59866 Federal Register / Vol. 75, No. 187 / Tuesday, September 28, 2010 / Proposed Rules 

1 17 CFR 229.303. 

2 17 CFR 229.10 et al. 3 17 CFR 249.308. 

4 17 CFR 249.220f. 

5 15 U.S.C. 78a et seq. 

6See, e.g., Disclosure in Management’s 

Discussion and Analysis About Off-Balance Sheet 

Arrangements, Contractual Obligations and 

Contingent Liabilities and Commitments, Release 

No. 33–8144 (Nov. 4, 2002) [67 FR 68054] (the ‘‘OBS 

Proposing Release’’); Disclosure in Management’s 

Discussion and Analysis About Off-Balance Sheet 

Arrangements, Contractual Obligations and 

Contingent Liabilities and Commitments, Release 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Parts 229 and 249 

[Release Nos. 33–9143; 34–62932; File No. 

S7–22–10] 

RIN 3235–AK72 

Short-Term Borrowings Disclosure 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Proposed rule. 

SUMMARY: We are proposing 

amendments to enhance the disclosure 

that registrants provide about short-term 

borrowings. Specifically, the proposals 

would require a registrant to provide, in 

a separately captioned subsection of 

Management’s Discussion and Analysis 

of Financial Condition and Results of 

Operations, a comprehensive 

explanation of its short-term 

borrowings, including both quantitative 

and qualitative information. The 

proposed amendments would be 

applicable to annual and quarterly 

reports, proxy or information statements 

that include financial statements, 

registration statements under the 

Securities Exchange Act of 1934, and 

registration statements under the 

Securities Act of 1933. We are also 

proposing conforming amendments to 

Form 8–K so that the Form would use 

the terminology contained in the 

proposed short-term borrowings 

disclosure requirement. 

In a companion release, we are 

providing interpretive guidance that is 

intended to improve overall discussion 

of liquidity and capital resources in 

Management’s Discussion and Analysis 

of Financial Condition and Results of 

Operations in order to facilitate 

understanding by investors of the 

liquidity and funding risks facing the 

registrant. 

DATES: Comments should be received on 

or before November 29, 2010. 

ADDRESSES: Comments may be 

submitted by any of the following 

methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/proposed.shtml); 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number S7–22–10 on the subject line; 

or 

• Use the Federal eRulemaking Portal 

(http://www.regulations.gov). Follow the 

instructions for submitting comments. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number S7–22–10. This file number 

should be included on the subject line 

if e-mail is used. To help us process and 

review your comments more efficiently, 

please use only one method. The 

Commission will post all comments on 

the Commission’s Internet Web site 

(http://www.sec.gov/rules/ 

proposed.shtml). Comments are also 

available for Web site viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street, NE., 

Washington, DC 20549, on official 

business days between the hours of 10 

a.m. and 3 p.m. All comments received 

will be posted without change; we do 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. 

FOR FURTHER INFORMATION CONTACT: 

Christina L. Padden, Attorney Fellow in 

the Office of Rulemaking, at (202) 551– 

3430, or Stephanie L. Hunsaker, 

Associate Chief Accountant, at (202) 

551–3400, in the Division of 

Corporation Finance; or Wesley R. 

Bricker, Professional Accounting 

Fellow, Office of the Chief Accountant 

at (202) 551–5300; U.S. Securities and 

Exchange Commission, 100 F Street, 

NE., Washington, DC 20549. 

SUPPLEMENTARY INFORMATION: We are 

proposing amendments to Item 303 1 of 

Regulation S–K 2 and amendments to 

Forms 8–K 3 and 20–F 4 under the 

Securities Exchange Act of 1934 

(‘‘Exchange Act’’).5

The proposed amendments include: 

• A new disclosure requirement in 

Management’s Discussion and Analysis 

of Financial Condition and Results of 

Operations (‘‘MD&A’’) relating to shortterm borrowings that would be 

designated as Item 303(a)(6) of 

Regulation S–K; 

• Amendments to Item 303(b) of 

Regulation S–K that would require 

interim period disclosure of short-term 

borrowings with the same level of detail 

as is proposed for annual presentation; 

• Conforming amendments to Item 5 

of Form 20–F to add short-term 

borrowings disclosure requirements; 

• Conforming amendments to the 

definition of ‘‘direct financial 

obligations’’ in Items 2.03 and 2.04 of 

Form 8–K; and 

• Revisions to Item 303 of Regulation 

S–K and Item 5 of Form 20–F to update 

the references to United States generally 

accepted accounting principles (‘‘U.S. 

GAAP’’) to reflect the release by the 

Financial Accounting Standards Board 

(‘‘FASB’’) of its FASB Accounting 

Standards Codification (‘‘FASB 

Codification’’). 

Table of Contents 

I. Background and Summary 

II. Discussion of the Proposed Amendments 

A. Short-Term Borrowings Disclosure 

B. Treatment of Foreign Private Issuers and 

Smaller Reporting Companies 

C. Leverage Ratio Disclosure Issues 

D. Technical Amendments Reflecting 

FASB Codification 

E. Conforming Amendments to Definition 

of ‘‘Direct Financial Obligation’’ in Form 

8–K 

F. Transition 

III. General Request for Comment 

IV. Paperwork Reduction Act 

A. Background 

B. Burden and Cost Estimates Related to 

the Proposed Amendments 

C. Request for Comment 

V. Cost-Benefit Analysis 

A. Introduction and Objectives of 

Proposals 

B. Benefits 

C. Costs 

D. Request for Comment 

VI. Consideration of Impact on the Economy, 

Burden on Competition and Promotion 

of Efficiency, Competition and Capital 

Formation 

VII. Small Business Regulatory Enforcement 

Fairness Act 

VIII. Initial Regulatory Flexibility Act 

Analysis 

A. Reasons for, and Objectives of, the 

Proposed Action 

B. Legal Basis 

C. Small Entities Subject to the Proposed 

Action 

D. Reporting, Recordkeeping, and other 

Compliance Requirements 

E. Duplicative, Overlapping, or Conflicting 

Federal Rules 

F. Significant Alternatives 

G. Solicitation of Comments 

IX. Statutory Authority and Text of the 

Proposed Amendments 

I. Background and Summary 

Over the past several years, we have 

provided guidance and have engaged in 

rulemaking initiatives to improve the 

presentation of information about 

funding and liquidity risk.6 As we have 

WReier-Aviles on DSKGBLS3C1PROD with PROPOSALS3

Federal Register / Vol. 75, No. 187 / Tuesday, September 28, 2010 / Proposed Rules 59867 

No. 33–8182 (Jan. 28, 2003) [68 FR 5982] (the ‘‘OBS 

Adopting Release’’) (adopting rules for disclosure in 

MD&A of off-balance sheet arrangements and 

aggregate contractual obligations); and Commission 

Guidance Regarding Management’s Discussion and 

Analysis of Financial Condition and Results of 

Operations, Release No. 33–8350 (Dec. 19, 2003) [68 

FR 75056] (the ‘‘2003 Interpretive Release’’) 

(providing interpretive guidance on disclosure in 

MD&A, including liquidity and capital resources). 

7See 2003 Interpretive Release, supra note 6, at 

75062. See also Commission Statement About 

Management’s Discussion and Analysis of Financial 

Condition and Results of Operations, Release 

No. 33–8056 (Jan. 22, 2002) [67 FR 3746] (the ‘‘2002 

Interpretive Release’’) and the OBS Adopting 

Release, supra note 6. 

8See L. H. Pedersen, When Everyone Runs for the 

Exit, 5 Int’l J. Cent. BankING 177 (2009) (‘‘[t]he 

global crisis that started in 2007 provides ample 

evidence of the importance of liquidity risk * * * 

[t]he crisis spilled over to other credit markets, 

money markets, convertible bonds, stocks and overthe-counter derivatives.’’); M. Brunnermeier, 

Deciphering the Liquidity and Credit Crunch 2007– 

2008, 23 J. Econ. Persp. 77 (2009); M. Brunnermeier 

& L. Pedersen, Market Liquidity and Funding 

Liquidity, 22 Rev. Fin. Stud. 2201 (2009); R. Huang, 

How Committed Are Bank Lines of Credit? Evidence 

from the Subprime Mortgage Crisis, (working paper) 

(Aug. 2010), available at http://www.phil.frb.org/ 

research-and-data/publications/working-papers/ 

2010/wp10-25.pdf; P. Strahan et al., Liquidity Risk 

Management and Credit Supply in the Financial 

Crisis, (working paper) (May 2010), available at 

http://papers.ssrn.com/sol3/ 

papers.cfm?abstract_id=1601992. 

9See, e.g., K. Ayotte & D. Steele, Bankruptcy or 

Bailouts?, 35 J. CORP. L. 469 (2010) (discussing 

illiquidity and insolvency for financial institutions 

in the context of the recent financial crisis); When 

the River Runs Dry, ECONOMIST, Feb. 11, 2010 

(‘‘Many of those clobbered in the crisis were struck 

down by a sudden lack of cash or funding sources, 

not because they ran out of capital.’’). 

10See D. Booth & J. Renier, Fed Policy in the 

Financial Crisis: Arresting the Adverse Feedback 

Loop, FRBD Economic Letter (Sept. 2009), available 

at http://www.dallasfed.org/research/eclett/2009/ 

el0907.html (‘‘Many businesses were hampered by 

the squeeze on short-term financing, a key source 

of working capital needed to prevent deeper 

reductions in inventories, jobs and wages.’’). 

11See, generally, B. Becker & V. Ivashina, 

Cyclicality of Credit Supply: Firm Level Evidence 

(May 2010) (Harvard Working Paper); C. M. James, 

Credit Market Conditions and the Use of Bank Lines 

of Credit, FRBSF Economic Letter 2009–27 (Aug. 

2009), available at http://www.frbsf.org/ 

publications/economics/letter/2009/el2009-27; M. 

Campello et al., Liquidity Management and 

Corporate Investment During a Financial Crisis 

(July 2010) (working paper) (examining how nonfinancial companies choose among various sources 

of liquidity), available at http:// 

faculty.fuqua.duke.edu/∼charvey/Research/ 

Working_Papers/ 

W99_Liquidity_management_and.pdf; V. Ivashina & 

D. Scharfstein, Bank Lending During the Financial 

Crisis of 2008, J. FIN. ECON. (forthcoming), 

available at http://ssrn.com/abstract=1297337 

(examining the increase in draw-downs or threats 

of draw-downs of existing credit lines by 

commercial and industrial firms and the related 

impact on bank lending). 

12See S. Sood, Is the Ride Coming to an End?, 

Global Investor, May 1, 2009 (‘‘Treasurers need to 

look harder at a broader range of funding 

alternatives, e.g., debt factoring, invoice factoring 

and trade finance which are essentially forms of 

collateralized financing’’); M. Lemmon et al., The 

Use of Asset-backed Securitization and Capital 

Structure in Industrial Firms: An Empirical 

Investigation (May 2010), available at http:// 

www.fma.org. 

13See J. Tirole, Illiquidity and All Its Friends 

(Bank for International Settlements, Working Paper 

No. 303, 2010), available at http://www.bis.org 

(‘‘[t]he recent crisis, we all know, was characterized 

by massive illiquidity.’’ In addition, ‘‘Overall there 

has been a tremendous increase in the proportion 

of short-term liabilities in the financial sector’’). See 

also, e.g., P. Eavis, Lehman’s Racy Repo, WALL ST. 

J., Mar. 12, 2010 (suggesting that repo financing ‘‘is 

highly vulnerable in times of panic, as the credit 

crisis showed’’); A. Martin et al., Repo Runs, 

FRBNY Staff Report No. 444 (Apr. 2010) 

(demonstrating that institutions funded by shortterm collateralized borrowings are subject to the 

threat of runs similar to those faced by commercial 

banks). 

14See, e.g., Brunnermeier, supra note 8, at 79–80; 

see also C. Borio, Market Distress and Vanishing 

Liquidity: Anatomy and Policy Options (Bank for 

International Settlements, Working Paper No. 158, 

2004), available at http://www.bis.org (‘‘Under 

stress, risk management practices, funding liquidity 

constraints, and in the most severe cases, concerns 

with counter-party risk become critical.’’). 

15See, e.g., the Division of Corporation Finance, 

Sample Letter Sent to Public Companies Asking for 

Information Related to Repurchase Agreements, 

Securities Lending Transactions, or Other 

Transactions Involving the Transfer of Financial 

Assets (Mar. 2010) (the ‘‘2010 Dear CFO Letter’’), 

available at http://www.sec.gov/divisions/corpfin/ 

guidance/cforepurchase0310.htm. 

16See V. Kotomin & D. Winters, Quarter-End 

Effects in Banks: Preferred Habitat or Window 

Dressing?, 29 J. FIN. RES. 1 (2006); M. Rappaport 

& T. McGinty, Banks Trim Debt, Obscuring Risks, 

WALL ST. J., May 25, 2010. 

17See, e.g., W. Dudley, President & CEO, FRBNY, 

Remarks at the Center for Economic Policy Studies 

Symposium: More Lessons From the Crisis, (Nov. 

13, 2009), available at http://newyorkfed.org/ 

newsevents/speeches/2009/dud091113.html (noting 

‘‘[a] key vulnerability turned out to be the misplaced 

assumption that securities dealers and others would 

be able to obtain very large amounts of short-term 

funding even in times of stress.’’); J. Lahart, U.S. 

Firms Build Up Record Cash Piles, WALL ST. J., 

June 10, 2010 (‘‘In the darkest days of late 2008, 

even large companies faced the threat that they 

wouldn’t be able to do the everyday, short-term 

borrowing needed to make payrolls and purchase 

inventory.’’). 

18See, e.g., Financial Crisis Inquiry Commission, 

Hearing on ‘‘The Shadow Banking System’’ (May 5, 

2010) (transcript available at http://www.fcic.gov/ 

hearings/pdfs/2010-0505-Transcript.pdf). 

19See Item 303(a)(1) and (2) of Regulation S–K 

and Instruction 5 to paragraph 303(a) [17 CFR 

229.303] (noting that liquidity generally shall be 

Continued 

emphasized in past guidance, MD&A 

disclosure relating to liquidity and 

capital resources is critical to an 

assessment of a company’s prospects for 

the future and even the likelihood of its 

survival.7 We believe that leverage and 

liquidity continue to be significant areas 

of focus for investors,8 particularly as 

many failures in the financial crisis 

arose due to liquidity constraints.9

A critical component of a company’s 

liquidity and capital resources is often 

its access to short-term borrowings for 

working capital and to fund its 

operations.10 Traditional sources of 

funding, such as trade credit, bank 

loans, and long-term or medium-term 

debt instruments, remain important for 

many types of businesses.11 However, 

other short-term financing techniques, 

including commercial paper, repurchase 

transactions and securitizations, have 

become increasingly common among 

financial institutions and industrial 

companies alike.12

Recent events have shown that these 

types of arrangements can be impacted, 

sometimes severely and rapidly, by 

illiquidity in the markets as a whole.13

When market liquidity is low, shortterm borrowings present increased risks: 

that financing rates will increase or 

terms will become unfavorable, that it 

will be more costly or impossible to roll 

over short-term borrowings, or for 

financial institutions, that demand 

depositors will withdraw funds.14

Moreover, short-term financing 

arrangements can present complex 

accounting and disclosure issues, even 

when market conditions are stable.15

Due to their short-term nature, a 

company’s use of such arrangements 

can fluctuate materially during a 

reporting period, which means that 

presentation of period-end amounts of 

short-term borrowings alone may not be 

indicative of that company’s funding 

needs or activities during the period. 

For example, a bank that routinely 

enters into repurchase transactions 

during the quarter might curtail that 

activity at quarter-end,16 resulting in a 

period-end amount of outstanding 

borrowings that does not necessarily 

reflect its business operations or related 

risks. Likewise, a retailer may have 

significant short-term borrowings during 

the year to finance inventory that is sold 

by year-end (and where those short-term 

borrowings are repaid by year-end). In 

that case, where the need to finance 

inventory purchases fluctuates, 

impacted by the timing and volume of 

inventory sales, the ability to have 

access to short-term borrowings may be 

very important to the company. 

