proposed collection of 

information; 

• Determine whether there are ways 

to enhance the quality, utility, and 

clarity of the information to be 

collected; 

• Evaluate whether there are ways to 

minimize the burden of the collection of 

information on those who respond, 

including through the use of automated 

collection techniques or other forms of 

information technology; and 

• Evaluate whether the proposed 

amendments would have any effects on 

any other collection of information not 

previously identified in this section. 

Any member of the public may direct 

to us any comments concerning the 

accuracy of these burden estimates and 

any suggestions for reducing these 

burdens. Persons submitting comments 

on the collection of information 

requirements should direct their 

comments to the Office of Management 

and Budget, Attention: Desk Officer for 

the U.S. Securities and Exchange 

Commission, Office of Information and 

Regulatory Affairs, Washington, DC 

20503, and send a copy to, Brent J. 

Fields, Secretary, U.S. Securities and 

Exchange Commission, 100 F Street NE, 

Washington, DC 20549, with reference 

to File No. S7–19–18. Requests for 

materials submitted to OMB by the 

Commission with regard to the 

collection of information requirements 

should be in writing, refer to File No. 

S7–19–18 and be submitted to the U.S. 

Securities and Exchange Commission, 

Office of FOIA Services, 100 F Street 

NE, Washington, DC 20549. OMB is 

required to make a decision concerning 

the collection of information 

requirements between 30 and 60 days 

after publication of the proposed 

amendments. Consequently, a comment 

to OMB is best assured of having its full 

effect if the OMB receives it within 30 

days of publication. 

IX. Small Business Regulatory 

Enforcement Fairness Act 

For purposes of the Small Business 

Regulatory Enforcement Fairness Act of 


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350Public Law 104–121, tit. II, 110 Stat. 857 

(1996). 

351 5 U.S.C. 601 et seq. 

352 5 U.S.C. 601(6). 

353See 17 CFR 230.157 under the Securities Act 

and 17 CFR 240.0–10(a) under the Exchange Act. 

354This estimate is based on staff analysis of 

XBRL data submitted by filers, other than coregistrants, with EDGAR filings of Forms 10–K, 20– 

F, and 40–F and amendments filed during the 

calendar year 2017 and a staff analysis of Forms 1– 

A and 1–K filed during the calendar year 2017. 

1996 (‘‘SBREFA’’),350 we solicit data to 

determine whether the proposed 

amendments constitute a ‘‘major’’ rule. 

Under SBREFA, a rule is considered 

‘‘major’’ where, if adopted, it results or 

is likely to result in: 

• An annual effect on the economy of 

$100 million or more (either in the form 

of an increase or a decrease); 

• A major increase in costs or prices 

for consumers or individual industries; 

or 

• Significant adverse effects on 

competition, investment, or innovation. 

Commenters should provide comment 

and empirical data on (a) the potential 

annual effect on the U.S. economy; (b) 

any increase in costs or prices for 

consumers or individual industries; and 

(c) any potential effect on competition, 

investment, or innovation. 

X. Initial Regulatory Flexibility Act 

Analysis 

This Initial Regulatory Flexibility Act 

Analysis has been prepared in 

accordance with the Regulatory 

Flexibility Act.351 It relates to the 

proposed amendments to the financial 

disclosure requirements in Rules 3–10 

and 3–16 of Regulation S–X to improve 

those requirements for both investors 

and registrants. 

A. Reasons for, and Objectives of, the 

Proposing Action 

The purpose of the proposed 

amendments to Rules 3–10 and 3–16 is 

to better align those requirements with 

the needs of investors and to simplify 

and streamline the disclosure 

obligations of registrants. The proposed 

changes would include amending both 

rules and relocating part of Rule 3–10 

and all of Rule 3–16 to proposed Rules 

13–01 and 13–02 in Regulation S–X, 

respectively. These changes are 

intended to provide investors with the 

information that is important given the 

specific facts and circumstances, make 

the disclosures easier to understand, 

and reduce the costs and burdens to 

registrants. The reasons for, and 

objectives of, the proposed amendments 

are discussed in more detail in Sections 

I through III above. 

B. Legal Basis 

We are proposing the rule and form 

amendments contained in this release 

under the authority set forth in Sections 

3, 6, 7, 8, 9, 10, 19(a), and 28 of the 

Securities Act of 1933, as amended and 

Sections 3(b), 12, 13, 15(d), 23(a), and 

36 of the Securities Exchange Act of 

1934, as amended. 

C. Small Entities Subject to the 

Proposed Rules 

The proposed changes would affect 

some registrants that are small entities. 

The Regulatory Flexibility Act defines 

‘‘small entity’’ to mean ‘‘small 

business,’’ ‘‘small organization,’’ or 

‘‘small governmental jurisdiction.’’ 352

For purposes of the Regulatory 

Flexibility Act, under our rules, an 

issuer, other than an investment 

company or an investment adviser, is a 

‘‘small business’’ or ‘‘small 

organization’’ if it had total assets of $5 

million or less on the last day of its most 

recent fiscal year and is engaged or 

proposing to engage in an offering of 

securities that does not exceed $5 

million.353 We estimate that there are 

1,196 issuers that file with the 

Commission, other than investment 

companies and investment advisers, 

that may be considered small entities 

and are potentially subject to the 

proposed amendments.354

D. Reporting, Recordkeeping, and Other 

Compliance Requirements 

As noted above, the purpose of the 

proposed amendments to Rules 3–10 

and 3–16 is to better align those 

requirements with the needs of 

investors and to simplify and streamline 

the disclosure obligations of registrants. 

Proposed Rule 3–10 would continue to 

permit the omission of separate 

financial statements of subsidiary 

issuers and guarantors when certain 

conditions are met and the parent 

company provides the Proposed 

Alternative Disclosures. While the 

conditions that must be met to omit 

separate subsidiary issuer or guarantor 

financial statements would continue to 

be located in proposed Rule 3–10, the 

disclosure requirements would be 

relocated to proposed Rule 13–01. The 

proposed amendments would: 

• Replace the condition that a 

subsidiary issuer or guarantor be 100% 

owned by the parent company with a 

condition that it be consolidated in the 

parent company’s consolidated financial 

statements; 

• replace Consolidating Information 

with Summarized Financial Information 

of the Obligor Group, which may be 

presented on a combined basis, and 

reduce the number of periods presented; 

• expand the qualitative disclosures 

about the guarantees and the issuers and 

guarantors; 

• eliminate quantitative thresholds 

for disclosure and require disclosure of 

additional information that would be 

material to a holder of the guaranteed 

security; 

• permit the Proposed Alternative 

Disclosures to be provided outside the 

footnotes to the parent company’s 

audited annual and unaudited interim 

consolidated financial statements in a 

registration statement covering the offer 

and sale of the subject securities and 

any related prospectus, and in certain 

Exchange Act reports filed shortly 

thereafter; 

• require that the Proposed 

Alternative Disclosures be included in 

the footnotes to the parent company’s 

consolidated financial statements for 

annual and quarterly reports beginning 

with the annual report for the fiscal year 

during which the first bona fide sale of 

the subject securities is completed; 

• eliminate the requirement to 

provide pre-acquisition financial 

statements of recently-acquired 

subsidiary issuers and guarantors; and 

• require the Proposed Alternative 

Disclosures for as long as the issuers 

and guarantors have an Exchange Act 

reporting obligation with respect to the 

guaranteed securities rather than for so 

long as the guaranteed securities are 

outstanding. 

The proposed amendments to Rule 3– 

10 would simplify and streamline the 

rule structure in several ways. Most 

significantly, under proposed Rules 3– 

10(a) and 3–10(a)(1) there would be only 

a single set of eligibility criteria that 

would apply to all issuer and guarantor 

structures instead of having separate 

sets of criteria contained in each of the 

five exceptions in existing Rules 3–10(b) 

through (f). Similarly, the requirements 

for the Proposed Alternative Disclosures 

would be included in a single location 

within proposed Rule 13–01, rather than 

spread among the multiple paragraphs 

of existing Rule 3–10. 

Proposed Rule 3–16 would replace 

the rule’s existing requirement to 

provide separate financial statements for 

each affiliate whose securities are 

pledged as collateral with financial and 

non-financial disclosures about the 

affiliate(s) and the collateral 

arrangement as a supplement to the 

consolidated financial statements of the 

registrant that issues the collateralized 

security. Similar to the proposed 

disclosures for issuers and guarantors of 

guaranteed securities under Rule 3–10, 

the disclosure requirements in Rule 3– 

16 would be amended and relocated to 

proposed Rule 13–02. 


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Additionally, instead of requiring 

disclosure only when the pledged 

securities meet or exceed a numerical 

threshold relative to the securities 

registered or being registered under the 

existing rule’s ‘‘substantial portion’’ test, 

the proposed amendments would 

require disclosure to the extent material 

to a holder of the collateralized security. 

Further, the proposed amendments 

would require disclosure of any 

additional information about the 

collateral arrangement and each affiliate 

whose security is pledged as collateral 

that would be material to a holder of the 

collateralized securities. We believe 

these proposed disclosures would 

enable an investor to evaluate the 

potential outcomes in the event of 

foreclosure, would reduce costs and 

burdens on registrants, and may 

facilitate the use of debt structures that 

include pledges of affiliate securities, 

resulting in improved collateral 

packages being available to investors. 