Therefore, although the financial 

services sector has been in the spotlight, 

the issues arising from short-term 

borrowings are not limited to that 

sector.17

Recent events have suggested that 

investors could benefit from additional 

transparency about companies’ shortterm borrowings, including particularly 

whether these borrowings vary 

materially during reporting periods 

compared to amounts reported at 

period-end without investor 

appreciation of those variations.18

Although current MD&A rules generally 

require disclosure of a registrant’s use of 

short-term borrowing arrangements and 

the registrant’s exposure to related risks 

and uncertainties,19 without a specific 

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59868 Federal Register / Vol. 75, No. 187 / Tuesday, September 28, 2010 / Proposed Rules 

discussed on both a long-term and short-term basis); 

see also 2002 Interpretive Release, supra note 7 

(providing interpretive guidance on MD&A, noting 

‘‘registrants should consider describing the sources 

of short-term funding and the circumstances that 

are reasonably likely to affect those sources of 

liquidity’’). 

20See 17 CFR 229.801, Item VII. 

21 Guide 3, as originally promulgated in 1968 

under the designations Guide 61 and Guide 3, 

served as an expression of the policies and practices 

of the Commission’s Division of Corporation 

Finance in order to assist issuers in the preparation 

of their registration statements and reports. See 

Guides for Preparation and Filing of Registration 

Statements, Release No. 33–4936 (Dec. 9, 1968) [33 

FR 18617]. In 1982, these guides were redesignated 

as Securities Act Industry Guide 3 and Exchange 

Act Industry Guide 3, and were included in the list 

of industry guides in Items 801 and 802 of 

Regulation S–K, but were not codified as rules. See 

Rescission of Guides and Redesignation of Industry 

Guides, Release No. 33–6384 [47 FR 11476], at 

11476 (‘‘The list of industry guides has been moved 

into Regulation S–K, which serves as the central 

repository of disclosure requirements under the 

Securities Act and Exchange Act, in order to more 

effectively put registrants on notice of their 

existence. These guides remain as an expression of 

the policies and practices of the Division of 

Corporation Finance and their status is unaffected 

by this change.’’) If the proposed amendments are 

adopted, the Commission would authorize its staff 

to amend Guide 3 to eliminate Item VII in its 

entirety. 

22See Items 303(a)(4) and (5) of Regulation S–K 

[17 CFR 229.303(a)(4) and (5)]. 

23See 2003 Interpretive Release, supra note 6, at 

75056. 

24See Item 303(a)(1) of Regulation S–K [17 CFR 

229.303(a)(1)]. 

25 Id. 

26See Item 303(a)(2)(ii) of Regulation 

S–K [17 CFR 229.303(a)(2)]. 

27 Id. 

28See 17 CFR 229.801. Bank holding companies 

typically include this disclosure in the MD&A 

section of their filings. 

29See Proposed Revision of Financial Statement 

Requirements and Industry Guide Disclosures for 

Bank Holding Companies, Release No. 33–6417 

(July 9, 1982) [47 FR 32158] at 32159. 

30See Item VII of Guide 3. 

31 Id. Item VII of Guide 3 calls for the presentation 

of information for each category of short-term 

borrowings that is reported in the financial 

statements pursuant Article 9 of Regulation S–X. 

Rule 9–03.13(3) of Regulation S–X [17 CFR 210.9– 

03.13(3)] requires separate balance sheet disclosure 

of ‘‘amounts payable for (1) Federal funds 

requirement to disclose information 

about intra-period short-term 

borrowings, investors may not have 

access to sufficient information to 

understand companies’ actual funding 

needs and financing activities or to 

evaluate the liquidity risks faced by 

companies during the reporting period. 

To address these issues, we are 

proposing to amend the MD&A 

requirements to enhance disclosure that 

registrants provide regarding the use 

and impact of short-term financing 

arrangements during each reporting 

period. The principal aspects of the 

proposals are outlined below. 

First, the proposed amendments 

would add new disclosure requirements 

relating to short-term borrowings, 

similar to the provisions for annual 

disclosure of short-term borrowings that 

are currently applicable to bank holding 

companies in accordance with the 

disclosure guidance set forth in Industry 

Guide 3, Statistical Disclosure by Bank 

Holding Companies (‘‘Guide 3’’).20 The 

proposed amendments would codify the 

Guide 3 provisions for disclosure of 

short-term borrowings in Regulation 

S–K, would require disclosure on an 

annual and quarterly basis, and would 

be expanded to apply to all companies 

that provide MD&A disclosure, not only 

to financial institutions. If the proposals 

are adopted, we expect to authorize the 

Commission’s staff to eliminate the 

corresponding provisions of Guide 3 to 

avoid redundant disclosure 

requirements.21

Second, we are proposing 

amendments to the requirements 

applicable to ‘‘foreign private issuers’’ in 

the ‘‘Operating and Financial Review 

and Prospects’’ item in Form 20–F to 

add short-term borrowings disclosure 

requirements, which would be 

substantially similar to the proposed 

amendments to MD&A, but without the 

requirement for quarterly reporting 

since foreign private issuers are not 

subject to quarterly reporting 

requirements. 

Third, we are proposing conforming 

amendments to the definition of ‘‘direct 

financial obligations’’ in Items 2.03 and 

2.04 of Form 8–K. 

Finally, the proposed amendments 

would update the references to U.S. 

GAAP in Item 303 of Regulation S–K 

and Item 5 of Form 20–F to reflect the 

FASB Codification. 

Over time, to enhance the information 

provided to investors through MD&A we 

have supplemented the principles-based 

disclosure requirements governing 

MD&A with more detailed and specific 

MD&A disclosure requirements, such as 

the contractual obligations table and the 

off-balance sheet arrangements 

disclosure requirements.22 Our proposal 

to require quantitative and qualitative 

information about short-term 

borrowings is similarly designed to 

enhance investor understanding of a 

company’s financial position and 

liquidity. We emphasize, however, that 

the addition of these specific disclosure 

requirements to MD&A supplements, 

and is not a substitute for the required 

discussion and analysis that enables 

investors to understand the company’s 

business as seen through the eyes of 

management.23

In a companion release, we are 

providing interpretive guidance that is 

intended to improve the overall 

discussion of liquidity and funding in 

MD&A in order to facilitate 

understanding by investors of the 

liquidity and funding risks facing 

registrants. 

II. Discussion of the Proposed 

Amendments 

A. Short-Term Borrowings Disclosure 

1. Existing Requirements for Disclosure 

of Short-Term Borrowings 

Existing MD&A requirements call for 

discussion and analysis of a registrant’s 

liquidity and capital resources. With 

respect to liquidity, registrants must 

identify any known trends or any 

known demands, commitments, events 

or uncertainties that will result in or 

that are reasonably likely to result in the 

registrant’s liquidity increasing or 

decreasing in any material way.24

Registrants are also required to identify 

and separately describe internal and 

external sources of liquidity.25 With 

respect to capital resources, a registrant 

is required to describe any known 

material trends, favorable or 

unfavorable, in its capital resources, 

indicating any expected material 

changes in the mix and relative cost of 

such resources.26 In its discussion of 

capital resources, a registrant is also 

required to consider changes between 

equity, debt and any off-balance sheet 

financing arrangements.27 However, 

other than in connection with this 

discussion of liquidity and capital 

resources under Item 303(a)(1) and (2) of 

Regulation S–K, companies that do not 

provide Guide 3 disclosure are not 

subject to any line item requirements for 

the reporting of specific data regarding 

short-term borrowing amounts or 

information about intra-period 

borrowing levels. 

Registrants that are bank holding 

companies provide statistical 

disclosures in accordance with the 

industry guidance set forth in Guide 3.28

Guide 3 is primarily intended to provide 

supplemental data to facilitate analysis 

and to allow for comparisons of sources 

of income and evaluations of exposures 

to risk.29 One of the important 

provisions of Guide 3 is annual 

disclosure of average, maximum monthend, and period-end amounts of shortterm borrowings.30 Registrants that 

follow the provisions of Guide 3 provide 

three years of annual data, broken out 

into three categories of short-term 

borrowings, namely: Federal funds 

purchased and securities sold under 

agreements to repurchase, commercial 

paper, and other short-term 

borrowings.31 We believe that this data 

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Federal Register / Vol. 75, No. 187 / Tuesday, September 28, 2010 / Proposed Rules 59869 

purchased and securities sold under agreements to 

repurchase, (2) commercial paper, and (3) other 

short-term borrowings.’’ 32As described below in this release, in codifying 

the Guide 3 short-term borrowings provisions in 

Regulation S–K, we are proposing several changes 

from the existing provisions of Item VII of Guide 3. 

The changes include: Expanding the categories of 

short-term borrowings that require disclosure; 

expanding the applicability to all registrants that 

are required to provide MD&A disclosure; requiring 

financial companies to provide disclosure of the 

daily maximum amount during the period, as well 

as averages on a daily average basis; requiring a 

discussion and analysis of short-term borrowings 

arrangements; and requiring quarterly reporting of 

short-term borrowings. See ‘‘Proposed New ShortTerm Borrowings Disclosure in MD&A.’’ 

33See Financial Statements of Significant Foreign 

Equity Investees and Acquired Foreign Businesses 

of Domestic Issuers and Financial Schedules, 

Release No. 33–7118 (Dec. 13, 1994) [59 FR 65632]. 

34 17 CFR 210.12–10. 

35The categories in former Rule 12–10 were 

amounts payable to: banks for borrowings; factors 

or other financial institutions for borrowings; and 

holders of commercial paper. 

36See Financial Statements of Significant Foreign 

Equity Investees and Acquired Foreign Businesses 

of Domestic Issuers and Financial Schedules, 

Release No. 33–7055 (Apr. 19, 1994) [59 FR 21814], 

at 21818. 37See Release No. 33–7118, supra note 30, at 

65635. 

is useful to show the types of short-term 

financings constituting a portion of the 

bank holding company’s liquidity 

profile, as well as to highlight 

differences between period-end and 

intra-period short-term financing 

activity and the overall liquidity risks it 

faces during the period. Given the 

utility of this data in analyzing liquidity 

and funding risks, we are proposing to 

require all registrants to provide 

disclosure in their MD&A similar to the 

short-term borrowings information 

called for by Guide 3.32 Further, since 

liquidity and funding risks can change 

rapidly over the course of a year, we are 

proposing to require the information for 

both annual and interim periods. 

We note that, in 1994, in connection 

with the elimination of various financial 

statement disclosure schedules, the 

Commission eliminated a short-term 

borrowings disclosure requirement for 

registrants that were not bank holding 

companies, which was similar to the 

existing Guide 3 short-term borrowings 

disclosure guidance.33 Former Rule 12– 

10 of Regulation S–X 34 required those 

registrants to include with their 

financial statements a schedule of shortterm borrowings that disclosed the 

maximum amount outstanding during 

the year, the average amount 

outstanding during the year, and the 

weighted-average interest rate during 

the period, with amounts broken out 

into specified categories of short-term 

borrowings.35

While former Rule 12–10 of 

Regulation S–X was similar to the shortterm borrowing requirements proposed 

in this release, we believe there are 

important differences. In proposing to 

eliminate the schedule, the Commission 

noted that ‘‘the disclosures concerning 

the registrant’s liquidity and capital 

resources that are required in MD&A 

would appear to be sufficiently 

informational to permit elimination of 

the short-term borrowing schedule.’’ 36

Although we believe that a thorough 

discussion of liquidity and capital 

resources under existing MD&A 

requirements often would provide 

qualitative information comparable to 

that elicited by the proposed 

requirements, we expect that the 

proposed requirements would serve as a 

useful framework for the provision of 

both quantitative and qualitative 

information about short-term 

borrowings that would supplement the 

registrant’s discussion of liquidity and 

capital resources. We also believe that, 

in contrast to the presentation required 

in the financial statement schedule that 

was eliminated in 1994, the information 

would be more useful to investors if it 

is provided in MD&A, in tabular form, 

coupled with a discussion and analysis 

to provide context for the quantitative 

data. 

Among the primary reasons cited for 

the repeal of Rule 12–10 were the 

practical difficulties involved in 

gathering the data and preparing 

meaningful disclosure.37 We note that 

some of those practical difficulties may 

be less relevant today because of 

technological advancements in 

accounting systems that have become 

more widely used by companies since 

1994. In addition, the requirements 

proposed today contain a number of 

features designed to address some of the 

practical difficulties cited by prior 

commentators in connection with 

former Rule 12–10. More importantly, 

however, recent events suggest that 

more detailed information about average 

short-term borrowings would facilitate a 

better understanding of whether a 

registrant’s period-end figures are 

indicative of levels during the period. In 

light of these changes, we believe the 

balance of factors may have shifted, 

such that the utility of the disclosure 

justifies the burden of preparing it. 

2. Proposed New Short-Term 

Borrowings Disclosure in MD&A 

Summary of Proposed Requirements 

We are proposing to amend our 

MD&A requirements to include a new 

section that would provide tabular 

information about a company’s shortterm borrowings, as well as a discussion 

and analysis of those short-term 

borrowings. We note that the current 

Guide 3 disclosure of short-term 

borrowings does not call for a 

qualitative discussion of the reasons for 

use by a registrant of the particular 

types of financing techniques, or of the 

drivers of differences between average 

amounts and period-end amounts 

outstanding for the period. We believe 

that including a requirement for a 

narrative explanation together with 

tabular data would provide important 

information so that investors can better 

understand the role of short-term 

financing and its related risks to the 

registrant as viewed through the eyes of 

management. 

The proposed amendments would 

codify in Regulation S–K the Guide 3 

provisions for disclosure of short-term 

borrowings applicable to bank holding 

companies and would apply to all 

companies that provide MD&A 

disclosure, not only to bank holding 

companies and other financial 

institutions. If the proposals are 

adopted, we expect to authorize the 

Commission’s staff to eliminate the 

corresponding provisions of Guide 3 in 

their entirety to avoid redundant 

disclosure requirements for bank 

holding companies. As proposed, 

registrants would be required to provide 

disclosure in MD&A of: 

• The amount in each specified 

category of short-term borrowings at the 

end of the reporting period and the 

weighted average interest rate on those 

borrowings; 

• The average amount in each 

specified category of short-term 

borrowings for the reporting period and 

the weighted average interest rate on 

those borrowings; 

• For registrants meeting the 

proposed definition of ‘‘financial 

company,’’ the maximum daily amount 

of each specified category of short-term 

borrowings during the reporting period; 

and 

• For all other registrants, the 

maximum month-end amount of each 

specified category short-term 

borrowings during the reporting period. 

We believe that the largest amount of 

short-term borrowings outstanding 

during the period is an important data 

point for assessing the intra-period 

fluctuation of short-term borrowings 

and, thus, of liquidity risk. Given the 

critical nature of liquidity and funding 

matters to a financial company’s 

business activities, we believe it may be 

important for an investor to know the 

maximum amount that a financial 

company has borrowed in any given 

period as an indication of its short-term 

financing needs. We are proposing that 

financial companies be required to 

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59870 Federal Register / Vol. 75, No. 187 / Tuesday, September 28, 2010 / Proposed Rules 

38Consistent with the approach taken in Guide 3 

and in former Rule 12–10 of Regulation S–X, we 

propose to define ‘‘short-term borrowings’’ by 

reference to the amounts payable for various 

categories of short-term obligations that are 

typically stated separately on the balance sheet in 

accordance with Regulation S–X. Under U.S. 

GAAP, short-term obligations are those that are 

scheduled to mature within one year after the date 

of an entity’s balance sheet or, for those entities that 

use the operating cycle concept of working capital, 

within an entity’s operating cycle that is longer than 

one year. See FASB ASC 210–10–20. As such, the 

proposed definition of short-term borrowings is 

intended to be a subset of short-term obligations 

under U.S. GAAP. 

39This last category is derived from the balance 

sheet line item in Rule 9–03.13(3) of Regulation S– 

X [17 CFR 210.9–03.13(3)] for ‘‘other short-term 

borrowings.’’ Amounts that a registrant includes on 

its balance sheet under a line item for ‘‘other shortterm borrowings’’ that do not fall into one of the 

other proposed categories would be disclosed under 

this category. 

40 17 CFR 210.9–03. 

41Rule 5–02.19(a) of Regulation S–X [17 CFR 

210.5–02.19(a)] also requires separate disclosure in 

the balance sheet of amounts payable to trade 

creditors, related parties, and underwriters, 

promoters and employees (other than related 

parties). Consistent with the approach taken in 

former Rule 12–10 of Regulation S–X and in 

existing Guide 3 provisions, we are proposing to 

define short-term borrowings more narrowly than 

‘‘current liabilities’’ or ‘‘short-term obligations.’’ 

42Registrants that are insurance companies 

follow Article 7 of Regulation S–X, which also 

incorporates certain standards of Article 5. For 

example, under Rule 7–03.16(b), insurance 

companies must include disclosure required by 

Rule 5–02.19(b), if the aggregate short-term 

borrowings from banks, factors and other financial 

institutions and commercial paper issued exceeds 

five percent of total liabilities. See 17 CFR 210.5– 

02.19(b) and 17 CFR 210.7–03.16(b). 

43 In such circumstances, a registrant should 

consider whether additional information should be 

provided to identify the financial statement line 

items where the period-end short-term borrowings 

amounts are reported. 

44See proposed Instruction 1 to Item 5.H of Form 

20–F. This approach is consistent with the existing 

Instruction 5 to Item 5 of Form 20–F for issuers that 

file financial statements that comply with 

International Financial Reporting Standards 

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

Standards Board (‘‘IASB’’). It is also consistent with 

the approach taken for tabular disclosure of 

contractual obligations in Form 20–F for filers that 

do not use U.S. GAAP. 

45See Instruction to Item VII of Guide 3. If the 

proposals are adopted, we expect to authorize our 

staff to eliminate Item VII of Guide 3 in its entirety. 

In that case, a registrant that provides Guide 3 

information would need to follow the proposed 

Item 303(a)(6) for its short-term borrowings 

disclosure in MD&A. 

disclose the maximum daily amount of 

short-term borrowings outstanding. Both 

Guide 3 and former Rule 12–10 called 

for disclosure of the maximum monthend amounts, which is the standard we 

are proposing to require for registrants 

that are not ‘‘financial companies.’’ As 

explained below, we are proposing 

monthly, rather than daily, maximum 

amounts for non-financial companies in 

view of the costs that non-financial 

companies may encounter in recording 

daily amounts and the information 

needs of investors. 

Definition of Short-Term Borrowings 

Under the proposed rule, ‘‘short-term 

borrowings’’ would be defined by 

reference to the various categories of 

arrangements that comprise the shortterm obligations reflected in a 

registrant’s financial statements, and all 

registrants would be required to present 

information for each category of shortterm borrowings.38 Specifically, as 

proposed, ‘‘short-term borrowings’’ 

would mean amounts payable for shortterm obligations that are: 

• Federal funds purchased and 

securities sold under agreements to 

repurchase; 

• Commercial paper; 

• Borrowings from banks; 

• Borrowings from factors or other 

financial institutions; and 

• Any other short-term borrowings 

reflected on the registrant’s balance 

sheet.39

These categories are derived from the 

categories of short-term borrowings 

specified in Guide 3 and Rule 9–03 of 

Regulation S–X,40 as well as certain 

categories of current liabilities set forth 

in Rule 5–02 of Regulation S–X.41

Registrants that are bank holding 

companies and other companies that 

follow Guide 3 prepare their financial 

statements in accordance with Article 9 

of Regulation S–X and present separate 

line items for categories of short-term 

borrowings on the face of their balance 

sheets under Rule 9–03 of Regulation S– 

X. Registrants that are commercial or 

industrial companies prepare their 

financial statements in accordance with 

Article 5 of Regulation S–X and present 

separate categories of current liabilities 

on the face of their balance sheets under 

Rule 5–02 of Regulation S–X.42

Categories and Disaggregation 

Rather than creating different 

disclosure categories for registrants 

based solely on existing financial 

reporting rules applicable to certain 

types of entities, the proposed 

requirement draws on the categories 

from both Rule 9–03 and Rule 5–02 so 

that a registrant must present each of the 

categories that is relevant to the types of 

short-term financing activities it 

conducts, even if that category is not 

required to be reported as a separate line 

item on its balance sheet under 

Regulation S–X.43 As a result, for 

example, registrants currently subject to 

Guide 3 would need to provide 

disclosure for the same categories as all 

other registrants. We believe this 

approach will result in more meaningful 

disclosure, since it will elicit more 

specific information regarding the 

borrowing methods actually used by the 

registrant. Foreign private issuers that 

do not prepare financial statements 

under U.S. GAAP would be permitted to 

provide disclosure of categories that 

correspond to the classifications used 

for such types of short-term borrowings 

under the comprehensive set of 

accounting principles that the company 

uses to prepare its primary financial 

statements, so long as the disclosure is 

provided at a level of detail that satisfies 

the objective of the disclosure 

requirement.44

The proposed requirements do not 

include a quantitative threshold for 

purposes of disaggregating amounts into 

categories of short-term borrowings. For 

bank holding companies, this would be 

a change from existing Guide 3 

instructions, which allow categories to 

be aggregated where they do not exceed 

30% of the company’s stockholders’ 

equity at the end of the period.45 On the 

one hand, including such a threshold 

could ease the compliance burden for a 

company where the distinction among 

categories of short-term borrowings is 

not material. On the other hand, 

including such a quantitative threshold 

could diminish the comparability of 

information across companies and, more 

fundamentally, could defeat the 

objective of specifically highlighting the 

types of short-term borrowing 

arrangements that expose registrants to 

liquidity risks. Accordingly, the 

allocation of amounts into the various 

categories is intended to achieve this 

purpose so that investors can assess the 

proportionate exposure to the funding 

risk and market risk inherent in the 

borrowing arrangements. 

In circumstances where aggregate 

amounts within a category of short-term 

borrowings are subject to a wide range 

of interest rates and exchange rates, we 

note that disclosure of those aggregate 

amounts may not be comparable or 

meaningful. For example, a company 

with operations outside of the United 

States may have, for a variety of reasons 

(such as the need to finance its 

subsidiaries in local currency or as a 

hedge against an asset denominated in 

that currency), foreign currencydenominated borrowings that have a 

significantly higher interest rate than 

the rate on its dollar-denominated 

borrowings. Under those circumstances, 

combining the dollar-denominated 

borrowings with the foreign currencydenominated borrowings could distort 

the presentation of the interest rates for 

the company, causing the combined 

weighted average interest rate on the 

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46We are not proposing a specific threshold or 

definition of ‘‘significant’’ for this purpose. As 

described below, we are proposing an instruction 

that allows a registrant to present the short-term 

borrowings attributable to any non-financial 

operations separately using the reporting rules for 

non-financial companies. 

47 15 U.S.C. 78c. See also proposed Item 

303(a)(6)(iv) of Regulation S–K and Item 5.H.4 of 

Form 20–F. 

48Business development companies are a 

category of closed-end investment companies that 

are not registered under the Investment Company 

Act of 1940, but are subject to certain provisions of 

that Act. See Section 2(a)(48) and Sections 54–65 

of the Investment Company Act of 1940 [15 U.S.C. 

80a–2(a)(48) and 80a–53–64]. 

49A mortgage real estate investment trust, or 

mortgage REIT, is a type of real estate investment 

trust that invests in mortgages and interests in 

mortgages. Mortgage REITs typically rely on the 

exemption from registration under the Investment 

Company Act of 1940 provided by Section 

3(c)(5)(C) of that Act. [15 U.S.C. 80a–3(c)(5)(C)]. 

50We note that the Dodd-Frank Wall Street 

Reform and Consumer Protection Act of 2010 (Pub. 

L. 111–203) (‘‘Dodd-Frank Act’’) includes defined 

terms for ‘‘financial institution,’’ ‘‘financial 

company,’’ and ‘‘non-bank financial company’’ 

which are used in various contexts in that 

legislation. Our proposed definition of ‘‘financial 

company’’ is informed by the terms used in the 

legislation, but is not exactly the same. Because 

each of those terms has a definition specific to the 

regulatory purpose of the section of the legislation 

in which it is used, none is perfectly aligned with 

the disclosure aim of our proposed requirement. 

Therefore, in keeping with the over-arching 

principles-based approach to MD&A requirements, 

we are proposing a definition of ‘‘financial 

company’’ based on the types of business activities 

that expose a company to similar liquidity risks that 

banks face. 

The enumerated examples of entities that would 

be considered ‘‘financial companies’’ for purposes of 

the proposed rule are similar to the entities covered 

by the definition of ‘‘financial institution’’ contained 

in Sec. 803 of the Dodd-Frank Act, which includes: 

A depository institution, as defined in Section 3 of 

the Federal Deposit Insurance Act (12 U.S.C. 1813); 

a branch or agency of a foreign bank, as defined in 

Section 1(b) of the International Banking Act of 

1978 (12 U.S.C. 3101); an organization operating 

under Section 25 or 25A of the Federal Reserve Act 

(12 U.S.C. 601–604a and 611 through 631); a credit 

union, as defined in Section 101 of the Federal 

Credit Union Act (12 U.S.C. 1752); a broker or 

dealer, as defined in Section 3 of the Securities 

Exchange Act of 1934 (15 U.S.C. 78c); an 

investment company, as defined in Section 3 of the 

Investment Company Act of 1940 (15 U.S.C. 80a– 

3); an insurance company, as defined in Section 2 

of the Investment Company Act of 1940 (15 U.S.C. 

80a–2); an investment adviser, as defined in Section 

202 of the Investment Advisers Act of 1940 (15 

U.S.C. 80b–2); a futures commission merchant, 

commodity trading advisor, or commodity pool 

operator, as defined in Section 1a of the Commodity 

Exchange Act (7 U.S.C. 1a); and any company 

engaged in activities that are financial in nature or 

incidental to a financial activity, as described in 

Section 4 of the Bank Holding Company Act of 1956 

(12 U.S.C. 1843(k)). 

In addition, we expect that registrants that meet 

the existing definition of ‘‘bank holding company’’ 

in Rule 1–02 of Regulation S–X [17 CFR 210.1–02] 

would be ‘‘financial companies’’ under the proposed 

definition. 

borrowings to be much higher than the 

company would incur to borrow in U.S. 

dollars alone. This would be 

particularly true if the borrowings are 

denominated in the currency of an 

economy that has experienced high 

rates of inflation. To address this issue, 

the proposal would include a 

requirement to further disaggregate 

amounts by currency or interest rate to 

the extent necessary to promote 

understanding or to prevent aggregate 

amounts from being misleading. 

Additional footnote disclosure 

describing the method for 

disaggregation is proposed to be 

required where necessary to an 

understanding of the data, stating, for 

example, the timing and exchange rates 

used for currency translations and any 

other pertinent data relating to the 

calculation of the amounts provided. 

Requirements for ‘‘Financial 

Companies’’ and Other Companies 

As noted above, the proposed rule 

would distinguish between registrants 

that engage in financial activities as 

their business and all other registrants 

for purposes of calculating and 

reporting maximum amounts 

outstanding and average amounts 

outstanding during the reporting period. 

Registrants that are ‘‘financial 

companies’’ would be required to 

compile and report data for the 

maximum daily amounts outstanding 

(meaning the largest amount 

outstanding at the end of any day in the 

reporting period) and the average 

amounts outstanding during the 

reporting period computed on a daily 

average basis (meaning the amount 

outstanding at the end of each day, 

averaged over the reporting period). 

Registrants that are not ‘‘financial 

companies’’ would be required to report 

the maximum month-end amounts 

outstanding (meaning the largest 

amount outstanding at the end of the 

last day of any month in the reporting 

period) and would be required to 

disclose the basis used for calculating 

the average amounts reported. These 

registrants would not be required to 

present average outstanding amounts 

computed on a daily average basis, but, 

under the proposal, the averaging period 

used must not exceed a month. 

For purposes of the proposed 

requirement, a ‘‘financial company’’ 

would mean a registrant that, during the 

relevant reported period, is engaged to 

a significant extent 46 in the business of 

lending, deposit-taking, insurance 

underwriting or providing investment 

advice, or is a broker or dealer as 

defined in Section 3 of the Exchange 

Act,47 and includes, without limitation, 

an entity that is, or is the holding 

company of, a bank, a savings 

association, an insurance company, a 

broker, a dealer, a business development 

company,48 an investment adviser, a 

futures commission merchant, a 

commodity trading advisor, a 

commodity pool operator, or a mortgage 

real estate investment trust.49 Although 

this non-exclusive list 50 would be 

provided in the rule as guidance to 

registrants, the proposed definition 

itself is intentionally flexible, so that 

disclosure of maximum daily amount 

outstanding and the average amount 

outstanding during the reporting period 

computed on a daily average basis 

would be required to be provided by 

registrants that are engaged to a 

significant extent in the business of 

lending, deposit-taking, insurance 

underwriting, providing investment 

advice, or are brokers or dealers or any 

of the other enumerated types of 

entities, regardless of their nominal 

industry affiliation, organizational 

structure or primary regulator. 

Some registrants that are engaged in 

both financial and non-financial 

businesses may meet the definition of 

‘‘financial company,’’ such as 

manufacturing companies that have a 

subsidiary that provides financing to its 

customers to purchase its products. For 

those registrants, the costs involved in 

providing averages computed on a daily 

average basis and maximum daily 

amounts of short-term borrowings may 

not be justified by the benefit to 

investors, where only a portion of their 

activities are financial in nature. To 

address this, the proposal would 

provide an instruction that would 

permit a company to provide separate 

short-term borrowings disclosure for its 

financial and non-financial business 

operations. A company relying on the 

instruction would be required to 

provide averages computed on a daily 

average basis and maximum daily 

amounts for the short-term borrowings 

arrangements of its financial operations, 

and would be permitted to follow the 

requirements and instructions 

applicable to non-financial companies 

for purposes of the short-term 

borrowings arrangements of its nonfinancial operations. The instruction 

would also require the company to 

provide an explanatory footnote to the 

table with information to enable readers 

to understand how the operations were 

grouped for purposes of the disclosure. 

Although investors could benefit from 

having all registrants provide data for 

maximum daily amounts and average 

amounts computed on a daily average 

basis, we preliminarily believe that it is 

appropriate to limit these daily 

requirements to entities that are engaged 

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51See proposed Item 303(a)(6)(ii) of Regulation 

S–K. 

52A discussion of the business purpose of the 

arrangements might encompass topics such as the 

use of proceeds of the borrowings and the reasons 

for the particular structure of the arrangements. 

53Similar to the existing requirement in Item 

303(a)(4)(i)(B) of Regulation S–K, this proposed 

requirement is intended to provide investors with 

an understanding of the importance to the registrant 

of its short-term borrowings as a financial matter 

and as they relate to the funding of its operations 

and to its risk management activities. 

54See Item 303(a)(1) and (a)(2) of Regulation 

S–K. 

55See, e.g., FASB ASC 210–10–20 (‘‘Short-term 

obligations are those that are scheduled to mature 

within one year after the date of an entity’s balance 

sheet or, for those entities that use the operating 

cycle concept of working capital described in 

paragraphs 210–10–45–3 and 210–10–45–7, within 

an entity’s operating cycle that is longer than one 

year.’’). 

in activities that are financial in nature. 

Because of the nature of their business 

activities, we believe it may be 

important for an investor to have 

information about the daily amounts of 

borrowings of financial companies, 

particularly where borrowed funds are 

invested in assets that contribute to 

their earnings activities. We believe that 

most banks would be able to track daily 

short-term borrowings without 

unreasonable effort or expense, and 

some companies that engage in financial 

businesses may already track this type 

of information for their own risk 

management purposes. 