Many of the proposed changes would 

simplify and streamline existing 

disclosure requirements in ways that are 

expected to reduce compliance burdens 

for all registrants, including small 

entities. Some of the proposed changes 

would incrementally increase 

compliance costs for registrants, 

although we do not expect these 

additional costs to be significant. In 

addition, compliance with the proposed 

amendments would require the use of 

professional skills, including accounting 

and legal skills. The proposed 

amendments are discussed in detail in 

Sections II and III above. We discuss the 

economic impact including the 

estimated costs and burdens, of the 

proposed amendments to all registrants, 

including small entities, in Sections VII 

and VIII above. 

E. Duplicative, Overlapping, or 

Conflicting Federal Rules 

We believe that the proposed 

amendments would not duplicate, 

overlap, or conflict with other federal 

rules. 

F. Significant Alternatives 

The Regulatory Flexibility Act directs 

us to consider alternatives that would 

accomplish our stated objectives, while 

minimizing any significant adverse 

impact on small entities. In connection 

with the proposed amendments, we 

considered the following alternatives: 

• Establishing different compliance or 

reporting requirements that take into 

account the resources available to small 

entities; 

• Clarifying, consolidating, or 

simplifying compliance and reporting 

requirements under the rules for small 

entities; 

• Using performance rather than 

design standards; and 

• Exempting small entities from all or 

part of the requirements. 

We believe the proposed amendments 

would simplify and streamline 

disclosure requirements in ways that are 

expected to reduce compliance burdens 

for all registrants, including small 

entities. We do not believe that the 

proposed amendments would impose 

any significant new compliance 

obligations. Accordingly, we do not 

believe it is necessary to exempt small 

entities from all or part of the proposed 

amendments. We note in this regard that 

the Commission’s existing disclosure 

requirements provide for scaled 

disclosure requirements and other 

accommodations for small entities, and 

the proposed amendments would not 

alter these existing accommodations. 

We are, however, soliciting comment on 

whether the amendments should permit 

additional or different flexibility for 

SRCs and other types of issuers to locate 

the Proposed Alternative Disclosures 

outside the financial statements in light 

of the burdens associated with annual 

audit, interim review, and internal 

control over financial reporting 

requirements. 

Finally, with respect to using 

performance rather than design 

standards, the proposed amendments 

generally contain elements similar to 

performance standards, which we 

believe is appropriate because it would 

allow registrants to omit financial 

information that is not necessary for an 

investment decision based on facts and 

circumstances applicable to that 

registrant and offering. For example, 

under the proposed amendments, the 

Summarized Financial Information of 

the Obligor Group that generally would 

be required could be omitted if it is not 

materially different from corresponding 

amounts in the parent company’s 

consolidated financial statements. This 

and other performance standards 

included in the proposed amendments 

would reduce compliance burdens for 

all registrants, including small entities. 

Request for Comment 

We encourage the submission of 

comments with respect to any aspect of 

this Initial Regulatory Flexibility 

Analysis. In particular, we request 

comments regarding: 

• How the proposed rule and form 

amendments can achieve their objective 

while lowering the burden on small 

entities; 

• the number of small entity 

companies that may be affected by the 

proposed rule and form amendments; 

• the existence or nature of the 

potential effects of the proposed 

amendments on small entity companies 

discussed in the analysis; and 

• how to quantify the effects of the 

proposed amendments. 

Commenters are asked to describe the 

nature of any effect and provide 

empirical data supporting the extent of 

that effect. Comments will be 

considered in the preparation of the 

Final Regulatory Flexibility Analysis, if 

the proposed rules are adopted, and will 

be placed in the same public file as 

comments on the proposed rules 

themselves. 

XI. Statutory Authority 

The amendments contained in this 

release are being proposed under the 

authority set forth in Sections 3, 6, 7, 8, 

10, 19(a), and 28 of the Securities Act, 

as amended, and Sections 3(b), 12, 13, 

15(d), 23(a), and 36 of the Exchange Act. 

List of Subjects in 17 CFR Parts 210, 

229, 239, 240 and 249 

Reporting and recordkeeping 

requirements, Securities. 

Text of Proposed Rule and Form 

Amendments 

For the reasons set out in the 

preamble, the Commission is proposing 

to amend title 17, chapter II of the Code 

of Federal Regulations as follows: 

PART 210—FORM AND CONTENT OF 

AND REQUIREMENTS FOR FINANCIAL 

STATEMENTS, SECURITIES ACT OF 

1933, SECURITIES EXCHANGE ACT 

OF 1934, INVESTMENT COMPANY ACT 

OF 1940, INVESTMENT ADVISERS ACT 

OF 1940, AND ENERGY POLICY AND 

CONSERVATION ACT OF 1975 

■ 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 


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guarantee or guaranteed security, such 

financial statements may be omitted if 

the issuer or guarantor is a consolidated 

subsidiary of the parent company, the 

parent company’s consolidated financial 

statements have been filed, and the 

conditions in paragraphs (a)(1) and (2) 

of this section have been met: 

(1) The guaranteed security is debt or 

debt-like; and 

(i) The parent company issues the 

security or co-issues the security, jointly 

and severally, with one or more of its 

consolidated subsidiaries; or 

(ii) A consolidated subsidiary issues 

the security or co-issues the security 

with one or more other consolidated 

subsidiaries of the parent company, and 

the security is guaranteed fully and 

unconditionally by the parent company. 

(2) The parent company provides the 

disclosures specified in § 210.13–01. 

(b) For the purposes of this section 

and § 210.13–01: 

(1) The ‘‘parent company’’ is the 

entity that: 

(i) Is an issuer or guarantor of the 

guaranteed security; 

(ii) Is, or as a result of the subject 

Securities Act registration statement 

will be, an Exchange Act reporting 

company; and 

(iii) Consolidates each subsidiary 

issuer and/or subsidiary guarantor of the 

guaranteed security in its consolidated 

financial statements. 

(2) A security is ‘‘debt or debt-like’’ if 

it has the following characteristics: 

(i) The issuer has a contractual 

obligation to pay a fixed sum at a fixed 

time; and 

(ii) Where the obligation to make such 

payments is cumulative, a set amount of 

interest must be paid. 

Note 1 to paragraph (b)(2). Neither the 

form of the security nor its title will 

determine whether a security is debt or debt 

like. Instead, the substance of the obligation 

created by the security will be determinative. 

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. 

§ 210.3–16 [Removed and Reserved] 

■ 3. Remove and reserve § 210.3–16. 

■ 4. Amend § 210.8–01 by revising Note 

3 and Note 4 to read as follows: 

§ 210.8–01 Preliminary Notes to Article 8. 

* * * * * 

Note 3 to § 210.8. The requirements of 

§ 210.3–10 are applicable to financial 

statements for a subsidiary of a smaller 

reporting company that issues securities 

guaranteed by the smaller reporting company 

or guarantees securities issued by the smaller 

reporting company. Disclosures about 

guarantors and issuers of guaranteed 

securities registered or being registered must 

be presented as required by § 210.13–01. 

Note 4 to § 210.8. Disclosures about a 

smaller reporting company’s affiliates whose 

securities collateralize any class of securities 

registered or being registered and the related 

collateral arrangement must be presented as 

required by § 210.13–02. 

* * * * * 

■ 5. Amend § 210.8–03 by adding 

paragraphs (b)(7) and (8) to read as 

follows: 

§ 210.8–03 Interim financial statements. 

* * * * * 

(b) * * * 

(7) Financial statements of and 

disclosures about guarantors and 

issuers of guaranteed securities. The 

requirements of § 210.3–10 are 

applicable to financial statements for a 

subsidiary of a smaller reporting 

company that issues securities 

guaranteed by the smaller reporting 

company or guarantees securities issued 

by the smaller reporting company. 

Disclosures about guarantors and issuers 

of guaranteed securities registered or 

being registered must be presented as 

required by § 210.13–01. 

(8) Disclosures about affiliates whose 

securities collateralize an issuance. 

Disclosures about a smaller reporting 

company’s affiliates whose securities 

collateralize any class of securities 

registered or being registered and the 

related collateral arrangement must be 

presented as required by § 210.13–02. 

* * * * * 

■ 6. Amend § 210.10–01 by adding 

paragraphs (b)(9) and (10) to read as 

follows: 

§ 210.10–01 Interim financial statements. 

* * * * * 

(b) * * * 

(9) The requirements of § 210.3–10 are 

applicable to financial statements for a 

subsidiary of the registrant that issues 

securities guaranteed by the registrant or 

guarantees securities issued by the 

registrant. Disclosures about guarantors 

and issuers of guaranteed securities 

registered or being registered must be 

presented as required by § 210.13–01. 

(10) Disclosures about a registrant’s 

affiliates whose securities collateralize 

any class of securities registered or 

being registered and the related 

collateral arrangement must be 

presented as required by § 210.13–02. 

* * * * * 

■ 7. Add an undesignated center 

heading and §§ 210.13–01 and 210.13– 

02 to read as follows: 

Financial and Non-Financial 

Disclosures for Certain Securities 

Registered or Being Registered 

§ 210.13–01 Guarantors and issuers of 

guaranteed securities registered or being 

registered. 