We expect that many other non-bank 

companies that engage in these types of 

activities do not currently track this 

information on a daily basis, so this 

proposed requirement could impose 

significant costs on these entities. On 

balance, however, we preliminarily 

believe that the importance of the 

information in the financial company 

setting justifies the increased costs. By 

contrast, for companies that are not 

financial companies, we are not 

proposing to require maximum daily 

amounts or averages calculated on a 

daily average basis because we 

preliminarily believe that the 

information with respect to those 

issuers is less important to investors 

than in the context of financial 

companies, and that the combination of 

our existing and proposed requirements 

should provide sufficient information 

about their use of short-term 

borrowings. However, we request 

comment on this issue below. 

Narrative Discussion of Short-Term 

Borrowings 

In order to provide context for the 

short-term borrowings data, we are also 

proposing to require a narrative 

discussion of short-term borrowings 

arrangements.51 This narrative 

discussion is not currently included in 

Guide 3. The topics proposed to be 

included would be: 

• A general description of the shortterm borrowings arrangements included 

in each category (including any key 

metrics or other factors that could 

reduce or impair the registrant’s ability 

to borrow under the arrangements and 

whether there are any collateral posting 

arrangements) and the business purpose 

of those arrangements; 52

• The importance to the registrant of 

its short-term borrowings arrangements 

to its liquidity, capital resources, 

market-risk support, credit-risk support 

or other benefits; 53

• The reasons for the maximum 

amount for the reporting period, 

including any non-recurring 

transactions or events, use of proceeds 

or other information that provides 

context for the maximum amount; and 

• The reasons for any material 

differences between average short-term 

borrowings for the reporting period and 

period-end short-term borrowings. 

This proposed short-term borrowings 

discussion and analysis is intended to 

highlight short-term financing activities 

and to complement the other MD&A 

requirements relating to liquidity and 

capital resources, but it is not intended 

to be repetitive of other disclosures 

relating to liquidity and capital 

resources. In preparing the short-term 

borrowings disclosure, we anticipate 

that a registrant would need to consider 

its disclosures of cash requirements 

presented in the contractual obligations 

table, its disclosures of off-balance sheet 

arrangements, as well as its other 

liquidity and capital resources 

disclosures.54 For example, the 

company may have significant 

payments under operating leases or may 

have entered into a significant 

repurchase agreement that is accounted 

for as a sale that will be settled shortly 

after the balance sheet date and that are 

disclosed in the contractual obligations 

table. To be able to settle these amounts, 

the company may plan to use existing 

short-term financing arrangements that 

will limit its ability to borrow for other 

purposes, such as making loans or 

financing inventory, which in turn can 

impact operations. In this example, the 

company should discuss these items 

together and explain the implications. A 

registrant would need to consider ways 

to integrate the proposed disclosures, 

together with disclosures made under 

existing MD&A requirements, into a 

clear, comprehensive description of its 

liquidity profile. For example, a 

registrant could consider organizing its 

discussion to address overall liquidity, 

and then short-term and long-term 

borrowings and liquidity needs. 

As discussed above, we believe 

investors would benefit from an 

expanded discussion and analysis about 

a company’s use of short-term 

borrowings. We believe that disclosure 

of a company’s short-term borrowings 

data, with a comprehensive discussion 

of its overall approach to short-term 

financings and the role of short-term 

borrowings in the company’s funding of 

its operations and business plan, can 

provide investors with additional 

information necessary to better evaluate 

a registrant’s current short-term 

liquidity profile and potential future 

trends in its liquidity and funding risks. 

Request for Comment 

1. Is information about short-term 

borrowings and intra-period variations 

in the level of short-term borrowings 

useful to investors? If so, should we 

require specific line item disclosure of 

this information in MD&A, as proposed, 

or would existing MD&A requirements 

for disclosure of liquidity and capital 

resources provide sufficient disclosure 

about these issues? If a specific MD&A 

requirement would be appropriate, does 

the proposed requirement capture the 

type of information about short-term 

borrowings that is important to 

investors? If not, how should we change 

the proposed requirement? For example, 

should we require disclosure of the 

weighted average interest rate on the 

short-term borrowings, as proposed? 

2. Consistent with the approach taken 

in Guide 3 and in former Rule 12–10 of 

Regulation S–X, we propose to define 

‘‘short-term borrowings’’ by reference to 

the amounts payable for various 

categories of short-term obligations that 

are typically reflected as short-term 

obligations on the balance sheet and 

stated as separate line items in 

accordance with Regulation S–X. Is the 

proposed definition sufficiently clear? If 

not, what changes should be made to 

the proposed definition? For example, 

should the definition refer to ‘‘shortterm obligations’’ as defined in U.S. 

GAAP? 55 In connection with any 

response, please provide information as 

to the costs associated with the 

implementation of any changes to the 

proposed definition. 

3. Are the proposed categories of 

short-term borrowings appropriate? If 

not, why not, and how should we 

change the proposed requirement? For 

example, should we apply different 

categories to Guide 3 companies as 

compared to other companies, as was 

the case when former Rule 12–10 of 

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Regulation S–X was in effect? Are the 

proposed categories appropriately 

tailored so that companies can monitor 

and provide the proposed disclosure? In 

particular, is the category for ‘‘any other 

short-term borrowings reflected on the 

registrant’s balance sheet’’ too broad? If 

so, how should it be narrowed? Are 

there other categories of short-term 

borrowings that should be broken out? 

For example, should amounts relating to 

repurchase arrangements be 

disaggregated into those that are 

collateralized by U.S. Treasury 

securities and those that are 

collateralized by other assets? If so, 

please include in your discussion the 

reasons such information would be 

meaningful to investors and provide an 

indication of the costs and burdens 

associated with providing that level of 

detail. 

4. Is disaggregation by currency or 

other grouping useful to the 

understanding of aggregate short-term 

borrowing amounts? Would the 

proposed requirement for disaggregation 

provide an appropriate level of detail? Is 

it sufficiently clear? Instead, should we 

prescribe a specified method or 

threshold for disaggregation? If so, 

describe it. For example, should we 

require information to be presented 

separately by currency where there is a 

significant amount of borrowings that 

are not denominated in the company’s 

reporting currency? If so, should we 

specify a threshold amount (e.g., 5, 15 

or 20% of borrowings) and what should 

that threshold be? Or should the 

amounts instead be disaggregated into 

more generalized categories, such as 

‘‘domestic’’ and ‘‘foreign’’ borrowings? 

Please provide details about the costs 

and benefits of any alternatives to the 

proposed disaggregation provision, and 

discuss whether requiring companies to 

follow a specific disaggregation method 

would impose practical difficulties on 

companies (or particular types of 

companies) when they are gathering and 

compiling the proposed short-term 

borrowings disclosure. 

5. We note that Guide 3 currently 

provides a quantitative threshold for 

separate disclosure of short-term 

borrowings by category. The proposed 

short-term borrowings provision does 

not contain a specific quantitative 

disclosure threshold for separate 

disclosure of amounts in the different 

categories of short-term borrowings. 

Should we establish a quantitative 

disclosure threshold for the separate 

categories of short-term borrowings, 

such as above a specified percentage of 

liabilities or stockholders’ equity (e.g., 5, 

10, 20, 30 or 40%)? If so, how should 

the threshold be computed? Should this 

quantitative disclosure threshold apply 

to all companies? 

6. As proposed, ‘‘financial companies’’ 

would be required to provide the largest 

daily amount of short-term borrowings. 

We understand that banks and bank 

holding companies track this 

information on a daily basis in 

connection with the preparation of 

reports to banking regulators. We also 

expect that other non-bank companies 

engaged in financial businesses that 

would fall within the scope of the 

proposed requirement do not currently 

track this type of information on a daily 

basis. Is this information useful to 

investors? What are the burdens and 

costs of requiring registrants that meet 

the definition of ‘‘financial company’’ 

but are not banks to meet that 

requirement? 

7. Is the activities-based definition of 

‘‘financial company’’ sufficiently clear? 

Are the activities identified (lending, 

deposit taking, insurance underwriting, 

providing investment advice, broker or 

dealer activities) as part of the definition 

appropriate, or are they overly-inclusive 

(or under-inclusive)? Should we provide 

a definition of the term ‘‘significant’’ as 

used in the proposed definition? If so, 

should we provide a numerical, 

threshold-based definition (e.g., 10% of 

total assets)? If so, what should the 

threshold be? Should it relate to assets 

or should it relate to revenues and 

income? Should we specify certain 

types of entities in the definition, as 

proposed? Should other entities be 

added to or excluded from the 

definition? If so, please provide details. 

Are there any circumstances that would 

cause an entity to come under the 

proposed definition that should be 

excluded, and if so, why? 

8. Should all registrants that are 

financial companies be required to 

provide the maximum daily amount of 

short-term borrowings, as proposed? 

Should registrants that are not financial 

companies be required to provide the 

maximum daily amount of short-term 

borrowings, rather than permitting them 

to provide the maximum month-end 

amount as is proposed? Do registrants 

that are not financial companies have 

systems to track and calculate this 

information on a daily basis? What are 

the burdens and costs of requiring 

companies engaged in non-financial 

businesses to meet that requirement? 

Should registrants that are not financial 

companies be required to disclose each 

month-end amount rather than the 

maximum, as proposed? Should 

registrants also be required to provide 

the minimum month-end (or daily for 

financial companies) amount 

outstanding? What are the burdens and 

costs of requiring companies to meet 

those requirements? 

9. Is the proposed accommodation for 

reporting that would allow financial 

companies to present information about 

their non-financial businesses on the 

same basis as other non-financial 

companies appropriate? Would this 

address cause concerns for these 

companies? Is the proposed instruction 

to implement this accommodation 

sufficiently clear? 

10. Should registrants be required to 

provide the largest amount of short-term 

borrowings outstanding at any time 

during the reporting period (meaning 

intra-day as opposed to close of 

business)? Would this amount be 

difficult for registrants to track? 

11. As proposed, registrants that are 

financial companies would be required 

to provide average amounts outstanding 

computed on a daily average basis. 

Should averages computed on a daily 

average basis be required only for 

certain companies (for example, bank 

holding companies, banks, savings 

associations, broker-dealers)? If so, why 

and which companies? In this 

connection, please describe whether 

financial companies that are not banks 

typically close their books on a daily 

basis and whether they have the systems 

to track and calculate this daily balance 

information used to compute averages 

on a daily average basis. What are the 

burdens and costs for a registrant (that 

is not a bank) to meet the proposed 

requirement? Are some types of 

businesses, such as multi-nationals, 

disproportionately affected by such 

costs? If so, please explain why. Is there 

an alternative requirement for such a 

business that would still meet the 

disclosure objective? 

12. As proposed, registrants that are 

not financial companies would be 

permitted to use a different averaging 

period, such as weekly or monthly, so 

long as the period used is not longer 

than a month. Is it appropriate to allow 

this type of flexibility given the 

possibility that longer averaging periods 

could mask fluctuations? Are certain 

borrowing practices more likely to be 

impacted than others, such as overdrafts 

used as financing? Is there an alternative 

requirement or instruction that could 

eliminate this issue while not imposing 

undue costs and burdens and still 

meeting the disclosure objective? 

13. Should we require a narrative 

discussion of short-term borrowing 

arrangements, as proposed? Are the 

narrative discussion topics useful to 

investors? Are there other discussion 

topics that would be useful to investors? 

If so, what other topics should we 

require to be discussed? Should we 

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59874 Federal Register / Vol. 75, No. 187 / Tuesday, September 28, 2010 / Proposed Rules 

56We are proposing to revise the ‘‘Instructions to 

Paragraph 303(b)’’ in Item 303 of Regulation S–K to 

accomplish this change to interim period reporting 

requirements. The proposed instructions would 

only apply to disclosure pursuant to Item 303(a)(6). 

See 17 CFR 229.303(b). 

57Proposed Instruction 8 to Paragraph 303(b) 

would require the registrant to include narrative 

discussion that highlights any material changes 

from prior periods. In doing so, registrants should 

consider whether including comparative period 

data would make the presentation of those material 

changes more clear. 

tailor the disclosure to omit information 

that may be unimportant to investors? If 

so, what information, and why, and 

which registrants would be affected? 

14. Do the proposed discussion topics 

provide enough flexibility to companies 

to fully and clearly describe their shortterm borrowings arrangements? 

15. If the proposals are adopted, we 

expect to authorize our staff to amend 

Guide 3 to eliminate Item VII in its 

entirety. Are there any other technical 

amendments that would be appropriate, 

such as the elimination of crossreferences in other Commission rules or 

forms, if the staff removes Item VII from 

Guide 3? 

3. Reporting Periods 

As proposed, the requirements would 

be applicable to annual and quarterly 

reports and registration statements. For 

annual reports, information would be 

presented for the three most recent 

fiscal years and for the fourth quarter. In 

addition, registrants preparing 

registration statements with audited 

full-year financial statements would be 

required to include short-term 

borrowings disclosure for the three most 

recent full fiscal year periods and 

interim information for any subsequent 

interim periods, consistent in each case 

with general MD&A requirements and 

instructions applicable to the relevant 

registration statement form 

requirements. For quarterly reports, 

information would be presented for the 

relevant quarter, without a requirement 

for comparative data. For registrants that 

are not subject to Guide 3, we are 

proposing a yearly phase-in of the 

requirements for comparative annual 

data until all three years are included in 

the annual presentation. This is 

described under the heading 

‘‘Transition’’ in this release. 

Notwithstanding this transitional 

accommodation, all registrants would be 

permitted to provide three full years 

during the transition period. 

A principal objective of the proposed 

disclosure is to provide transparency 

about intra-period borrowings activity, 

as a supplement to disclosure of periodend amounts. To achieve this purpose 

in each reporting period, we are 

proposing that disclosure in quarterly 

reports and interim period disclosure in 

registration statements include shortterm borrowings information presented 

with the same level of detail as would 

be provided for annual periods.56

Companies would need to include the 

full presentation of quantitative and 

qualitative information for short-term 

borrowings during the interim period, 

rather than only disclosing material 

changes that have occurred since the 

previous balance sheet date. In addition, 

registrants would be required to identify 

material changes from previously 

reported disclosures in the discussion 

and analysis, so that any material 

changes would be highlighted. This 

layered approach is intended to enhance 

transparency of short-term borrowing 

activities during the specific quarterly 

period, while still emphasizing material 

changes so that investors can more 

easily understand how the exposures 

have evolved from past reporting 

periods. 

In addition, registrants would be 

required to provide quarterly short-term 

borrowings information for the fourth 

fiscal quarter in their annual report. 

Because the disclosure is intended to 

provide additional transparency about a 

registrant’s short-term borrowing 

practices, including the ability of the 

registrant to obtain financing to conduct 

its business, and the costs of that 

financing, during the year, we believe 

that short-term borrowings data for the 

fourth quarter would be useful to 

investors. As this type of reporting 

requirement would be a departure from 

our long-standing approach to the 

presentation of fourth quarter financial 

information in MD&A contained in 

annual reports, we specifically request 

comment below on this issue, and 

particularly whether material 

information as to short-term borrowing 

activities prior to year-end would be lost 

without separate quarterly disclosure for 

the fourth quarter. 

As proposed, interim period 

disclosures would be presented without 

comparative period data.57 We believe 

that this data is most meaningful to 

show changes from annual borrowing 

amounts and any intra-period variations 

from period-end amounts. In addition, 

because any seasonal trends in the 

information should generally already be 

disclosed under existing MD&A 

requirements, we preliminarily do not 

believe it is necessary to specifically 

require prior period comparisons to 

identify seasonality in borrowing levels. 