(a) For each class of guaranteed 

security registered or being registered 

for which the registrant is the parent 

company (as that term is defined in 

§ 210.3–10(b)(1)), provide the following 

disclosures to the extent material to 

holders of the guaranteed security: 

(1) Identification of the issuers and 

guarantors of the guaranteed security; 

(2) A description of the terms and 

conditions of the guarantees, and how 

payments to holders of the guaranteed 

security may be affected by the 

composition of and relationships among 

the issuers, guarantors, and subsidiaries 

of the parent company that are not 

issuers or guarantors of the guaranteed 

security; 

(3) A description of other factors that 

may affect payments to holders of the 

guaranteed security, such as contractual 

or statutory restrictions on dividends, 

guarantee enforceability, or the rights of 

a noncontrolling interest holder; 

(4) Summarized financial information 

as specified in § 210.1–02(bb)(1) of each 

issuer and guarantor of the guaranteed 

security. The summarized financial 

information of each such issuer and 

guarantor consolidated in the parent 

company’s consolidated financial 

statements may be presented on a 

combined basis with the summarized 

financial information of the parent 

company. Intercompany transactions 

between issuers and guarantors whose 

summarized financial information is 

presented on a combined basis shall be 

eliminated. If the information provided 

in response to the requirements of this 

section is applicable to one or more, but 

not all, issuers and/or guarantors, 

separately disclose the summarized 

financial information applicable to 

those issuers and/or guarantors. The 

financial information of subsidiaries 

that are not issuers or guarantors shall 

not be combined with that of issuers 

and guarantors. The method selected to 


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present investments in subsidiaries that 

are not issuers or guarantors shall be 

disclosed and used for all such 

subsidiaries for all of the classes of 

guaranteed securities for which 

disclosure is required by this section, 

and shall be reasonable in the 

circumstances. Disclose this 

summarized financial information as of 

and for the most recently ended fiscal 

year and interim period included in the 

parent company’s consolidated financial 

statements. If the disclosure required by 

this paragraph (a)(4) is omitted because 

it is not material to holders of the 

guaranteed security, disclose a 

statement to that effect and the reasons 

therefore; and 

(5) Any other quantitative or 

qualitative information that would be 

material to making an investment 

decision with respect to the guaranteed 

security. 

Note 1 to paragraph (a). The parent 

company may elect to provide the 

disclosures required by this section in a 

footnote to its consolidated financial 

statements or alternatively, in management’s 

discussion and analysis of financial 

condition and results of operations described 

in § 229.303 (Item 303 of Regulation S–K) of 

this chapter in its registration statement 

covering the offer and sale of the subject 

securities and any related prospectus, and in 

Exchange Act reports on the forms described 

in §§ 249.310 (Form 10–K), 249.220f (Form 

20–F), and 249.308a (Form 10–Q) of this 

chapter required to be filed during the fiscal 

year in which the first bona fide sale of the 

subject securities is completed. If not 

otherwise included in the consolidated 

financial statements or in management’s 

discussion and analysis of financial 

condition and results of operations, the 

parent company must include the disclosures 

in its prospectus immediately following 

‘‘Risk Factors,’’ if any, or otherwise, 

immediately following pricing information 

described in § 229.503(c) (Item 503(c) of 

Regulation S–K) of this chapter. However, the 

parent company must provide the disclosures 

in a footnote to its consolidated financial 

statements in its annual and quarterly reports 

beginning with its annual report filed on the 

forms described in §§ 249.310 (Form 10–K) 

and 249.220f (Form 20–F) of this chapter for 

the fiscal year during which the first bona 

fide sale of the subject securities is 

completed. 

(b) [Reserved] 

§ 210.13–02 Affiliates whose securities 

collateralize securities registered or being 

registered. 

(a) For each class of security 

registered or being registered that is 

collateralized by a security of the 

registrant’s affiliate or affiliates, provide 

the following disclosures to the extent 

material to holders of the collateralized 

security: 

(1) A description of the security 

pledged as collateral and each affiliate 

whose security is pledged as collateral; 

(2) A description of the terms and 

conditions of the collateral arrangement, 

including the events or circumstances 

that would require delivery of the 

collateral; 

(3) A description of the trading market 

for the affiliate’s security pledged as 

collateral or a statement that there is no 

market; 

(4) Summarized financial information 

as specified in § 210.1–02(bb)(1) of each 

affiliate whose securities are pledged as 

collateral. The summarized financial 

information of each such affiliate 

consolidated in the registrant’s financial 

statements may be presented on a 

combined basis. Intercompany 

transactions between affiliates whose 

summarized financial information is 

presented on a combined basis shall be 

eliminated. If the information provided 

in response to the requirements of this 

section is applicable to one or more, but 

not all, affiliates, separately disclose the 

summarized financial information 

applicable to those affiliates. Disclose 

this summarized financial information 

as of and for the most recently ended 

fiscal year and interim period included 

in the registrant’s consolidated financial 

statements. If the disclosure required by 

this paragraph (a)(4) is omitted because 

it is not material to holders of the 

collateralized security, disclose a 

statement to that effect and the reasons 

therefore; and 

(5) Any other quantitative or 

qualitative information that would be 

material to making an investment 

decision with respect to the 

collateralized security. 

Note 1 to paragraph (a). The registrant may 

elect to provide the disclosures required by 

this section in a footnote to its consolidated 

financial statements or alternatively, in 

management’s discussion and analysis of 

financial condition and results of operations 

described in § 229.303 (Item 303 of 

Regulation S–K) of this chapter in its 

registration statement covering the offer and 

sale of the subject securities and any related 

prospectus, and in Exchange Act reports on 

the forms described in §§ 249.310 (Form 10– 

K), 249.220f (Form 20–F), and 249.308a 

(Form 10–Q) of this chapter required to be 

filed during the fiscal year in which the first 

bona fide sale of the subject securities is 

completed. If not otherwise included in the 

consolidated financial statements or in 

management’s discussion and analysis of 

financial condition and results of operations, 

the registrant must include the disclosures in 

its prospectus immediately following ‘‘Risk 

Factors,’’ if any, or otherwise, immediately 

following pricing information described in 

§ 229.503(c) (Item 503(c) of Regulation S–K) 

of this chapter. However, the registrant must 

provide the disclosures in a footnote to its 

consolidated financial statements in its 

annual and quarterly reports beginning with 

its annual report filed on the forms described 

in §§ 249.310 (Form 10–K) and 249.220f 

(Form 20–F) of this chapter for the fiscal year 

during which the first bona fide sale of the 

subject securities is completed. 

(b) [Reserved] 

PART 229—STANDARD 

INSTRUCTIONS FOR FILING FORMS 

UNDER SECURITIES ACT OF 1933, 

SECURITIES EXCHANGE ACT OF 1934 

AND ENERGY POLICY AND 

CONSERVATION ACT OF 1975— 

REGULATION S–K 

■ 8. The authority citation for part 229 

reads as follows: 

Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 

77k, 77s, 77z–2, 77z–3, 77aa(25), 77aa(26), 

77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 

77nnn, 77sss, 78c, 78i, 78j, 78j–3, 78l, 78m, 

78n, 78n–1, 78o, 78u–5, 78w, 78ll, 78 mm, 

80a–8, 80a–9, 80a–20, 80a–29, 80a–30, 80a– 

31(c), 80a–37, 80a–38(a), 80a–39, 80b–11 and 

7201 et seq.; 18 U.S.C. 1350; sec. 953(b), Pub. 

L. 111–203, 124 Stat. 1904 (2010); and sec. 

102(c), Pub. L. 112–106, 126 Stat. 310 (2012). 

■ 9. Amend § 229.504 by revising 

Instruction 6 to read as follows: 

§ 229.504 (Item 504) Use of proceeds. 

* * * * * 

6. Where the registrant indicates that 

the proceeds may, or will, be used to 

finance acquisitions of other businesses, 

the identity of such businesses, if 

known, or, if not known, the nature of 

the businesses to be sought, the status 

of any negotiations with respect to the 

acquisition, and a brief description of 

such business shall be included. Where, 

however, pro forma financial statements 

reflecting such acquisition are not 

required by §§ 210.1–01 through 

210.13–02 (Regulation S–X) of this 

chapter, including § 210.8–05 (Rule 8– 

05 of Regulation S–X) of this chapter for 

smaller reporting companies, to be 

included in the registration statement, 

the possible terms of any transaction, 

the identification of the parties thereto 

or the nature of the business sought 

need not be disclosed, to the extent that 

the registrant reasonably determines 

that public disclosure of such 

information would jeopardize the 

acquisition. Where §§ 210.1–01 through 

210.13–02 (Regulation S–X) of this 

chapter, including § 210.8–04 (Rule 8– 

04 of Regulation S–X) of this chapter for 

smaller reporting companies, as 

applicable, would require financial 

statements of the business to be 

acquired to be included, the description 

of the business to be acquired shall be 

more detailed. 

* * * * * 


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■ 10. Amend § 229.1100 by revising 

paragraphs (c)(2)(ii)(C), (D), and (F) to 

read as follows: 

§ 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 § 239.13 (Form S–3) of this 

chapter or General Instruction I.A.5(iii) 

of the form described in § 239.33 (Form 

F–3) of this chapter is met with respect 

to the pool assets relating to such third 

party and the disclosures specified in 

§ 210.13–01 (Rule 13–01 of Regulation 

S–X) of this chapter have been provided 

in the reports to be referenced. Financial 

statements of the third party may be 

omitted if the requirements of § 210.3– 

10 (Rule 3–10 of Regulation S–X) of this 

chapter are satisfied. 

(D) If the pool assets relating to the 

third party are guaranteed by a wholly 

owned subsidiary of the third party and 

the subsidiary does not meet the 

conditions of paragraph (c)(2)(ii)(A) or 

(B) of this section, the criteria in either 

paragraph (c)(2)(ii)(A) or (B) of this 

section are met with respect to the third 

party and the disclosures specified in 

Rule 13–01 of Regulation S–X have been 

provided in the reports to be referenced. 

Financial statements of the subsidiary 

guarantor may be omitted if the 

requirements of Rule 3–10 of Regulation 

S–X are satisfied. 

* * * * * 

(F) The third party is a U.S. 

government-sponsored enterprise, has 

outstanding securities held by nonaffiliates with an aggregate market value 

of $75 million or more, and makes 

information publicly available on an 

annual and quarterly basis, including 

audited financial statements prepared in 

accordance with generally accepted 

accounting principles covering the same 

periods that would be required for 

audited financial statements under 

§§ 210.1–01 through 210.13–02 

(Regulation S–X) of this chapter and 

non-financial information consistent 

with that required by §§ 229.10 through 

229.1208 (Regulation S–K). 

* * * * * 

■ 11. Amend § 229.1112 by revising 

paragraph (b)(2) to read as follows: 

§ 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 § 240.14a3(b) of this chapter) shall be filed under 

this item. 

* * * * * 

■ 12. Amend § 229.1114 by revising 

paragraph (b)(2)(ii) to read as follows: 

§ 229.1114 (Item 1114) Credit enhancement 

and other support, except for certain 

derivatives instruments. 

* * * * * 

(b) * * * 

(2) * * * 

(ii) If any entity or group of affiliated 

entities providing enhancement or other 

support described in paragraph (a) of 

this section is liable or contingently 

liable to provide payments representing 

20% or more of the cash flow 

supporting any offered class of the assetbacked securities, provide financial 

statements meeting the requirements of 

§§ 210.1–01 through 210.13–02 

(Regulation S–X) of this chapter, except 

§§ 210.3–05 (Rule 3–05) and 210.11–01 

through 210.11–03 (Article 11 of 

Regulation S–X) of this chapter, of such 

entity or group of affiliated entities. 

Financial statements of such 

enhancement provider and its 

subsidiaries consolidated (as required 

by § 240.14a–3(b) of this chapter) shall 

be filed under this item. 

* * * * * 

■ 13. Amend § 229.1115 by revising 

paragraph (b)(2) to read as follows: 

§ 229.1115 (Item 1115) Certain derivatives 

instruments. 

* * * * * 

(b) * * * 

(2) If the aggregate significance 

percentage related to any entity or group 

of affiliated entities providing derivative 

instruments contemplated by this 

section is 20% or more, provide 

financial statements meeting the 

requirements of §§ 210.1–01 through 

210.13–02 (Regulation S–X) of this 

chapter, except §§ 210.3–05 (Rule 3–05) 

and 210.11–01 through 210.11–03 

(Article 11 of Regulation S–X) of this 

chapter, of such entity or group of 

affiliated entities. Financial statements 

of such entity and its subsidiaries 

consolidated (as required by § 240.14a– 

3(b) of this chapter) shall be filed under 

this item. 

* * * * * 

PART 239—FORMS PRESCRIBED 

UNDER THE SECURITIES ACT OF 1933 

■ 14. The authority citation for part 239 

is revised to read as follows: 

Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 

77j, 77s, 77z–2, 77z–3, 77sss, 78c, 78l, 78m, 

78n, 78o(d), 78o–7, 78u–5, 78w(a), 78ll, 

78mm, 80a–2(a), 80a–3, 80a–8, 80a–9, 80a– 

10, 80a–13, 80a–24, 80a–26, 80a–29, 80a–30, 

and 80a–37; and sec. 107, Pub. L. 112–106, 

126 Stat. 312, unless otherwise noted. 

■ 15. Amend § 239.31 by revising 

paragraph (b) to read as follows: 

§ 239.31 Form F–1, registration statement 

under the Securities Act of 1933 for 

securities of certain foreign private issuers. 

* * * * * 

(b) If a registrant is a majority-owned 

subsidiary, which does not itself meet 

the conditions of these eligibility 

requirements, it shall nevertheless be 

deemed to have met such conditions if 

its parent meets the conditions and if 

the parent fully guarantees the securities 

being registered as to principal and 

interest. In such an instance the parentguarantor is the issuer of a separate 

security consisting of the guarantee 

which must be concurrently registered 

but may be registered on the same 

registration statement as are the 

guaranteed securities. Both the parentguarantor and the subsidiary shall each 

disclose the information required by 

this Form as if each were the only 

registrant except that if the subsidiary 

will not be eligible to file annual reports 

on the form described in § 249.229f 

(Form 20–F) of this chapter after the 

effective date of the registration 

statement, then it shall disclose the 

information specified in the form 

described in § 239.11 (Form S–1) of this 

chapter. The requirements of § 210.3–10 

(Rule 3–10 of Regulation S–X) of this 

chapter are applicable to financial 

statements for a subsidiary of a parent 

company that issues securities 

guaranteed by the parent company. 

■ 16. Amend Form F–1 (referenced in 

§ 239.31) by revising Instruction I.B 

under ‘‘General Instructions’’ to read as 

follows: 

Note: The text of Form F–1 does not, and 

this amendment will not, appear in the Code 

of Federal Regulations. 


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UNITED STATES SECURITIES AND 

EXCHANGE COMMISSION 

Washington, DC 20549 

FORM F–1 

REGISTRATION STATEMENT UNDER 

THE SECURITIES ACT OF 1933 

* * * * * 

GENERAL INSTRUCTIONS 

I. Eligibility Requirements for Use of 

Form F–1 

* * * * * 

B. If a registrant is a majority-owned 

subsidiary, which does not itself meet 

the conditions of these eligibility 

requirements, it shall nevertheless be 

deemed to have met such conditions if 

its parent meets the conditions and if 

the parent fully guarantees the securities 

being registered as to principal and 

interest. Note: In such an instance the 

parent-guarantor is the issuer of a 

separate security consisting of the 

guarantee which must be concurrently 

registered but may be registered on the 

same registration statement as are the 

guaranteed securities. Both the parentguarantor and the subsidiary shall each 

disclose the information required by 

this Form as if each were the only 

registrant except that if the subsidiary 

will not be eligible to file annual reports 

on Form 20–F after the effective date of 

the registration statement, then it shall 

disclose the information specified in 

Forms S–1 (§ 239.11 of this chapter). 

The requirements of Rule 3–10 of 

Regulation S–X (§ 210.3–10 of this 

chapter) are applicable to financial 

statements for a subsidiary of a parent 

company that issues securities 

guaranteed by the parent company. 

* * * * * 

■ 17. Amend § 239.33 by revising Note 

to paragraph (a)(5) to read as follows: 

§ 239.33 Form F–3, for registration under 

the Securities Act of 1933 of securities of 

certain foreign private issuers offered 

pursuant to certain types of transactions. 

* * * * * 

Note to paragraph (a)(5). In the situations 

described in paragraphs (a)(5)(iii), (iv), and 

(v) of this section, the parent or majorityowned subsidiary guarantor is the issuer of 

a separate security consisting of the 

guarantee, which must be concurrently 

registered, but may be registered on the same 

registration statement as are the guaranteed 

non-convertible securities. Both the parent 

and majority-owned subsidiary shall each 

disclose the information required by this 

Form as if each were the only registrant 

except that if the majority-owned subsidiary 

will not be eligible to file annual reports on 

the forms described in § 249.220f (Form 20– 

F) or § 249.240f (Form 40–F) of this chapter 

after the effective date of the registration 

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. 

* * * * * 

■ 18. Amend Form F–3 (referenced in 

§ 239.33) by revising the note to 

Instruction I.A.5 under ‘‘General 

Instructions’’ to read as follows: 

Note: The text of Form F–3 does not, and 

this amendment will not, appear in the Code 

of Federal Regulations. 

UNITED STATES SECURITIES AND 

EXCHANGE COMMISSION 

Washington, DC 20549 

FORM F–3 

REGISTRATION STATEMENT UNDER 

THE SECURITIES ACT OF 1933 

* * * * * 

GENERAL INSTRUCTIONS 

* * * * * 

I. Eligibility Requirements for Use of 

Form F–3 

* * * * * 

A. Registration Requirements 

* * * * * 

5. Majority-owned Subsidiaries. If a 

registrant is a majority-owned 

subsidiary, security offerings may be 

registered on this Form if: 

* * * * * 

Note: In the situation described in 

paragraphs I.A.5(iii), I.A.5(iv), and I.A.5(v) 

above, the parent or majority-owned 

subsidiary guarantor is the issuer of a 

separate security consisting of the guarantee, 

which must be concurrently registered, but 

may be registered on the same registration 

statement as are the guaranteed nonconvertible securities. Both the parent or 

majority-owned subsidiary shall each 

disclose the information required by this 

Form as if each were the only registrant 

except that if the majority-owned subsidiary 

will not be eligible to file annual reports on 

Form 20–F or Form 40–F after the effective 

date of the registration statement, then it 

shall disclose the information specified in 

Form S–3. The requirements of Rule 3–10 of 

Regulation S–X are applicable to financial 

statements for a subsidiary of a parent 

company that issues securities guaranteed by 

the parent company or guarantees securities 

issued by the parent company. 