Moreover, other than the presentation of 

short-term borrowings information for 

the fourth fiscal quarter, registrants 

would not be required to include a 

quarterly breakdown of short-term 

borrowings information in their annual 

report. Because quarterly information 

would be available in Forms 10–Q for 

all quarters other than the fourth 

quarter, we do not believe that repeating 

that quarterly information in the annual 

report would be useful to investors. 

These interim period requirements 

would not apply to registrants that are 

foreign private issuers or smaller 

reporting companies. In addition, 

smaller reporting companies would be 

permitted to disclose two fiscal years 

rather than three, in accordance with 

existing disclosure accommodations for 

small entities. For a discussion of the 

treatment of these types of entities, see 

the discussion under ‘‘Treatment of 

Foreign Private Issuers and Smaller 

Reporting Companies’’ in this release. 

Request for Comment 

16. Are the proposed reporting 

periods appropriate? Should we require 

annual short-term borrowings 

information in annual reports, as 

proposed? Should annual reports 

instead include a quarterly breakdown 

of short-term borrowings information? 

Should annual reports include quarterly 

information for the fourth fiscal quarter 

in addition to annual information, as 

proposed? For example, would 

disclosure of information for the fourth 

fiscal quarter be necessary to highlight 

any efforts to reduce borrowings at yearend, below the levels prevailing 

throughout the fourth fiscal quarter? Is 

the presentation of this information for 

the fourth fiscal quarter, in isolation 

without corresponding quarterly 

financial statements and MD&A for that 

period, potentially misleading? If so, 

what additional information should be 

required? Should quarterly reports be 

required to include quarterly 

information, as proposed? Should 

registration statements be required to 

include annual and interim information, 

as proposed? In each case, explain the 

reasons for requiring the applicable 

reporting periods and provide 

information as to whether investors 

would find the information useful. 

Please also include details about 

additional costs involved. 

17. Should we require quarterly 

disclosure at the same level of detail as 

annual period disclosure, as proposed? 

Does the proposed presentation provide 

information that is useful to investors? 

Describe in detail the costs and benefits 

of providing full (rather than material 

changes) interim period disclosures of 

the proposed short-term borrowings 

information. Instead, should we require 

quarterly reports to include disclosure 

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58See generally proposed Item 303(a)(6)(ii)(B), (C) 

and (D) of Regulation S–K. 

59 15 U.S.C. 77z–2. 

60 15 U.S.C. 78u–5. 

61See OBS Adopting Release, supra note 6, at 

5993. 

62See, e.g., Letter of Committee on Federal 

Regulation of Securities of the American Bar 

Association’s Section of Business Law in Response 

to the OBS Proposing Release, available at http:// 

www.sec.gov/rules/proposed/s74202.shtml 

(‘‘[B]ecause of the inherent predictive nature of 

disclosures of contingent liabilities and 

commitments. * * * [W]e are concerned that the 

failure to include that provision would lead to a 

negative inference that such disclosure is not 

covered by the safe harbor.’’). 

In the OBS Adopting Release, the Commission 

emphasized that notwithstanding the safe harbor 

provided in Item 303(c) of Regulation S–K, the 

statutory safe harbor, by its terms, as well as the safe 

harbor rules under Securities Act Rule 175 [17 CFR 

230.175] and Exchange Act Rule 3b–6 [17 CFR 

240.3b–6] may be available for the forward-looking 

disclosure required by Items 303(a)(4) and (5) of 

Regulation S–K. 

63See OBS Proposing Release, supra note 6, at 

68065–68066. 

64The term ‘‘MJDS filers’’ refers to registrants that 

file reports and registration statements with the 

Commission in accordance with the requirements of 

the U.S.-Canadian Multijurisdictional Disclosure 

System (the ‘‘MJDS’’). The definition for ‘‘foreign 

private issuer’’ is contained in Exchange Act Rule 

3b–4(c) [17 CFR 240.3b–4(c)]. A foreign private 

issuer is any foreign issuer other than a foreign 

government, except for an issuer that has more than 

50% of its outstanding voting securities held of 

record by U.S. residents and any of the following: 

A majority of its officers and directors are citizens 

or residents of the United States, more than 50% 

of its assets are located in the United States, or its 

business is principally administered in the United 

States. 

65Form 20–F is the combined registration 

statement and annual report form for foreign private 

issuers under the Exchange Act. It also sets forth 

disclosure requirements for registration statements 

filed by foreign private issuers under the Securities 

Act. 

In designing the integrated disclosure regime for 

foreign private issuers the Commission endeavored 

to ‘‘design a system that parallels the system for 

domestic issuers but also takes into account the 

different circumstances of foreign registrants.’’ 

Integrated Disclosure System for Foreign Private 

Issuers, Release No. 33–6360 (Nov. 20, 1981) [46 FR 

58511]. As such, the requirements of Item 5 of Form 

20–F are analogous to those in Item 303 of 

Regulation S–K. Although the wording is not 

identical, we interpret Item 5 as requiring the same 

disclosure as Item 303 of Regulation S–K. See 

Rules, Registration and Annual Report for Foreign 

Private Issuers, Release No. 34–16371 (Nov. 29, 

1979) [44 FR 70132] (adopting Form 20–F and 

stating that the Commission would consider 

revisions when MD&A requirements in Regulation 

S–K were adopted); Integrated Disclosure System 

for Foreign Private Issuers, Release No. 33–6360 

(revising Form 20–F to add requirements consistent 

with the MD&A requirements in Regulation S–K); 

International Disclosure Standards, Release No. 33– 

7745 (Sept. 28, 1999)[64 FR 53900] (adopting 

revisions to Form 20–F to conform to international 

disclosure standards endorsed by the International 

Organization of Securities Commissions in 1998); 

see also OBS Adopting Release, supra note 6, at 

5992 n. 135. 

of material changes only? If so, why? 

How would disclosure of material 

changes address the issue of 

transparency of intra-period 

borrowings? 

18. For annual periods, should we 

require, as proposed, three years of 

comparative data? Or would data for the 

current year, without historical 

comparison periods, provide investors 

with adequate information? Describe in 

detail the costs and benefits of 

providing comparative period 

disclosures in this context. 

19. Is the proposed disclosure for the 

current interim period sufficient, or 

should we also require comparative 

period data? If so, which comparative 

periods would be most useful? Explain 

how prior period comparisons would be 

useful to investors; for example, would 

prior period comparisons be needed to 

identify seasonality in borrowing levels? 

If so, instead of requiring comparative 

data, should we specifically require 

companies to qualitatively describe 

trends or seasonality in borrowing 

levels? Describe in detail the costs and 

benefits of providing comparative 

period disclosures in this context. 

20. Should we require year-to-date 

information in addition to quarterly 

information for interim periods? Would 

year-to-date information be useful to 

investors? Describe in detail the costs 

and benefits of providing year-to-date 

information in this context. 

4. Application of Safe Harbors for 

Forward-Looking Statements 

In some instances, the disclosure 

provided in response to the proposed 

short-term borrowings narrative 

discussion requirements could include 

disclosure of forward-looking 

information.58 We are not, however, 

proposing to extend the safe harbor in 

Item 303(c) of Regulation S–K to include 

disclosures of forward-looking 

information made pursuant to proposed 

Item 303(a)(6). This safe harbor was 

adopted in connection with the 

adoption of Items 303(a)(4) and (a)(5) 

and explicitly applies the statutory safe 

harbors of Sections 27A59 of the 

Securities Act and 21E 60 of the 

Exchange Act to those Items in order to 

remove possible ambiguity about 

whether the statutory safe harbors 

would be available for that 

information.61 The disclosure required 

by Items 303(a)(4) and (a)(5) consists 

primarily of forward-looking 

information, and as such, issuers and 

market participants expressed particular 

concerns about the application of 

existing safe harbors to that 

disclosure.62 In the proposing release for 

Item 303(c), we requested comment as 

to whether the safe harbor in Item 303(c) 

should be expanded to cover all 

forward-looking information in 

MD&A.63 We declined to adopt such an 

expansion. We preliminarily believe 

that the proposed short-term borrowings 

disclosure requirements, which 

primarily concern disclosure of 

historical amounts together with 

qualitative information about the 

registrant’s use of short-term 

borrowings, would not present any 

distinctive issues under the application 

of the statutory safe harbor, and, 

accordingly, we are not proposing to 

provide any specific provision or 

guidance as to its application to this 

information. Companies would need to 

treat forward-looking information 

disclosed pursuant to proposed Item 

303(a)(6) in the same manner as other 

MD&A disclosure for purposes of the 

statutory safe harbor. We further note 

that nothing in the proposed 

requirements would limit (or expand) 

the scope of the statutory safe harbor, 

the safe harbor rules under Securities 

Act Rule 175 or Exchange Act Rule 

3b–6, or Item 303(c) of Regulation S–K. 

Request for Comment 

21. Is there any need for further 

guidance from the Commission with 

respect to the application of either the 

statutory or the rule-based safe harbors 

to the information called for by the 

proposed short-term borrowings 

disclosure requirement? If so, please 

provide details as to the potential 

ambiguity in the application of existing 

safe harbors. In particular, what 

information called for by the proposed 

requirements raises doubt as to the 

applicability of the statutory safe harbor 

or the safe harbor rules under Securities 

Act Rule 175 or Exchange Act Rule 3b6? 

22. Should Item 303(c) of Regulation 

S–K be revised to also cover forwardlooking information disclosed pursuant 

to the proposed short-term borrowings 

disclosure requirement? 

B. Treatment of Foreign Private Issuers 

and Smaller Reporting Companies 

1. Foreign Private Issuers (Other Than 

MJDS Filers) 

The proposed amendments would 

apply to foreign private issuers that are 

not MJDS filers.64 The existing MD&Aequivalent disclosure requirements in 

Form 20–F 65 currently mirror the 

substantive MD&A requirements for 

U.S. companies, and we believe that our 

proposed changes to the MD&A 

requirements for U.S. companies would 

provide important disclosure to 

investors that should also be provided 

by foreign private issuers. Accordingly, 

we are proposing a new paragraph H 

under Item 5 (Operational and Financial 

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59876 Federal Register / Vol. 75, No. 187 / Tuesday, September 28, 2010 / Proposed Rules 

66See proposed Instruction 1 to Item 5.H of Form 

20–F. 

67See Instruction 2 to Item 5.F of Form 20–F. 

68See Instruction 5 to Item 5 of Form 20–F. 

69 17 CFR 249.308a. See proposed Instruction 8 to 

Item 303(b) of Regulation S–K [17 CFR 229.303(b)]. 

70 17 CFR 249.306. A foreign private issuer must 

furnish under cover of Form 6–K material 

information that it: Makes public or is required to 

make public under its home country laws, files or 

is required to file with a stock exchange on which 

its securities are traded and which was made public 

by that exchange under the rules of the stock 

exchange or distributes or is required to distribute 

to security holders. In instances where a foreign 

private issuer is furnishing interim information on 

short-term borrowings under those circumstances, 

we would encourage the foreign private issuer to 

consider providing an update to its annual shortterm borrowings disclosure, although it would not 

be required to do so. 

71This treatment is consistent with the approach 

we took when adopting off-balance sheet 

arrangements and contractual obligations 

disclosure. See OBS Adopting Release, supra note 

6, at 5992 n. 139. 

72The proposed amendments would apply to 

Securities Act registration statements on Forms F– 

1 [17 CFR 239.31], F–3 [17 CFR 239.33] and F–4 [17 

CFR 239.34]. Each of these registration statements 

references the disclosure requirements in Form 20– 

F. 

73Proposed ‘‘Instruction 8 to Paragraph 303(b)’’ 

would exclude smaller reporting companies from 

the requirement to provide all the information 

specified in paragraph (a)(6) in interim periods. As 

proposed, Item 303(d) would state that smaller 

reporting companies are only required to provide 

material changes to the information specified in 

proposed Item 303(a)(6) in interim periods. The 

proposed revisions to Item 303(d) would not affect 

the existing accommodation for disclosure of Item 

303(a)(5) information. 

Review and Prospects) in Form 20–F 

covering short-term borrowings. 

Because foreign private issuers using 

a comprehensive set of accounting 

principles other than U.S. GAAP might 

capture data and prepare their financial 

statements using different categories of 

short-term borrowings, we propose to 

include an instruction to paragraph H 

that would permit a foreign private 

issuer to base the categories of shortterm borrowings used in the rule on the 

classifications for such types of shortterm borrowings under the 

comprehensive set of accounting 

principles which the company uses to 

prepare its primary financial statements, 

so long as the disclosure is provided in 

a level of detail that satisfies the 

objective of the Item 5.H disclosure 

requirement.66 This approach is 

consistent with the approach to 

contractual obligations disclosure in 

Item 5.F, for which foreign private 

issuers are instructed to base their 

tabular disclosure on the classifications 

of obligations used in the generally 

accepted accounting principles under 

which the company prepares its primary 

financial statements.67 Similarly, in 

connection with references to FASB 

pronouncements used in Item 5 of Form 

20–F, issuers that file financial 

statements that comply with IFRS as 

issued by the IASB are instructed to 

‘‘provide disclosure that satisfies the 

objective of Item 5 disclosure 

requirements.’’ 68 Other than this 

instruction regarding the categorization 

of short-term borrowings, the short-term 

borrowings disclosure requirement 

proposed for Form 20–F is substantially 

similar to the proposed provision 

applicable to U.S. issuers. 

The reporting periods applicable to 

U.S. issuers are proposed to also apply 

to foreign private issuers, except with 

respect to quarterly reporting. For 

annual reports on Form 20–F, foreign 

private issuers would present three 

years of annual short-term borrowings 

data, subject to the proposed transition 

accommodation applicable to all 

registrants that are not bank holding 

companies. Foreign private issuers 

preparing registration statements with 

audited full-year financial statements 

would be required to include short-term 

borrowings disclosure for the three most 

recent full fiscal year periods and 

quarterly information for any 

subsequent interim periods included in 

the registration statement in accordance 

with the requirements of the relevant 

registration statement form. The 

proposed amendments for U.S. issuers 

would require quarterly disclosure of 

short-term borrowings in quarterly 

reports on Form 10–Q.69 Foreign private 

issuers, however, are not required to file 

quarterly reports with the Commission, 

and therefore the proposed amendments 

would not apply to Form 6–K 70 reports 

submitted by foreign private issuers.71

Thus, unless a foreign private issuer 

(other than an MJDS filer) files a 

Securities Act registration statement 

that must include interim period 

financial statements and related MD&Aequivalent disclosure,72 it would not be 

required to update its disclosure under 

proposed Item 5.H of Form 20–F more 

than annually. 

Request for Comment 

23. Should we apply the proposed 

amendments to foreign private issuers’ 

annual reports on Form 20–F, as 

proposed? Or should we exclude these 

annual reports from the scope of the 

amendments? If so, why? 

24. Should we apply the proposed 

amendments to foreign private issuers’ 

registration statements, as proposed? Or 

should these registration statements be 

excluded from the scope of the 

proposed rules? In particular, should we 

not require the interim period shortterm borrowings information to be 

included in the registration statements 

of foreign private issuers? If not, why? 

25. Should we limit the application of 

the new disclosure requirements to 

foreign private issuers that are banks or 

bank holding companies, or that are 

financial companies? If so, why? 

26. Is the instruction to proposed Item 

5.H regarding the categories of shortterm borrowings appropriate? Is the 

instruction clear? If not, how can it be 

clarified? 

2. MJDS Filers 

The proposed amendments would not 

affect MJDS filers. The disclosure 

provided by Canadian issuers is 

generally that which is required under 

Canadian law, and we do not propose to 

depart from our approach with respect 

to financial disclosure provided by 

MJDS filers. Accordingly, we are not 

proposing to further amend Form 40–F 

at this time. 

Request for Comment 

27. Should we amend Form 40–F to 

include the new short-term borrowings 

disclosure requirements? If so, why? 

3. Smaller Reporting Companies 

Smaller reporting companies 

currently provide disclosure pursuant to 

Item 303, subject to the special 

accommodation provided in Item 303(d) 

that, among other things, permits the 

exclusion of tabular disclosure of 

contractual obligations under Item 

303(a)(5). The proposed short-term 

borrowings disclosure requirements 

would apply to smaller reporting 

companies, except that quarterly 

disclosures would not be required 

unless material changes have occurred 

during that interim period (as is the case 

under existing requirements for interim 

period disclosure) and information for 

the fourth fiscal quarter would not be 

required in annual reports. To this end, 

we propose to amend Item 303(d) to 

clarify that smaller reporting companies 

need only provide the proposed Item 

303(a)(6) information on an annual basis 

and, in interim periods, if any material 

changes have occurred.73 In addition, 

for smaller reporting companies 

providing financial information on net 

sales and revenues and on income from 

continuing operations for only two 

years, only two years of short-term 

borrowings information would be 

required, consistent with the scaled 

MD&A disclosure requirement for 

smaller reporting companies under 

existing Item 303(d). 

This accommodation for interim 

period disclosure is intended to balance 

the practical impact of the disclosure 

requirement with the need to enhance 

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Federal Register / Vol. 75, No. 187 / Tuesday, September 28, 2010 / Proposed Rules 59877 

74See, e.g., Financial Stability Board, Report of 

the Financial Stability Forum on Addressing Procyclicality in the Financial System (2009) available 

at http://www.financialstabilityboard.org/ 

publications/r_0904a.pdf; S. Deng, SIVs, Bank 

Leverage and Subprime Mortgage Crisis, (Dec. 

2009), available at http://ssrn.com/ 

abstract=1319431. 

75See, e.g., K. D’Hulster, The Leverage Ratio, 

WORLD BANK PUB. POL’Y J. (2009); J. Gabilondo, 

Financial Moral Panic! Sarbanes-Oxley, Financier 

Folk Devils, and Off-Balance Sheet Arrangements, 

36 SETON HALL L. REV. 781 (2006) (proposing that 

a financial transparency ratio would reduce the 

public information gap arising from off-balance 

sheet arrangements); P. M. Hildebrand, ViceChairman of the Governing Board of the Swiss 

National Bank, Is Basel II Enough? The Benefits of 

a Leverage Ratio, London School of Economics 

Financial Markets Group Lecture, Dec. 15, 2008, 

available at http://www.bis.org/review/ 

r081216d.pdf; Standard & Poor’s, The Basel III 

Leverage Ratio is a Raw Measure but Could 

Supplement Risk Based Capital Measures, April 15, 

2010, available at http://www.bis.org/publ/bcbs165/ 

splr.pdf. 

76See FASB ASC 942–505–50, Regulatory Capital 

Disclosures. Specifically, bank holding companies 

must present their required and actual ratios and 

amounts of Tier 1 leverage, Tier 1 risk based capital, 

and total risk based capital, (for savings 

institutions) tangible capital, and (for certain banks 

and bank holding companies) Tier 3 capital for 

market risk. Under U.S. GAAP, bank holding 

companies are required to include this information 

in the footnotes to their financial statements. 

77See Regulation Y, Appendices A (Risk-Based 

Capital), B (Leverage Measure) and D (Tier I 

Leverage Measure) [12 CFR 225]. 

78See The Federal Reserve Board et al., Joint 

Report: Differences in Capital and Accounting 

Standards among the Federal Banking and Thrift 

Agencies (Feb. 5, 2003) [68 FR 5976]. 

79See, e.g., Item 303(a)(1) of Regulation S–K, and 

Instructions 1, 2 and 3 to Paragraph 303(a). 

80See, e.g., P. Kraft, Rating Agency Adjustment to 

GAAP Financial Statements and Their Effect on 

Ratings and Bond Yields (Nov. 1, 2009) at http:// 

ssrn.com/abstract=1266381. 

disclosure of liquidity risks facing 

smaller reporting companies. While 

liquidity risks, particularly those arising 

from short-term borrowings, are equally 

important for smaller reporting 

companies, we also believe that smaller 

reporting companies are likely to have 

fewer complex financing alternatives 

available. Accordingly, we believe that 

smaller reporting companies would not 

likely have as many significant changes 

to the liquidity profile presented in 

periodic reports as other reporting 

companies. Thus, we do not believe that 

the burden of preparing expanded 

interim period reporting is justified by 

the incremental information that would 

be provided compared to that provided 

under the existing interim updating 

model applicable to smaller reporting 

companies. 

Request for Comment 

28. Does the proposal strike the 

proper balance between imposing 

proportional costs and burdens on 

smaller reporting companies while 

providing adequate information to 

investors? Would the proposed new 

short-term borrowings disclosure be 

useful to investors in smaller reporting 

companies? Are there any features of the 

proposed requirements that would 

impose unique difficulties or significant 

costs for smaller reporting companies? If 

so, how should we change the 

requirements to reduce those difficulties 

or costs while still achieving the 

disclosure objective? 

29. Should we provide the proposed 

exemption for interim period updating 

to smaller reporting companies? If not, 

please discuss whether the expanded 

level of interim period disclosure by 

smaller reporting companies would be 

useful to investors and why. 

30. Would the gathering of data and 

preparation of expanded interim period 

disclosure be burdensome to smaller 

reporting companies? Could the 

proposed requirement be structured a 

different way for smaller reporting 

entities so as to enable interim period 

reporting without imposing a significant 

cost? If so, please provide details of 

such an alternative. 

31. Are the nature of the short-term 

borrowings and the related risks 

different for smaller reporting 

companies such that additional or 

alternate disclosure would be 

appropriate? In particular, would the 

proposed annual requirement for 

disclosing short-term borrowings 

information cause a smaller reporting 

company to collect the same data it 

would need to collect for interim 

reporting, such that the expanded level 

of interim period disclosure proposed 

for registrants that are not smaller 

reporting companies would not be 

unduly burdensome? 

C. Leverage Ratio Disclosure Issues 

Many observers believe that high 

leverage at financial institutions, in the 

U.S. and globally, was a contributing 

factor to the financial crisis.74 As a 

result, investors and market participants 

are increasingly focused on leverage 

ratio disclosures, particularly for banks 

and for non-bank financial 

institutions.75 Similarly, we believe that 

investors may benefit from additional 

transparency about the capitalization 

and leverage profile of non-financial 

companies, particularly for those 

companies that rely heavily on external 

financing and credit markets to fund 

their businesses and future growth. 

Under U.S. GAAP, bank holding 

companies are currently required to 

disclose certain capital and leverage 

ratios (calculated in accordance with the 

requirements of their primary banking 

regulator) in the financial statements 

that are included in filings with the 

Commission.76 The Commission’s staff 

has observed that some bank holding 

companies also include disclosure of 

these ratios in their MD&A presented in 

annual and quarterly reports. The 

financial statement disclosure by bank 

holding companies of their capital and 

leverage ratios provides to investors 

some of the same information that 

banking regulators use to assess a bank’s 

capital adequacy and leverage levels.77

For U.S. banks and thrifts, the standards 

applied by the various banking agencies 

are substantially uniform,78 which 

means that the ratios that bank holding 

companies are required to include in 

their financial statements filed with the 

Commission should be calculated using 

consistent methodology. Consistent 

with existing disclosure rules, where 

disclosed ratios are likely to be 

materially impacted by known events 

such as short-term borrowings, 

contractual obligations or off-balance 

sheet arrangements, or are not otherwise 

indicative of the registrant’s leverage 

profile, additional disclosure would be 

required in order to provide an 

understanding of the registrant’s 

financial condition and prospects.79

We are considering whether to extend 

a leverage ratio disclosure requirement 

to companies that are not bank holding 

companies. We understand that, outside 

the banking industry, a variety of 

metrics are used to evaluate a 

company’s debt levels and capital 

adequacy. There does not appear to be 

a ‘‘one-size-fits all’’ leverage ratio that is 

used by companies or investors. For 

example, we understand that financial 

analysts, credit analysts and other 

sophisticated users of financial 

statements tend to apply their own 

models and calculate their own ratios 

for use in their analyses of a registrant’s 

financial health, using their own 

proprietary calculation methods.80 We 

also understand that there is not a 

consensus on how to measure and treat 

‘‘off-balance sheet’’ leverage for purposes 

of calculating leverage or capital ratios. 

We are requesting comment today as to 

the scope of a potential disclosure 

requirement, and importantly, how such 

a requirement would take into account 

the differences among metrics and 

industries while still providing 

comparability. 

Request for Comment 

32. Should all types of registrants be 

required to provide leverage ratio 

disclosure and discussion? Are there 

differences among industries or types of 

businesses that would need to be 

addressed in such a requirement so that 

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81See Commission Guidance Regarding the 

Financial Accounting Standards Board’s 

Accounting Standards Codification, Release No. 33– 

9062A (Aug. 19, 2009)[74 FR 42772] (stating that, 

concurrent with the effective date of the FASB 

Codification, references in the Commission’s rules 

and staff guidance to specific standards under U.S. 

GAAP should be understood to mean the 

corresponding reference in the FASB Codification). 

82The instructions to Item 5.F (Tabular 

Disclosure of Contractual Obligations) of Form 20– 

F direct registrants to provide disclosure of 

contractual obligations (other than purchase 

obligations, for which a definition is provided) 

based on the classifications used in the generally 

accepted accounting principles under which the 

registrant prepares its primary financial statements. 

Accordingly, no update for FASB codification is 

necessary for Item 5.F of Form 20–F. 

83 Item 2.03(c) defines a ‘‘direct financial 

obligation’’ as any of the following: (1) a long-term 

debt obligation, as defined in Item 303(a)(5)(ii)(A) 

of Regulation S–K [17 CFR 229.303(a)(5)(ii)(A)]; (2) 

a capital lease obligation, as defined in Item 

303(a)(5)(ii)(B) of Regulation S–K [17 CFR 

229.303(a)(5)(ii)(B)];(3) an operating lease 

obligation, as defined in Item 303(a)(5)(ii)(C) of 

Regulation S–K [17 CFR 229.303(a)(5)(ii)(C)]; or (4) 

a short-term debt obligation that arises other than 

in the ordinary course of business. The item defines 

‘‘short-term debt obligation’’ as a payment obligation 

under a borrowing arrangement that is scheduled to 

mature within one year, or, for those companies 

that use the operating cycle concept of working 

capital, within a company’s operating cycle that is 

longer than one year. 

84Public Law 107–204, 116 Stat. 745 (2002). See 

Additional Form 8–K Disclosure Requirements and 

Acceleration of Filing Date, Release No. 33–8400 

(Mar. 16, 2004) [69 FR 15594]. 

it is meaningful to investors? If so, how 

should ‘‘leverage ratio’’ be defined in 

this context? Is comparability across 

companies and industries important, or 

is the disclosure more meaningful if it 

is presented in the context of the 

particular registrant’s business? 

33. Rather than extending the leverage 

ratio disclosure requirement to include 

all registrants, should we extend it only 

to other financial institutions or 

financial services companies? If so, how 

should the scope of included companies 

be defined? Would the proposed 

definition of ‘‘financial company’’ used 

in proposed Item 303(a)(6) work for this 

purpose? How should ‘‘leverage ratio’’ be 

defined in this context? Is there a 

different metric that would be more 

useful to investors? Should the ratio 

include ‘‘off-balance sheet’’ leverage or 

off-balance sheet equity adjustments? If 

so, describe how such a ratio would be 

calculated. What are the costs and 

benefits of defining a leverage ratio that 

would be applicable to all registrants? 

Where relevant, discuss the usefulness 

of a standardized ratio requirement 

given that many users of financial 

statements make their own calculations. 

34. Should bank holding companies 

be required to include the same level of 

disclosure of leverage and capital ratios 

for quarterly financial statements as 

they do for annual financial statements, 

rather than quarterly reporting of 

material changes? Should additional 

disclosures be required to accompany 

existing ratio disclosure that would 

make it more meaningful? 

D. Technical Amendments Reflecting 

FASB Codification 

On June 30, 2009, the FASB issued 

FASB Statement of Financial 

Accounting Standards No. 168, The 

FASB Accounting Standards 

Codification and the Hierarchy of 

Generally Accepted Accounting 

Principles—a replacement of FASB 

Statement No. 162, to establish the 

FASB Codification as the source of 

authoritative non-Commission 

accounting principles recognized by the 

FASB to be applied by nongovernmental 

entities in the preparation of financial 

statements in conformity with U.S. 

GAAP. In August 2009, we issued 

guidance regarding the interpretation of 

references in the Commission’s rules 

and staff guidance to specific standards 

under U.S. GAAP in light of the FASB 

Codification.81 As noted in that 

interpretive release, the Commission 

and its staff intend to embark on a 

longer term rulemaking and updating 

initiative to revise comprehensively 

specific references to specific standards 

under U.S. GAAP in the Commission’s 

rules and staff guidance. Although we 

plan to make those comprehensive 

changes at a later date, we believe it is 

appropriate, at the same time that we 

propose to make other amendments to 

Item 303 of Regulation S–K and Item 5 

of Form 20–F, to propose technical 

amendments to these provisions to 

reflect the FASB Codification. These 

proposed technical amendments 

include: 

• Updating the U.S. GAAP references 

in the definition of ‘‘off-balance sheet 

arrangement’’ in Item 303(a)(4)(ii) of 

Regulation S–K and Item 5.E.2 of Form 

20–F; 

• Updating U.S. GAAP references in 

the existing definitions of ‘‘Long-Term 

Debt Obligation,’’ ‘‘Capital Lease 

Obligation’’ and ‘‘Operating Lease 

Obligation’’ in Item 303(a)(5)(ii) of 

Regulation S–K; 82 and 

• Updating U.S. GAAP references in 

instructions 8 and 9 of the Instructions 

to Paragraph 303(a) of Regulation S–K. 

As part of our continuing initiative to 

update the references in the 

Commission’s rules and staff guidance, 

we believe that these proposed technical 

amendments would assist registrants in 

applying the relevant definitions and 

instructions, without needing to spend 

time and resources to identify the 

corresponding FASB provision as 

contemplated by the interpretive 

guidance. 

Request for Comment 

35. Are there any additional revisions 

to the provisions of Regulation S–K or 

Form 20–F affected by the proposal that 

would be necessary or appropriate to 

reflect the release by the FASB of its 

FASB codification? 

E. Conforming Amendments to 

Definition of ‘‘Direct Financial 

Obligation’’ in Form 8–K 

We are proposing revisions to the 

definition of ‘‘direct financial 

obligation’’ used in Items 2.03 and 2.04 

of Form 8–K to conform to the 

definition of short-term borrowings used 

in proposed Item 303(a)(6). Specifically, 

the proposed amendment would revise 

paragraph (4) of the definition of ‘‘direct 

financial obligation’’ contained in Item 

2.03(c) of Form 8–K.83

The current definition of ‘‘direct 

financial obligation’’ was adopted as 

part of the 2004 adoption of Items 2.03 

and 2.04 of Form 8–K, in connection 

with updates to Form 8–K to require 

real-time disclosure of material 

information regarding changes in a 

company’s financial condition or 

operations as mandated by Section 409 

of the Sarbanes-Oxley Act of 2002.84

Items 2.03 and 2.04 of Form 8–K are 

intended to provide real-time disclosure 

when a company becomes obligated 

under a direct financial obligation or 

off-balance sheet arrangement that is 

material to the company, and upon the 

triggering of an increase or acceleration 

of any of those types of transactions 

where the impact would be material to 

the company. This real-time disclosure 

was intended to supplement and align 

with the requirements for annual and 

quarterly disclosure of off-balance sheet 

arrangements and contractual 

obligations under Items 303(a)(4) and 

(a)(5) of Regulation S–K. 

Acknowledging the importance of shortterm financing disclosure to an 

understanding of a company’s financial 

condition and risk profile, we included 

certain short-term debt obligations in 

the definition of ‘‘direct financial 

obligations,’’ along with the long-term 

debt, leases and purchase obligations 

identified by reference to Item 303(a)(5) 

of Regulation S–K. 