* * * * * 

■ 19. Amend Form 1–A (referenced in 

§ 239.90) by revising paragraph (b)(7) of 

Part F/S to read as follows: 

Note: The text of Form 1–A does not, and 

this amendment will not, appear in the Code 

of Federal Regulations. 

UNITED STATES SECURITIES AND 

EXCHANGE COMMISSION 

Washington, DC 20549 

FORM 1–A 

REGULATION A OFFERING 

STATEMENT UNDER THE 

SECURITIES ACT OF 1933 

* * * * * 

Part F/S 

* * * * * 

(b) Financial Statements for Tier 1 

Offerings 

* * * * * 

(7) Financial Statements of and 

Disclosures About Other Entities. The 

circumstances described below may 

require you to file financial statements 

of, or provide disclosures about, other 

entities in the offering statement. The 

financial statements of other entities 

must be presented for the same periods 

as if the other entity was the issuer as 

described above in paragraphs (b)(3) and 

(b)(4) unless a shorter period is 

specified by the rules below. The 

financial statements of other entities 

shall follow the same audit requirement 

as paragraph (b)(2) of this Part F/S: 

(i) Financial Statements of and 

Disclosures About Guarantors and 

Issuers of Guaranteed Securities. The 

requirements of Rule 3–10 of Regulation 

S–X are applicable to financial 

statements of a subsidiary that issues 

securities guaranteed by the ‘‘parent 

company,’’ as that term is defined in 

Rule 3–10 of Regulation S–X, or 

guarantees securities issued by the 

parent company. However, the reference 

in Rule 3–10(a) of Regulation S–X to ‘‘an 

issuer or guarantor of a guaranteed 

security that is registered or being 

registered is required to file financial 

statements required by Regulation S–X 

with respect to the guarantee or 

guaranteed security’’ instead refers to 

‘‘an issuer or guarantor of a guaranteed 

security that is qualified or being 

qualified pursuant to Regulation A is 

required to file financial statements 

required by Part F/S of Form 1–A with 

respect to the guarantee or guaranteed 

security.’’ The parent company must 

also provide the disclosures required by 

Rule 13–01 of Regulation S–X. The 

parent company may elect to provide 

these disclosures in a footnote to its 

consolidated financial statements or 

alternatively, in management’s 

discussion and analysis of financial 

condition and results of operations 

described in Item 9 of Form 1–A in its 


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offering statement on Form 1–A filed in 

connection with the offer and sale of the 

subject securities. 

(ii) Disclosures About Affiliates 

Whose Securities Collateralize an 

Issuance. Disclosures about an issuer’s 

affiliates whose securities collateralize 

any class of securities being offered 

must be provided as required by Rule 

13–02 of Regulation S–X. The issuer 

may elect to provide these disclosures 

in a footnote to its consolidated 

financial statements or alternatively, in 

management’s discussion and analysis 

of financial condition and results of 

operations described in Item 9 of Form 

1–A in its offering statement on Form 1– 

A filed in connection with the offer and 

sale of the subject securities. 

* * * * * 

■ 20. Amend Form 1–K (referenced in 

§ 239.91) by revising paragraph Item 7(g) 

of Part II to read as follows: 

Note: The text of Form 1–K does not, and 

this amendment will not, appear in the Code 

of Federal Regulations. 

UNITED STATES SECURITIES AND 

EXCHANGE COMMISSION 

Washington, DC 20549 

FORM 1–K 

* * * * * 

PART II 

* * * * * 

Item 7. Financial Statements 

* * * * * 

(g) Financial Statements of and 

Disclosures About Other Entities. The 

circumstances described below may 

require you to file financial statements 

of, or provide disclosures about, other 

entities. The financial statements of 

other entities must be presented for the 

same periods as the issuer’s financial 

statements described above in 

paragraphs (d) and (e) unless a shorter 

period is specified by the rules below. 

(1) Financial Statements of and 

Disclosures About Guarantors and 

Issuers of Guaranteed Securities. The 

requirements of Rule 3–10 of Regulation 

S–X are applicable to financial 

statements of a subsidiary that issues 

securities guaranteed by the ‘‘parent 

company,’’ as that term is defined in 

Rule 3–10 of Regulation S–X, or 

guarantees securities issued by the 

parent company. However, the reference 

in Rule 3–10(a) of Regulation S–X to ‘‘an 

issuer or guarantor of a guaranteed 

security that is registered or being 

registered is required to file financial 

statements required by Regulation S–X 

with respect to the guarantee or 

guaranteed security’’ instead refers to 

‘‘an issuer or guarantor of a guaranteed 

security that is qualified or being 

qualified pursuant to Regulation A is 

required to file financial statements 

required by Item 7 of Part II of Form 1– 

K with respect to the guarantee or 

guaranteed security.’’ The parent 

company must also provide the 

disclosures required by Rule 13–01 of 

Regulation S–X. The parent company 

may elect to provide these disclosures 

in a footnote to its consolidated 

financial statements or alternatively, in 

management’s discussion and analysis 

of financial condition and results of 

operations described in Item 9 of Form 

1–A in reports on Form 1–K and Form 

1–SA required to be filed during the 

fiscal year in which the first bona fide 

sale of the subject securities is 

completed. However, the parent 

company must provide the disclosures 

in a footnote to its consolidated 

financial statements in its annual and 

semiannual reports beginning with its 

annual report filed on Form 1–K for the 

fiscal year during which the first bona 

fide sale of the subject securities is 

completed. 

(2) Disclosures About Affiliates Whose 

Securities Collateralize an Issuance. 

Disclosures about an issuer’s affiliates 

whose securities collateralize any class 

of securities being offered must be 

provided as required by Rule 13–02 of 

Regulation S–X. The issuer may elect to 

provide these disclosures in a footnote 

to its consolidated financial statements 

or alternatively, in management’s 

discussion and analysis of financial 

condition and results of operations 

described in Item 9 of Form 1–A in 

reports on Form 1–K and Form 1–SA 

required to be filed during the fiscal 

year in which the first bona fide sale of 

the subject securities is completed. 

However, the issuer must provide the 

disclosures in a footnote to its 

consolidated financial statements in its 

annual and semiannual reports 

beginning with its annual report filed on 

Form 1–K for the fiscal year during 

which the first bona fide sale of the 

subject securities is completed. 

* * * * * 

■ 21. Amend Form 1–SA (referenced in 

§ 239.92) by revising Item 3(e) to read as 

follows: 

Note: The text of Form 1–SA does not, and 

this amendment will not, appear in the Code 

of Federal Regulations. 

UNITED STATES SECURITIES AND 

EXCHANGE COMMISSION 

Washington, DC 20549 

FORM 1–SA 

* * * * * 

INFORMATION TO BE INCLUDED IN 

REPORT 

* * * * * 

Item 3. Financial Statements 

* * * * * 

(e) Financial Statements of and 

Disclosures About Other Entities. The 

circumstances described below may 

require you to file financial statements 

of, or provide disclosures about, other 

entities. These financial statements and 

disclosures may be unaudited. 

(1) Financial Statements of and 

Disclosures About Guarantors and 

Issuers of Guaranteed Securities. The 

requirements of Rule 3–10 of Regulation 

S–X are applicable to financial 

statements of a subsidiary that issues 

securities guaranteed by the ‘‘parent 

company,’’ as that term is defined in 

Rule 3–10 of Regulation S–X, or 

guarantees securities issued by the 

parent company. However, the reference 

in Rule 3–10(a) of Regulation S–X to ‘‘an 

issuer or guarantor of a guaranteed 

security that is registered or being 

registered is required to file financial 

statements required by Regulation S–X 

with respect to the guarantee or 

guaranteed security’’ instead refers to 

‘‘an issuer or guarantor of a guaranteed 

security that is qualified or being 

qualified pursuant to Regulation A is 

required to file financial statements 

required by Item 3 of Form 1–SA with 

respect to the guarantee or guaranteed 

security.’’ The parent company must 

also provide the disclosures required by 

Rule 13–01 of Regulation S–X. The 

parent company may elect to provide 

these disclosures in a footnote to its 

consolidated financial statements or 

alternatively, in management’s 

discussion and analysis of financial 

condition and results of operations 

described in Item 9 of Form 1–A in 

reports on Form 1–K and Form 1–SA 

required to be filed during the fiscal 

year in which the first bona fide sale of 

the subject securities is completed. 

However, the parent company must 

provide the disclosures in a footnote to 

its consolidated financial statements in 

its annual and semiannual reports 

beginning with its annual report filed on 

Form 1–K for the fiscal year during 

which the first bona fide sale of the 

subject securities is completed. 

(2) Disclosures About Affiliates 

Whose Securities Collateralize an 

Issuance. Disclosures about an issuer’s 

affiliates whose securities collateralize 

any class of securities being offered 

must be provided as required by Rule 

13–02 of Regulation S–X. The issuer 

may elect to provide these disclosures 

in a footnote to its consolidated 


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financial statements or alternatively, in 

management’s discussion and analysis 

of financial condition and results of 

operations described in Item 9 of Form 

1–A in reports on Form 1–K and Form 

1–SA required to be filed during the 

fiscal year in which the first bona fide 

sale of the subject securities is 

completed. However, the issuer must 

provide the disclosures in a footnote to 

its consolidated financial statements in 

its annual and semiannual reports 

beginning with its annual report filed on 

Form 1–K for the fiscal year during 

which the first bona fide sale of the 

subject securities is completed. 

PART 240—GENERAL RULES AND 

REGULATIONS, SECURITIES 

EXCHANGE ACT OF 1934 

■ 22. The authority citation for part 240 

continues to read in part as follows: 

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 

77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, 

77sss, 77ttt, 78c, 78c–3, 78c–5, 78d, 78e, 78f, 

78g, 78i, 78j, 78j–1, 78k, 78k–1, 78l, 78m, 

78n, 78n–1, 78o, 78o–4, 78o–10, 78p, 78q, 

78q–1, 78s, 78u–5, 78w, 78x, 78ll, 78mm, 

80a-20, 80a–3, 80a–29, 80a–37, 80b–3, 80b– 

4, 80b–11, 7201 et seq.; and 8302; 7 U.S.C. 

2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 

1350; and Pub. L. 111–203, 939A, 124 Stat. 

1887 (2010); and secs. 503 and 602, Pub. L. 

112–106, 126 Stat. 326 (2012), unless 

otherwise noted. 

* * * * * 

■ 23. 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 

■ 24. The authority citation for part 249 

continues to read in part as follows: 

Authority: 15 U.S.C. 78a et seq. and 7201 

et seq.; 12 U.S.C. 5461 et seq.; 18 U.S.C. 1350; 

Sec. 953(b), Pub. L. 111–203, 124 Stat. 1904; 

Sec. 102(a)(3), Pub. L. 112–106, 126 Stat. 309 

(2012); Sec. 107, Pub. L. 112–106, 126 Stat. 

313 (2012), and Sec. 72001, Pub. L. 114–94, 

129 Stat. 1312 (2015), unless otherwise 

noted. 

* * * * * 

■ 25. Amend Form 20–F (referenced in 

§ 249.220f) by revising Instruction 1 to 

Item 8 to read as follows: 

Note: The text of Form 20–F does not, and 

this amendment will not, appear in the Code 

of Federal Regulations. 

UNITED STATES SECURITIES AND 

EXCHANGE COMMISSION 

Washington, DC 20549 

FORM 20–F 

* * * * * 

Instructions to Item 8: 

1. This item refers to the company, 

but note that under Rules 3–05, 3–09, 

3–10, 3–14, 13–01, and 13–02 of 

Regulation S–X, you also may have to 

provide financial statements or financial 

information for entities other than the 

issuer. In some cases, you may have to 

provide financial statements for a 

predecessor. See the definition of 

‘‘predecessor’’ in Exchange Act Rule 

12b-2 and Securities Act Rule 405. 

* * * * * 

By the Commission. 

Dated: July 24, 2018. 

Brent J. Fields, 

Secretary. 

Note: The following appendix will not 

appear in the Code of Federal Regulations. 

Appendix 

Financial Disclosures About Guarantors and 

Issuers of Guaranteed Securities and 

Affiliates Whose Securities Collateralize a 

Registrant’s Securities 

For ease of reference, set forth below is a 

table summarizing the main features of 

existing Rule 3–10 and Rule 3–16 and the 

proposed rules. This is only a summary of 

certain requirements contained in the 

Commission’s rules and regulations, as well 

as a summary of certain proposed rules; it is 

not a substitute for the rules and regulations 

or for the proposed rules. Registrants should 

refer to the existing rules and to the proposed 

rule text for the full requirements and the 

description of those requirements in the 

release. The changes we are proposing 

include amending both rules and relocating 

part of Rule 3–10 and all of Rule 3–16 to 

proposed Rules 13–01 and 13–02, 

respectively. 

Summary of existing Rule 3–10 Summary of proposed rules 

Financial Statement 

Requirement & 

Omission of Subsidiary Issuer and 

Guarantor Financial 

Statements.

Rule 3–10(a) states that every issuer of a registered security that is 

guaranteed and every guarantor of a registered security must file 

the financial statements required for a registrant by Regulation 

S–X. 

Rules 3–10(b)–(f) set forth five exceptions to this general rule, which 

permit the omission of separate financial statements of subsidiary 

issuers and guarantors when certain conditions are met, including 

that the parent company provides the Alternative Disclosures. 

Each issuer of a registered security that is guaranteed and each 

guarantor of a registered security must file the financial statements 

required for a registrant by Regulation S–X; however, proposed 

Rule 3–10(a) would no longer contain this express statement. 

Proposed Rule 3–10(a) would continue to permit the omission of 

separate financial statements of subsidiary issuers and guarantors 

when certain conditions are met, including that the parent company provides the Proposed Alternative Disclosures. 

Rule Structure & Eligible Issuer and Guarantor Structures.Rules 3–10(b) through (f) set forth the five exceptions. Each exception specifies the eligible structures to which it applies, and the 

conditions that must be met. In each case, the parent company 

must provide the Alternative Disclosures. 

Eligible issuer and guarantor structures: 

• A finance subsidiary issues securities that its parent company 

guarantees (Rule 3–10(b)); 

• an operating subsidiary issues securities that its parent company guarantees (Rule 3–10(c)); 

• a subsidiary issues securities that its parent company and 

one or more other subsidiaries of its parent company guarantee (Rule 3–10(d)); 

• a parent company issues securities that one of its subsidiaries guarantees (Rule 3–10(e)); or 

• a parent company issues securities that more than one of its 

subsidiaries guarantees (Rule 3–10(f)). 

The proposed rules would replace the exceptions in existing Rule 3– 

10(b) through (f). Proposed Rule 3–10(a) would permit the separate financial statements of a subsidiary issuer or guarantor to be 

omitted if the eligibility conditions in proposed Rules 3–10(a) and 

3–10(a)(1) are met and the Proposed Alternative Disclosures 

specified in proposed Rule 13–01 are provided in the filing, as required by proposed Rule 3–10(a)(2). Proposed Rule 3–10(a)(1) 

sets forth the eligible structures. 

Eligible issuer and guarantor structures: 

• The parent company issues the security or co-issues the security, jointly and severally, with one or more of its consolidated subsidiaries (Proposed Rule 3–10(a)(1)(i)); or 

• a consolidated subsidiary issues the security, or co-issues it 

with one or more other consolidated subsidiaries of the parent 

company, and the security is guaranteed fully and unconditionally by the parent company (Proposed Rule 3–10(a)(1)(ii)). 

The role of subsidiary guarantors would not be specified in the proposed categories of structures; however, the proposed rules are 

intended to cover the structures permitted in existing Rules 3– 

10(b) through (f). 


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Summary of existing Rule 3–10 Summary of proposed rules 

Conditions to Omit 

Separate Subsidiary 

Issuer and Guarantor 

Financial Statements.

If an issuer and guarantor structure matches one of the exceptions 

in Rules 3–10(b) through (f), the conditions in the applicable exception paragraph must be met, including: 

• Consolidated financial statements of the parent company 

have been filed; 

• each subsidiary issuer and guarantor is ‘‘100% owned’’ by the 

parent company; 

• each guarantee is ‘‘full and unconditional’’ and, where there 

are multiple guarantees, joint and several; and 

• the parent company provides the Alternative Disclosures in its 

financial statement footnotes. 

Additionally, the 2000 Release states the guaranteed security must 

be debt or debt-like. 

The applicable conditions, set forth in proposed Rule 3–10, include: 

• Consolidated financial statements of the parent company 

have been filed (proposed Rule 3–10(a)); 

• the subsidiary issuer or guarantor is a consolidated subsidiary 

of the parent company (proposed Rule 3–10(a)); 

• the guaranteed security is debt or debt-like (proposed Rule 3– 

10(a)(1)); 

• the issuer and guarantor structure must match one of the eligible issuer and guarantor structures (proposed Rule 3– 

10(a)(1)(i) or (ii)); and 

• the parent company provides the Proposed Alternative Disclosures (proposed Rule 3–10(a)(2)). 

Parent Company Financial Statements 

Condition.

The identity of the parent company will vary based on the particular 

corporate structure; however, the 2000 Release stated three conditions must be met before an entity can be considered a ‘‘parent 

company,’’ including that the entity: 

• Is an issuer or guarantor of the subject securities; 

• is an Exchange Act reporting company, or will be one as a result of the subject Securities Act registration statement; and 

• owns 100% of each subsidiary issuer or guarantor directly or 

indirectly. 

‘‘Parent company’’ would be defined in proposed Rule 3–10(b)(1) 

and require that the entity: 

• Is an issuer or guarantor of the guaranteed security; 

• is an Exchange Act reporting company, or will become one as 

a result of the subject Securities Act registration statement; 

and 

• consolidates each subsidiary issuer and/or guarantor in its 

consolidated financial statements. 