We believe it is appropriate to align 

the existing reporting requirements for 

short-term debt obligations under Items 

2.03 and 2.04 of Form 8–K with the new 

proposed definition of short-term 

borrowings in Item 303(a)(6), in order to 

continue to provide consistency of 

disclosure. Accordingly, we are 

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85See proposed revisions to Item 2.03(c)(4) of 

Form 8–K. 86See General Instruction 3 of Guide 3. 

87 44 U.S.C. 3501 et seq. 

88 44 U.S.C. 3507(d) and 5 CFR 1320.11. 

89The paperwork burden from Regulation S–K 

and the Industry Guides is imposed through the 

forms that are subject to the disclosures in 

Regulation S–K and the Industry Guides and is 

reflected in the analysis of those forms. To avoid 

a Paperwork Reduction Act inventory reflecting 

duplicative burdens, for administrative 

convenience, we estimate the burdens imposed by 

each of Regulation S–K and the Industry Guides to 

be a total of one hour. 

proposing to amend clause (4) of the 

definition of direct financial obligation 

to refer to ‘‘a short-term borrowing, as 

defined in Item 303(a)(6)(iii) of 

Regulation S–K (17 CFR 

229.303(a)(6)(iii) that arises other than 

in the ordinary course of business.’’ 85 In 

doing so, however, we propose to retain 

the existing carve-out in the definition 

of direct financial obligation for 

obligations that arise in the ordinary 

course of business, in order to maintain 

the focus of Items 2.03 and 2.04 on realtime disclosure of individual 

transactions that are not routine or 

‘‘ordinary course’’ financing 

transactions. If we were to eliminate the 

ordinary course of business carve-out in 

the definition, we do not believe that 

the level of material information 

provided would justify the burden on 

registrants to prepare, and the burden 

on investors to review and understand, 

potentially voluminous disclosure about 

routine transactions. In addition, we 

believe that the proposed short-term 

borrowings disclosures in MD&A would 

provide investors with timely 

information about fluctuations in shortterm borrowings levels and about shortterm borrowings practices, such that 

current reporting on Form 8–K of 

particular instances of significant 

fluctuations that arise due to ordinary 

course transactions would not 

necessarily provide additional insight to 

investors. Moreover, a registrant that 

experiences a material increase in shortterm borrowings during a reporting 

period that is not consistent with past 

practices would likely need to consider 

carefully whether the underlying 

transactions causing the fluctuations fall 

within the meaning of ‘‘ordinary course 

of business’’ for purposes of Items 2.03 

and 2.04. 

Request for Comment 

36. Instead of amending the definition 

of ‘‘direct financial obligation’’ to refer to 

proposed Item 303(a)(6), should the 

category of short-term financings 

included in the definition of ‘‘direct 

financial obligation’’ for purposes of 

Items 2.03 and 2.04 of Form 8–K differ 

from the standard used in proposed 

Item 303(a)(6)? Describe how the 

standards should differ and explain 

why. For example, should we retain the 

existing reference to ‘‘short-term debt 

obligation’’ instead? 

37. Is the proposed definition of shortterm borrowings sufficiently tailored so 

as to exclude borrowing obligations that 

arise in the ordinary course of business, 

so that the carve-out in the definition of 

direct financial obligation is 

unnecessary? Should the carve-out for 

obligations that arise in the ordinary 

course of business be retained, as 

proposed? Describe the costs and 

burdens for companies if the carve-out 

were eliminated, particularly the burden 

on management to make an assessment 

of materiality of each short-term 

borrowing transaction within the filing 

timeframe. Is current reporting of 

routine short-term borrowing 

transactions that are material to the 

registrant sufficient? Would the new 

reporting requirements regarding shortterm borrowing practices and average 

borrowings sufficiently improve 

reporting on this topic, so that Form 8– 

K reporting of ordinary course shortterm borrowings would be unnecessary? 

Explain why or why not. 

F. Transition 

In connection with the proposed 

short-term borrowings disclosure, we 

are proposing a transition 

accommodation for registrants that are 

not bank holding companies or subject 

to Guide 3 that would, for purposes of 

the annual reporting requirement, 

permit those companies to phase in 

compliance with the comparable annual 

period disclosure under proposed Item 

303(a)(6). In the initial year of the 

transition period, these companies 

would be required to include short-term 

borrowings information for the most 

recent fiscal year and permitted to omit 

information for the two preceding fiscal 

years. In the second year of the 

transition period, these companies 

would be required to include the two 

most recent fiscal years, and permitted 

to omit the third preceding fiscal year. 

In the third year of the transition period, 

and thereafter, these companies would 

be required to include disclosure for the 

each of the three most recent fiscal years 

as prescribed in proposed Item 

303(a)(6)(v). This transition 

accommodation would not apply to 

bank holding companies or other 

companies subject to Guide 3, since 

those companies already provide this 

disclosure for the three most recent 

fiscal years (or two fiscal years for 

certain smaller bank holding 

companies).86

Request for Comment 

38. Is the proposed transition 

accommodation appropriate? Should we 

require all companies to present all 

required periods at the outset? 

39. Would the proposed transition 

accommodation be useful for 

registrants? Is it sufficiently clear? 

Should we extend it to cover bank 

holding companies? If so, why? 

40. Are any other transition 

accommodations necessary for any 

aspects of the proposed requirements? 

Would any of the proposed 

requirements present any particular 

difficulty or expense that should be 

addressed by a transition 

accommodation? If so, please explain 

what would be needed and why. For 

example, should we provide a transition 

period to allow smaller reporting 

companies and/or non-bank companies 

time to set up systems to gather the data 

for the proposed disclosure? If so, what 

should that period be? 

III. General Request for Comment 

We request and encourage any 

interested person to submit comments 

on any aspect of our proposals, other 

matters that might have an impact on 

the amendments, and any suggestions 

for additional changes. With respect to 

any comments, we note that they are of 

greatest assistance to our rulemaking 

initiative if accompanied by supporting 

data and analysis of the issues 

addressed in those comments and by 

alternatives to our proposals where 

appropriate. 

IV. Paperwork Reduction Act 

A. Background 

Certain provisions of the proposed 

amendments contain ‘‘collection of 

information’’ requirements within the 

meaning of the Paperwork Reduction 

Act of 1995 (PRA).87 We are submitting 

the proposed amendments to the Office 

of Management and Budget (OMB) for 

review in accordance with the PRA.88

The titles for the collection of 

information are: 

(A) ‘‘Regulation S–K’’ (OMB Control 

No. 3235–0071); 89

(B) ‘‘Form 10–K’’ (OMB Control No. 

3235–0063); 

(C) ‘‘Form 10–Q’’ (OMB Control No. 

3235–0070); 

(D) ‘‘Form 8–K’’ (OMB Control No. 

3235–0060); 

(E) ‘‘Form 20–F’’ (OMB Control No. 

3235–0288); 

(F) ‘‘Form 10’’ (OMB Control No. 

3235–0064); 

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90 15 U.S.C. 80a–1 et seq. 

91We calculated an annual average over a threeyear period because OMB approval of PRA 

submissions covers a three-year period. For 

administrative convenience, the presentation of 

totals related to the paperwork burden hours have 

been rounded to the nearest whole number. The 

estimates reflect the burden of collecting and 

disclosing information under the PRA. Other costs 

associated with the proposed amendments are 

discussed in below under ‘‘Cost-Benefit Analysis.’’ 

92We further assume that the proposed 

amendments would not affect the number of filings. 

(G) ‘‘Form S–1’’ (OMB Control No. 

3235–0065); 

(H) ‘‘Form F–1’’ (OMB Control No. 

3235–0258); 

(I) ‘‘Form S–4’’ (OMB Control No. 

3235–0324); 

(J) ‘‘Form F–4’’ (OMB Control No. 

3235–0325); 

(K) ‘‘Proxy Statements—Regulation 

14A (Commission Rules 14a–1 through 

14a–15) and Schedule 14A’’ (OMB 

Control No. 3235–0059); 

(L) ‘‘Information Statements— 

Regulation 14C (Commission Rules 14c– 

1 through 14c–7) and Schedule 14C’’ 

(OMB Control No. 3235–0057); and 

(M) ‘‘Form N–2’’ (OMB Control No. 

3235–0026). 

These regulations, schedules and 

forms were adopted under the Securities 

Act and the Exchange Act, and in the 

case of Form N–2, the Investment 

Company Act of 1940.90 They set forth 

the disclosure requirements for periodic 

and current reports, registration 

statements, and proxy and information 

statements filed by companies to help 

investors make informed investment 

and voting decisions. The hours and 

costs associated with preparing, filing 

and sending each form or schedule 

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 unless it displays a 

currently valid OMB control number. 

We anticipate that the proposed 

amendments to Item 303 of Regulation 

S–K and to Item 5 of Form 20–F would 

increase existing disclosure burdens for 

annual reports on Form 10–K and Form 

20–F, quarterly reports on Form 10–Q, 

current reports on Form 8–K, proxy and 

information statements, and registration 

statements on Forms 10, S–1, F–1, S–4, 

F–4 and N–2 by requiring new 

disclosure and discussion of short-term 

borrowings to be provided on an annual 

and interim basis. 

At the same time, the proposed 

technical amendments to Item 303 of 

Regulation S–K and Item 5.E of Form 

20–F that update references to U.S. 

GAAP to reflect the FASB Codification 

would not increase existing disclosure 

burdens for annual reports on Form 10– 

K and Form 20–F, quarterly reports on 

Form 10–Q, current reports on Form 8– 

K, proxy and information statements, 

and registration statements on Forms 10, 

S–1, F–1, S–4, F–4 and N–2. 

We also estimate that the amendments 

to the definition of ‘‘direct financial 

obligation’’ for purposes of disclosure 

requirements in Items 2.03 and 2.04 of 

Form 8–K would not increase existing 

disclosure burdens for filings of Form 

8–K. Although we propose to amend the 

existing definition to conform to the 

terminology used in the proposed 

MD&A requirements, we propose to 

retain the existing carve-out for ordinary 

course obligations. Thus, we assume 

that the proposed change in the 

definition would not substantially 

change the existing scope of the 

disclosure requirement, and, therefore, 

the proposed amendments would not 

increase the number of Form 8–K filings 

nor add incremental costs and burdens 

to the existing disclosure burden under 

Form 8–K. We solicit comment on 

whether our assumption is correct, and 

if not, how to estimate the additional 

number of Forms 8–K that would be 

filed pursuant to the proposed 

amendments to the definition of ‘‘direct 

financial obligation.’’ We note that, 

based on the number of filings made 

under Items 2.03 and 2.04 of Form 8– 

K in 2009, only approximately 4% of all 

Form 8–K filings would be made in 

connection with those Items. 

Compliance with the proposed 

amendments would be mandatory. 

Responses to the information collections 

would not be kept confidential, and 

there would be no mandatory retention 

period for the information disclosed. 

B. Burden and Cost Estimates Related to 

the Proposed Amendments 

As discussed below, we have 

estimated the average number of hours 

a company would spend preparing and 

reviewing the proposed disclosure 

requirements and the average hourly 

rate for outside professionals. In 

deriving our estimates, we recognize 

that some companies would experience 

costs in excess of those averages in the 

first year of compliance with the 

proposed amendments, and some 

companies may experience less than the 

average costs. The estimates of reporting 

and cost burdens provided in this PRA 

analysis address the time, effort and 

financial resources necessary to provide 

the proposed collections of information 

and are not intended to represent the 

full economic cost of complying with 

the proposal. 

For purposes of the PRA, we estimate 

that over a three year period, the average 

annual incremental paperwork burden 

for all companies to prepare the 

disclosure that would be required under 

the proposals to be approximately 

872,458 hours of company personnel 

time and a cost of approximately 

$144,061,000 for the services of outside 

professionals.91 These estimates include 

the time and the cost of implementing 

data gathering systems and disclosure 

controls and procedures, the time and 

cost of in-house preparers, review by 

executive officers, in-house counsel, 

outside counsel, in-house accounting 

staff, independent auditors and 

members of the audit committee, and 

the time and cost of filing documents 

and retaining records. 

Our methodologies for deriving the 

burden hour and cost estimates 

presented in the tables below represent 

the average burdens for all registrants 

who are required to provide the 

disclosure, both large and small. As 

discussed elsewhere in this release, the 

time required to prepare the proposed 

disclosures could vary significantly 

depending on, among other factors, the 

nature of the registrant’s business, its 

capital structure, its internal controls 

and disclosure controls systems, its risk 

management systems and other 

applicable regulatory requirements. In 

addition, the estimates do not 

distinguish between registrants that are 

bank holding companies and other 

registrants. Although bank holding 

companies and other companies that 

currently provide Guide 3 disclosure 

would already collect and disclose on 

an annual basis some of the information 

covered by the new requirements, the 

new requirements are not identical to 

the provisions of Guide 3. Accordingly, 

for purposes of these estimates, we 

assume that bank holding companies 

would have the same burden as other 

registrants, although they might not 

actually incur additional expenses for 

those portions of the new requirements 

that are the same as the existing 

provisions of Guide 3. 

Because our estimates assume that 

100% of public companies engage in 

short-term borrowings from time to 

time, we estimate that the same 

percentage of companies would be 

impacted by the proposed disclosure 

requirements for short-term 

borrowings.92 Therefore, for those 

companies that do not engage in shortterm borrowing activities during a 

reporting period, the incremental 

burdens and costs may be lower than 

our estimate. However, because these 

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93OBS Adopting Release, supra note 6, at 5994 

(which we estimated to be 14.5 hours for annual 

reports and proxy statements, 16 hours for 

registration statements and 10 hours for quarterly 

reports). 94OBS Adopting Release, supra note 6, at 5994 

(which we estimated to be 7.5 hours for annual 

reports and proxy statements, 8.5 hours for 

registration statements and 3 hours for quarterly 

reports). 

95 Disclosure of Accounting Policies for 

Derivative Financial Instruments and Derivative 

Commodity Instruments and Disclosure of 

Qualitative and Quantitative Information About 

Market Risk Inherent in Derivative Financial 

Instruments, Other Financial Instruments and 

Derivative Commodity Instruments, Release No. 

33–7386 (Jan. 31, 1997) [62 FR 6044] (which we 

estimated to be 80 hours total per registrant). 

96The current estimate of annual responses for 

Form N–2 is 205. Our best estimate of the total 

number of Forms N–2 filed in 2009 by business 

development companies is 29. Accordingly, for 

purposes of Table 2, we reduced the current 

estimate of annual responses for Form N–2 (205 

Form N–2 filings) to 29 Form N–2 filings. 

97This adjustment is based on our best estimate 

of the number of Forms 10–Q filed by smaller 

reporting companies in 2009. 

98For Form 20–F, we estimate that 25% of the 

burden is carried by the company and 75% by 

outside professionals because we assume that 

foreign private issuers rely more heavily on outside 

counsel for preparation of the Form. 

companies may still need to implement 

systems and controls to capture shortterm borrowings data that is not 

currently collected, we have assumed 

that they would share the same average 

burden and cost estimate. In addition, 

we assume that the burden hours of the 

proposed amendments would be 

comparable to the burden hours related 

to similar disclosure requirements, such 

as off-balance sheet arrangements 

disclosure requirements,93 contractual 

obligations disclosure requirements,94

and requirements for the qualitative and 

quantitative disclosure of market risk,95

which call for quantitative and/or 

qualitative discussion and analysis of 

financial data. 

We derived the estimates by 

estimating the total amount of time it 

would take a company to implement 

systems to capture the data, implement 

related disclosure controls and 

procedures, prepare and review the 

disclosure pursuant to the proposed 

short-term borrowings requirements. We 

first estimated the total amount of time 

it would take a company to prepare and 

review the proposed disclosure for each 

form, using the estimates for the 

comparable disclosure requirements 

identified above as a starting point. 