Ownership Condition ... The exceptions in Rules 3–10(b) through (f) require that each subsidiary issuer or guarantor must be 100% owned by the parent 

company to omit its separate financial statements. 

Proposed Rule 3–10(a) would require that the subsidiary issuer or 

guarantor be a consolidated subsidiary of the parent company pursuant to the relevant accounting standards already in use. 

Proposed Rule 13–01(a)(3) would require, to the extent material, a 

description of any factors that may affect payments to holders of 

the guaranteed security, such as the rights of a non-controlling interest holder. Proposed Rule 13–01(a)(4) would require separate 

disclosure of Summarized Financial Information for subsidiary 

issuers and guarantors affected by those factors. 

Debt or Debt-Like Security Definition: Rule 3–10 does not define when a security is ‘‘debt or debt-like;’’ 

however, the 2000 Release described characteristics of a debt or 

debt-like security, including: 

• The issuer has a contractual obligation to pay a fixed sum at 

a fixed time; and 

• where the obligation to make such payments is cumulative, a 

set amount of interest must be paid. 

Proposed Rule 3–10(a)(1) would state explicitly that the guaranteed 

security must be ‘‘debt or debt-like’’ and proposed Rule 3–10(b)(2) 

would state that a guaranteed security would be considered ‘‘debt 

or debt-like’’ if: 

• The issuer has a contractual obligation to pay a fixed sum at 

a fixed time; and 

• where the obligation to make such payments is cumulative, a 

set amount of interest must be paid. 

Subsidiary Guarantee 

Eligibility Requirements.

The exceptions in Rule 3–10(b) through (f) specify that a guarantee 

be full and unconditional and, when there are multiple guarantees, 

be joint and several. The requirements are imposed on the guarantee regardless of whether the guarantor is the parent company 

or a subsidiary. 

The parent company’s role with respect to the guaranteed security 

would determine whether the structure is eligible to provide the 

Proposed Alternative Disclosures. The parent company must be 

the issuer or full and unconditional guarantor of the guaranteed 

security (proposed Rules 3–10(a)(1)(i) and (ii)). 

If a subsidiary guarantee is not full and unconditional, or where there 

are multiple guarantees, not joint and several, disclosure of such 

terms and conditions would be required by proposed Rule 13– 

01(a)(2), to the extent material. Proposed Rule 13–01(a)(4) would 

require separate disclosure of the Summarized Financial Information for subsidiary guarantor(s) to which such terms and conditions 

apply, to the extent material. 

Alternative Disclosures 

& Proposed Alternative Disclosures.

To be eligible to omit the separate financial statements of a subsidiary issuer or guarantor, each exception in Rules 3–10(b) 

through (f) requires that the parent company must provide the Alternative Disclosures in the footnotes to its consolidated financial 

statements. The form and content of the Alternative Disclosures 

are determined based on the facts and circumstances and are either a brief narrative or Consolidating Information. Specific elements of Consolidating Information are discussed below. 

Alternative Disclosures may consist of a brief narrative instead of 

Consolidating Information when: 

• The subsidiary is a finance subsidiary, and the parent company is the only guarantor of the securities; 

The proposed rule would replace the brief narrative form and Consolidating Information form of Alternative Disclosure with the Proposed Alternative Disclosures specified in proposed Rule 13–01. 

Specific elements of the Proposed Alternative Disclosures are discussed below. 

The Proposed Alternative Disclosures would be required in all cases, 

to the extent material to holders of the guaranteed security (proposed Rule 13–01(a)). Additionally, proposed Rule 13–01(a)(5) 

would require disclosure of any quantitative or qualitative information that would be material to making an investment decision with 

respect to the guaranteed security. 

• the parent company of the subsidiary issuer has no independent assets or operations, the parent company guarantees the securities, no subsidiary of the parent company guarantees the securities, and any subsidiaries of the parent company other than the issuer are minor; and 

• the parent company issuer has no independent assets or operations and all of the parent company’s subsidiaries, other 

than minor subsidiaries, guarantee the securities. 

Consolidating Information and Proposed 

Alternative Disclosures—Level of Detail.

The instructions for preparing Consolidating Information are specified in Rule 3–10(i). Consolidating Information includes all major 

captions of the balance sheet, income statement, and cash flow 

statement that are required to be shown separately in interim financial statements prepared under Article 10 of Regulation S–X. 

Rules 3–10(i)(11)(i) and (ii), respectively, require disclosure of any 

financial and narrative information about each guarantor if it would 

be material for investors to evaluate the sufficiency of the guarantee, and disclosure of sufficient information to make the financial information presented not misleading. 

The proposed rule would require the Proposed Alternative Disclosures specified in proposed Rule 13–01. Proposed Rule 13– 

01(a)(4) would require, for each issuer and guarantor, Summarized Financial Information, as specified in Rule 1–02(bb) of Regulation S–X, which would include select balance sheet and income 

statement line items. Disclosure of additional line items of financial 

information beyond what is specified in proposed Rule 13–01(a)(4) 

would be required by proposed Rule 13–01(a)(5), to the extent 

material. If the disclosures required by proposed Rule 13–01(a)(4) 

are omitted because they are immaterial, proposed Rule 13– 

01(a)(4) requires disclosure to that effect and the reasons. 


amozie on DSK3GDR082PROD with PROPOSALS2
Federal Register / Vol. 83, No. 191 / Tuesday, October 2, 2018 / Proposed Rules 49687 

Summary of existing Rule 3–10 Summary of proposed rules 

Consolidating Information and Proposed 

Alternative Disclosures—Combined 

Basis.

The applicable exception in Rule 3–10(c) through (f) specifies the 

columns of information that must be presented, and Rule 3– 

10(i)(6) describes circumstances when additional columns are required. 

To distinguish the assets, liabilities, operations, and cash flows of 

the entities that are legally obligated to make payments under the 

guarantee from those that are not, the columnar presentation must 

show: 

• A parent company’s investments in all consolidated subsidiaries based upon its proportionate share of their net assets 

(Rule 3–10(i)(3)); and 

• subsidiary issuer and guarantor investments in certain consolidated subsidiaries using the equity method of accounting 

(Rule 3–10(i)(5). 

Proposed Rule 13–01(a)(4) would permit the Summarized Financial 

Information of each issuer and guarantor consolidated in the parent company’s consolidated financial statements to be presented 

on a combined basis with the Summarized Financial Information of 

the parent company. However, if information provided in response 

to disclosures specified in proposed Rule 13–01 is applicable to 

one or more, but not all, issuers and guarantors, proposed Rule 

13–01(a)(4) would require, to the extent it is material, separate 

disclosure of Summarized Financial Information for the issuers 

and guarantors to which the information applies. 

The proposed rule would no longer require separate disclosure of 

the financial information of non-guarantor subsidiaries. 

Proposed Rule 13–01(a)(4) would allow the parent company to determine which method best meets the objective of excluding the financial information of non-issuer and non-guarantor subsidiaries 

from the Proposed Alternative Disclosures, so long as the selected 

method is disclosed and used for all non-issuer and non-guarantor 

subsidiaries for all classes of guaranteed securities for which the 

disclosure is required, and is reasonable in the circumstances. 

Consolidating Information and Proposed 

Alternative Disclosures—Periods to 

Present.

Consolidating Information must be provided as of, and for, the same 

periods as the parent company’s consolidated financial statements 

(Rule 3–10(i)(2)). 

Proposed Rule 13–01(a)(4) would require Summarized Financial Information to be provided as of, and for, the most recently ended 

fiscal year and year-to-date interim period, if applicable, included 

in the parent company’s consolidated financial statements. 

Consolidating Information and Proposed 

Alternative Disclosures—Non-Financial Disclosures.

Rule 3–10 requires certain non-financial disclosures, including: 

• Disclosure, if true, that each subsidiary issuer or subsidiary 

guarantor is 100% owned by the parent company, that all 

guarantees are full and unconditional, and where there is 

more than one guarantor, that all guarantees are joint and 

several (Rules 3–10(i)(8)(i)–(iii); 

• restricted net assets (Rule 3–10(i)(10); and 

• certain types of restrictions on the ability of the parent company or any guarantor to obtain funds from their subsidiaries 

(Rule 3–10(i)(9). 

Proposed Rules 13–01(a)(1) through (3) would require disclosures, 

to the extent material, about the issuers and guarantors, the terms 

and conditions of the guarantees, and how the issuer and guarantor structure and other factors may affect payments to holder of 

the guaranteed securities. Additionally, proposed Rule 13–01(a)(5) 

would require disclosure of any facts and circumstances specific 

to particular issuers and guarantors that would be material to holders of the guaranteed security that are not specifically required by 

proposed Rules 13–01(a)(1) through (3). 

Rules 3–10(i)(11)(i) and (ii), respectively, require disclosure of any financial and narrative information about each guarantor if it would 

be material for investors to evaluate the sufficiency of the guarantee, and disclosure of sufficient information to make the financial information presented not misleading. 

Location and Audit Requirement of Alternative Disclosures 

and Proposed Alternative Disclosure.

The exceptions in Rules 3–10(b) through (f) require the Alternative 

Disclosures to be included in the notes to the parent company’s 

consolidated financial statements. Rule 3–10(i)(2) requires Consolidating Information to be audited for the same periods that the 

parent company financial statements are required to be audited. 

The note to proposed Rule 13–01(a) would allow the parent company to provide the Proposed Alternative Disclosures in a footnote 

to its consolidated financial statements or alternatively, in MD&A in 

its registration statement covering the offer and sale of the subject 

securities and any related prospectus, and in Exchange Act reports on Form 10–K, Form 20–F, and Form 10–Q required to be 

filed during the fiscal year in which the first bona fide sale of the 

subject securities is completed. If a parent company elects to provide the disclosures in its audited financial statements, the Proposed Alternative Disclosures would be required to be audited. If 

not otherwise included in the consolidated financial statements or 

in MD&A, the parent company would be required to include the 

Proposed Alternative Disclosures in its prospectus immediately following ‘‘Risk Factors,’’ if any, or otherwise, immediately following 

pricing information described in Item 503(c) of Regulation S–K. 

The parent company would be required to provide the Proposed 

Alternative Disclosures in a footnote to its consolidated financial 

statements in its annual and quarterly reports beginning with its 

annual report filed on Form 10–K or Form 20–F for the fiscal year 

during which the first bona fide sale of the subject securities is 

completed. 

Recently-Acquired 

Subsidiary Issuers 

and Guarantors.

If a parent company acquires a new subsidiary issuer or guarantor, 

Rule 3–10(g) requires the parent company to provide one year of 

audited pre-acquisition financial statements of the newly-acquired 

issuer or guarantor (and, if applicable, unaudited interim financial 

statements) when the: 

• Parent company acquires the new subsidiary during or subsequent to one of the periods for which financial statements are 

presented in a Securities Act registration statement filed in 

connection with the offer and sale of the debt securities; 

The proposed rule would not include this requirement. Proposed 

Rule 13–01(a)(5) would require information about recently-acquired subsidiary issuers and guarantors if it would be material to 

an investment decision in the guaranteed security. 

• subsidiary is deemed ‘‘significant’’ (Rule 3–10(g)(1)(ii); and 

• subsidiary is not reflected in the audited consolidated results 

of the parent company for at least nine months of the most 

recent fiscal year (Rule 3–10(g)(1)). 


amozie on DSK3GDR082PROD with PROPOSALS2
49688 Federal Register / Vol. 83, No. 191 / Tuesday, October 2, 2018 / Proposed Rules 

Summary of existing Rule 3–10 Summary of proposed rules 

Exchange Act Reporting and Continuous 

Reporting Obligation.

Subsidiary issuers and guarantors that avail themselves of an exception that allows for the Alternative Disclosures in lieu of separate financial statements are exempt from Exchange Act reporting 

by Rule 12h–5. The parent company, however, must continue to 

provide the Alternative Disclosures for as long as the guaranteed 

securities are outstanding. This obligation continues even if the 

subsidiary issuers and guarantors could have suspended their reporting obligations under Exchange Act Rule 12h–3 or Section 

15(d) of the Exchange Act, had they chosen not to avail themselves of a Rule 3–10 exception and reported separately from the 

parent company. 

Subsidiary issuers and guarantors that are permitted to omit their financial statements under proposed Rule 3–10 would continue to 

be exempt from Exchange Act reporting under Rule 12h–5. The 

proposed rule would permit a parent company to cease providing 

the Proposed Alternative Disclosures if the corresponding subsidiary issuer’s or guarantor’s Section 15(d) obligation is suspended automatically by operation of Section 15(d)(1) or through 

compliance with Rule 12h–3. As a continued condition of eligibility 

to omit the financial statements of a subsidiary issuer or guarantor, a parent company must continue providing the Proposed Alternative Disclosures for so long as the subsidiary issuer or guarantor has a Section 12(b) reporting obligation with respect to the 

guarantee or guaranteed security. 

Summary of existing Rule 3–16 Summary of proposed rules 

Rule 3–16 Financial 

Statements and Proposed Disclosures.

Rule 3–16(a) requires a registrant to provide separate annual and interim financial statements for each affiliate whose securities constitute a ‘‘substantial portion’’ of the collateral for any class of securities registered or being registered as if the affiliate were a separate registrant. 

Under the proposed amendments, Rule 3–16 Financial Statements 

would be replaced with a requirement that a registrant provide the 

financial and non-financial disclosures about the affiliate(s) and the 

collateral arrangement specified in proposed Rule 13–02(a). 

When Disclosure is 

Required.

Rule 3–16 Financial Statements are required when an affiliate’s securities constitute a ‘‘substantial portion’’ of the collateral for the 

securities registered or being registered. An affiliate’s securities 

shall be deemed to constitute a ‘‘substantial portion’’ if the aggregate principal amount, par value, or book value of the securities 

as carried by the registrant, or the market value of such securities, 

whichever is the greatest, equals 20 percent or more of the principal amount of the secured class of securities (Rule 3–16(b)). 

Proposed Rule 13–02(a) would require the disclosures specified in 

proposed Rule 13–02(a)(1) through (4) in all cases, to the extent 

material to holders of the collateralized security. Additionally, proposed Rule 13–02(a)(5) would require disclosure of any quantitative or qualitative information that would be material to making 

an investment decision with respect to the collateralized security. 

Financial and Non-Financial Disclosures.Rule 3–16 Financial Statements are those that would be required if 

the affiliate were a separate registrant. 

Proposed Rule 13–02(a)(4) would require, for each affiliate whose 

securities are pledged as collateral, Summarized Financial Information, as specified in Rule 1–02(bb) of Regulation S–X, which 

would include select balance sheet and income statement line 

items. Disclosure of additional line items of financial information 

beyond what is specified in proposed Rule 13–02(a)(4) would be 

required by proposed Rule 13–02(a)(5), to the extent material. If 

the disclosures required by proposed Rule 13–02(a)(4) are omitted 

because they are immaterial, proposed Rule 13–02(a)(4) requires 

disclosure to that effect and the reasons therefore. 

Proposed Rules 13–02(a)(1) through (3) would require certain non-financial disclosures, to the extent material, about the securities 

pledged as collateral, each affiliate whose securities are pledged, 

the terms and conditions of the collateral arrangement, and whether a trading market exists for the pledged securities. Additionally, 

proposed Rule 13–02(a)(5) would require disclosure of any other 

quantitative or qualitative information that would be material to 

making an investment decision with respect to the collateralized 

security. 

Combined Basis .......... Separate Rule 3–16 Financial Statements are required for each affiliate whose securities constitute a ‘‘substantial portion’’ of the collateral for securities registered or being registered. Proposed Rule 13–02(a)(4) would permit the Summarized Financial 

Information of each affiliate consolidated in the registrant’s consolidated financial statements to be presented on a combined basis. 

However, if information provided in response to disclosures specified in proposed Rule 13–02 is applicable to one or more, but not 

all, affiliates, proposed Rule 13–02(a)(4) would require, to the extent it is material, separate disclosure of Summarized Financial Information for the affiliates to which the information applies. 

Periods Presented ....... Rule 3–16 Financial Statements are required for the same annual 

and interim periods as if the affiliate were a separate registrant. As 

such, the financial statements are required to be provided for the 

periods required by Rules 3–01 and 3–02 of Regulation S–X. 

However, Rule 3–16 Financial Statements are not required in 

quarterly reports, such as Form 10–Q. 

Proposed Rule 13–02(a)(4) would require disclosure as of and for 

the most recently ended fiscal year and interim period included in 

the registrant’s consolidated financial statements. Disclosure 

would be required in quarterly reports, such as Form 10–Q (proposed Rule 10–01(b)(10)). 

Location and Audit Requirement of the Disclosure.Rule 3–16 Financial Statements are required to be audited for the 

periods required by Rules 3–01 and 3–02 of Regulation S–X. 

The note to proposed Rule 13–02(a) would allow the registrant to 

provide the disclosures required by this section in a footnote to its 

consolidated financial statements or alternatively, in MD&A in its 

registration statement covering the offer and sale of the subject 

securities and any related prospectus, and in Exchange Act reports on Form 10–K, Form 20–F, and Form 10–Q required to be 

filed during the fiscal year in which the first bona fide sale of the 

subject securities is completed. If a registrant elects to provide the 

disclosures in its audited financial statements, the proposed disclosures would be required to be audited. If not otherwise included 

in the consolidated financial statements or in MD&A, the registrant 

would be required to include the disclosures in its prospectus immediately following ‘‘Risk Factors,’’ if any, or otherwise, immediately following pricing information described in Item 503(c) of 

Regulation S–K. The registrant would be required to provide the 

disclosures in a footnote to its consolidated financial statements in 

its annual and quarterly reports beginning with its annual report 

filed on Form 10–K or Form 20–F for the fiscal year during which 

the first bona fide sale of the subject securities is completed. 


amozie on DSK3GDR082PROD with PROPOSALS2
Federal Register / Vol. 83, No. 191 / Tuesday, October 2, 2018 / Proposed Rules 49689 

[FR Doc. 2018–19456 Filed 10–1–18; 8:45 am] 

BILLING CODE 8011–01–P 


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