Because we believe that the proposed 

rules would impose an increased 

burden on companies in connection 

with the implementation of data 

gathering systems and the 

implementation of related disclosure 

controls and procedures as compared to 

those comparable disclosure 

requirements, we added hours to those 

estimates, to reflect our best estimate of 

the additional time needed to 

implement the new systems. 

The tables below illustrate the total 

incremental annual compliance burden 

of the collection of information in hours 

and in cost under the proposed 

amendments for annual reports, proxy 

and information statements, quarterly 

reports and current reports on Form 8– 

K under the Exchange Act (Table 1) and 

for registration statements under the 

Securities Act and Exchange Act (Table 

2). There is no change to the estimated 

burden of the collection of information 

under Regulation S–K because the 

burdens that Regulation S–K imposes 

are reflected in our revised estimates for 

the forms. The burden estimates were 

calculated by multiplying the estimated 

number of annual responses by the 

estimated average number of hours it 

would take a company to prepare and 

review the proposed disclosure 

requirements. We recognize that some 

registrants may need to include MD&A 

disclosure in more than one filing 

covering the same period, accordingly 

actual numbers may be lower than our 

estimates. 

We have based our estimated number 

of annual responses on the actual 

number of filings during the 2009 fiscal 

year, with three exceptions. First, we 

reduced the number of annual responses 

for Schedules 14A and 14C, based on 

our belief that only a minimal number 

of companies that file these schedules 

would need to prepare MD&A 

disclosure for the filing, rather than 

incorporating by reference from a 

periodic report. Second, we reduced the 

number of annual responses for Form 

N–2, based on our estimate of the 

number of Form N–2 filings made by 

business development companies in 

2009 because only business 

development companies are required to 

include MD&A disclosure in a Form N– 

2.96 In addition, we recognize that 

smaller reporting companies would be 

exempted from ‘‘full’’ interim period 

reporting in their quarterly reports 

rather than only reporting material 

changes on a quarterly basis. To reflect 

this, we reduced the number of annual 

responses of Forms 10–Q by our 

estimate of the number of Forms 10–Q 

filed by smaller reporting companies.97

For Exchange Act reports and proxy 

and information statements, we estimate 

that 75% of the burden of preparation 

is carried by the company 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.98 For registration 

statements, we estimate that 25% of the 

burden of preparation is carried by the 

company 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. The portion of the burden carried 

by outside professionals is reflected as 

a cost, while the portion of the burden 

carried by the company is reflected in 

hours. 

TABLE 1—INCREMENTAL PAPERWORK BURDEN UNDER THE PROPOSED AMENDMENTS FOR ANNUAL REPORTS, QUARTERLY

REPORTS, FORMS 8–K AND PROXY AND INFORMATION STATEMENTS

Annual 

responses 99

Incremental 

burden hours/ 

form 

Total incremental burden 

hours 

75% Company 25% Professional Professional 

costs 

(A) (B) (C)=(A)*(B) 

(D)=(C)*0.75 (E)=(C)*0.25 (F)=(E)*$400 

10–K ......................................................... 13,545 40 541,800 406,350 135,450 $54,180,000 

20–F ......................................................... 942 30 28,260 7,065 21,195 8,478,000 

10–Q ........................................................ 28,841 20 574,840 431,130 143,710 57,484,000 

8–K ........................................................... 115,795 0 0 0 0 0 

SCH 14A .................................................. 365 30 10,950 8,212.5 2,737.5 1,095,000 

SCH 14C .................................................. 34 30 1,020 765 255 102,000 

Total .................................................. 159,522 150 1,156,860 853,522.5 303,347.5 121,339,000 

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99Except as described above, the number of 

responses reflected in the table equals the actual 

number of forms and schedules filed with the 

Commission during the 2009 fiscal year. 

100Except as described above, the number of 

responses reflected in the table equals the actual 

number of forms filed with the Commission during 

the 2009 fiscal year. 

TABLE 2—INCREMENTAL PAPERWORK BURDEN UNDER THE PROPOSED AMENDMENTS FOR REGISTRATION STATEMENTS

Annual 

responses 100

Incremental 

burden hours/ 

form 

Total incremental burden 

hours 

25% Company 75% Professional Professional 

costs 

(A) (B) (C)=(A)*(B) 

(D)=(C)*0.25 (E)=(C)*0.75 (F)=(E)*$400 

S–1 ........................................................... 1,168 35 40,880 10,220 30,660 $12,264,000 

F–1 ........................................................... 42 35 1,470 367.5 1,102.5 441,000 

S–4 ........................................................... 619 35 21,665 5,416.25 16,248.75 6,499,500 

F–4 ........................................................... 68 35 2,380 595 1,785 714,000 

10 ............................................................. 238 35 8,330 2,082.5 6,247.5 2,499,000 

N–2 ........................................................... 29 35 1,015 253.75 761.25 304,500 

Total .................................................. 2,164 210 75,740 18,935 56,805 22,722,000 

1. Annual Reports and Proxy/ 

Information Statements 

We estimate that the preparation of 

annual reports currently results in a 

total annual compliance burden of 

21,986,455 hours and an annual cost of 

outside professionals of $3,591,562,980. 

We estimate that the preparation of 

proxy and information statements 

currently result in a total annual 

compliance burden of 735,122 hours 

and an annual cost of outside 

professionals of $86,608,526. 

As set forth in Table 1 above, if the 

proposals were adopted, we estimate 

that the incremental cost of outside 

professionals for annual reports would 

be approximately $62,658,000 per year 

and the incremental company burden 

would be approximately 413,415 hours 

per year; and, for proxy and information 

statements, the total incremental cost of 

outside professionals would be 

approximately $1,197,000 per year and 

the incremental company burden would 

be approximately 8,978 hours per year. 

For purposes of our submission to the 

OMB under the PRA, if the proposals 

were adopted, the total cost of outside 

professionals for annual reports would 

be approximately $3,654,220,980 per 

year and the total company burden 

would be approximately 22,399,870 

hours per year; and the total cost of 

outside professionals for proxy and 

information statements would be 

approximately $87,805,526 per year and 

the total company burden would be 

approximately 744,100 hours per year. 

2. Quarterly Reports 

We estimate that Form 10–Q 

preparation currently results in a total 

annual compliance burden of 4,559,793 

hours and an annual cost of outside 

professionals of $607,972,400. As set 

forth in Table 1 above, if the proposals 

were adopted, we estimate that the 

incremental cost of outside 

professionals for quarterly reports 

would be approximately $57,484,000 

per year and the incremental company 

burden would be approximately 431,130 

hours per year. For purposes of our 

submission to the OMB under the PRA, 

if the proposals were adopted, the total 

cost of outside professionals for 

quarterly reports would be 

approximately $665,456,400 per year 

and the total annual company burden 

for quarterly reports would be 

approximately 4,990,923 hours per year. 

3. Current Reports on Form 8–K 

Form 8–K prescribes information 

about significant events that a registrant 

must disclose on a current basis. We are 

proposing amendments to the 

definitions used in Items 2.03 and 2.04 

of Form 8–K that revise the terminology 

used, but which we assume would not 

significantly impact the scope of 

information required to be disclosed 

under those items. Accordingly, we 

estimate that the proposed amendments 

would not increase the number of 

current reports filed on Form 8–K nor 

add incremental costs and burdens to 

the existing disclosure burden under 

Form 8–K. If the proposed revisions to 

Items 2.03 and 2.04 of Form 8–K were 

adopted, we estimate that, on average, 

completing and filing a Form 8–K 

would require the same amount of time 

currently spent by entities completing 

the form—approximately 4 hours. 

We estimate that Form 8–K 

preparation currently results in a total 

annual compliance burden of 493,436 

hours and an annual cost of outside 

professionals of $65,791,500. 

4. Registration Statements 

We estimate that the preparation of 

registration statements that would be 

affected by the proposed amendments 

currently has a total annual compliance 

burden of 1,023,273 hours and an 

annual cost of outside professionals of 

$1,127,687,401. As set forth in Table 2 

above, if the proposals were adopted, 

we estimate that the incremental cost of 

outside professionals for registration 

statements would be approximately 

$22,722,000 per year and the 

incremental company burden would be 

approximately 18,935 hours per year. 

For purposes of our submission to the 

OMB under the PRA, if the proposals 

were adopted, the total cost of outside 

professionals for registration statements 

would be approximately $1,150,409,401 

per year and the total company burden 

would be approximately 1,042,208 

hours per year. 

C. 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 would have 

practical utility; 

• Evaluate the accuracy of our 

estimates of the burden of the proposed 

collections 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 collections 

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 collections 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 the 

burdens. Persons who desire to submit 

comments on the collection of 

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Federal Register / Vol. 75, No. 187 / Tuesday, September 28, 2010 / Proposed Rules 59883 

101 K. Kelly et al., Big Banks Move To Mask Risk 

Levels—Quarter-End Loan Figures Sit 42% Below 

Peak, Then Rise as New Period Progresses, Wall St. 

J., Apr. 9, 2010; and M. Rappaport & T. McGinty, 

supra note 16 (reporting that ‘‘the practice, known 

as end-of-quarter ‘window dressing’ on Wall Street, 

suggests that the banks are carrying more risk most 

of the time than their investors or customers can 

easily see. This activity has accelerated since 2008 

***’’.). 

102M. Griffiths & D. Winters, The Turn of the 

Year in Money Markets: Tests of the Risk-Shifting 

Window Dressing and Preferred Habitat 

Hypotheses, J. BUS, 2005, vol. 78, no. 4.; M. 

Griffiths & D. Winters, On a Preferred Habitat for 

Liquidity at the Turn-of-the-Year: Evidence From 

the Term-Repo Market, 12 J. FIN. SERV. RES. 1, 

1997; V. Kotomin & D. Winters, Quarter-End Effects 

in Banks: Preferred Habitat or Window Dressing?, 

29 J. FIN. SERV. RES. 1, 2006. 

103Banks and bank holding companies report the 

quarterly average for Federal funds sold and 

securities purchased under agreements to resell 

(FFIEC 031 and 041 Schedule RC–K, and FR Y–9C 

Schedule HC–K). 

104See e.g., Board of Governors of the Federal 

Reserve System, Announcement of Board Approval 

Under Delegated Authority and Submission to 

OMB, (March. 18, 2006) [71 FR 11194]. (‘‘The FR 

Y–9 family of reports historically has been, and 

Continued 

information requirements should direct 

their comments to the OMB, Attention: 

Desk Officer for the Securities and 

Exchange Commission, Office of 

Information and Regulatory Affairs, 

Washington, DC 20503, and send a copy 

of the comments to Elizabeth M. 

Murphy, Secretary, Securities and 

Exchange Commission, 100 F Street, 

NE., Washington, DC 20549–1090, with 

reference to File No. S7–22–10. 

Requests for materials submitted to the 

OMB by us with regard to these 

collections of information should be in 

writing, refer to File No. S7–22–10 and 

be submitted to the Securities and 

Exchange Commission, Office of 

Investor Education and Advocacy, 100 F 

Street, NE., Washington, DC 20549– 

0213. Because the OMB is required to 

make a decision concerning the 

collections of information between 30 

and 60 days after publication, your 

comments are best assured of having 

their full effect if the OMB receives 

them within 30 days of publication. 

V. Cost-Benefit Analysis 

A. Introduction and Objectives of 

Proposals 

We are proposing amendments to 

enhance the disclosure that companies 

provide about short-term borrowings in 

order to provide more useful disclosure 

to investors about liquidity and shortterm financings and to enhance investor 

understanding of issuers’ liquidity. The 

proposed amendments are intended to 

improve disclosure by expanding and 

supplementing existing requirements. 

First, the proposals would require a 

registrant to provide a comprehensive 

explanation of its short-term 

borrowings, including both quantitative 

and qualitative information. In addition, 

we are proposing conforming 

amendments to Form 8–K so that the 

Form uses the terminology contained in 

the proposed short-term borrowings 

disclosure requirement. Finally, we are 

making technical amendments to Item 

303 of Regulation S–K to revise 

references to U.S. GAAP to reflect the 

FASB Codification. 

The proposals seek to improve 

transparency of a company’s short-term 

borrowings in order to provide investors 

with comprehensive information about 

a company’s liquidity profile and 

demands on capital resources in each 

reporting period. The proposals also aim 

to clarify existing MD&A requirements 

in these areas to assist registrants in 

preparing disclosure that is meaningful, 

useful and clear. Ultimately, the 

proposals are expected to enhance the 

ability of investors to make informed 

investment decisions and to allocate 

capital on a more efficient basis. 

We considered alternative regulatory 

approaches for achieving these 

objectives, including providing further 

interpretive guidance on existing MD&A 

disclosure requirements and 

encouraging companies to voluntarily 

provide quantitative and qualitative 

information on short-term borrowings 

where material to their financial 

condition. Although some public 

companies are voluntarily providing 

more detailed information as to shortterm financings in their MD&A, we have 

observed that some companies generally 

do not provided investors with the 

desired level of detail in their disclosure 

absent a specific disclosure requirement 

or guidance, such as Guide 3. To elicit 

more detailed and comparable 

disclosures regarding a company’s 

short-term borrowings activities in each 

reporting period as part of its overall 

liquidity profile, we are proposing 

mandated disclosure of short-term 

borrowings to complement existing 

MD&A disclosures. 

B. Benefits 

The proposed disclosures would 

benefit investors by informing them 

about the fluctuations in short-term 

borrowings during the reporting period. 

Information about the variability of 

borrowing levels and variations in types 

of borrowing activities over the course 

of the reporting period should enable 

investors to better understand the ability 

of a registrant to obtain the financing it 

needs to conduct its business operations 

and the costs of that financing, and how 

those may vary during the reporting 

period. The transparency of the 

financial statements should increase 

because investors would be able to learn 

more about the amount of financial risk 

taken by the company, its liquidity and 

capital resources, and the amount of 

capital deployed in earning activities by 

the company on an on-going basis 

during the year, including at quarterends. The proposed narrative discussion 

of the short-term borrowings 

arrangements, including the importance 

of those arrangements to the registrant 

in terms of its liquidity and capital 

resources, should provide investors 

with insight into the magnitude of the 

registrant’s short-term borrowing 

activities, the specific material impact of 

the short-term borrowing arrangements 

on the registrant, and the factors that 

could affect its ability to continue to use 

those short-term borrowing 

arrangements. 

The proposed disclosures would 

inform investors about the amount of 

financial risk taken by the company.101

For some businesses, short-term 

borrowings may decrease or increase at 

quarter- and year-ends due to innate 

fluctuations in cash flow obligations. In 

other cases, management may be 

deliberately reducing short-term debt at 

period ends.102 Regardless of the cause, 

period-end financial statements could 

be less informative regarding the 

financial risks taken by companies 

during the period. The proposed 

disclosures should add transparency to 

the ongoing risks taken by companies. 

These disclosures should also help 

facilitate a more accurate understanding 

of a company’s liquidity and capital 

resources. 

The proposed disclosures should also 

inform investors about the amount of 

capital deployed in earning activities by 

a company and thus help evaluate its 

overall source of profitability. Investors 

should benefit from knowing whether 

the period-end balance sheet fully 

reflects all intra-period activities and 

assets. The disclosure should also 

enable more accurate comparisons 

between companies that engage in a 

pattern of borrowing and those that do 

not. 

Thus, the new disclosures should 

enhance transparency and competition 

especially in industries where shortterm borrowing practices are common. 

Similar disclosure requirements exist in 

a more limited fashion for banks and 

bank holding companies under 

applicable banking regulations.103

Therefore, bank regulators find this 

information to be useful in monitoring 

the risk of these institutions.104

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59884 Federal Register / Vol. 75, No. 187 / Tuesday, September 28, 2010 / Proposed Rules 

continues to be, the primary source of financial 

information on [bank holding companies] between 

on-site inspections. Financial information from 

these reports is used to detect emerging financial 

problems, to review performance and conduct preinspection analysis, to monitor and evaluate capital 

adequacy, to evaluate [bank holding company] 

mergers and acquisitions, and to analyze a [bank 

holding company’s] overall financial condition to 

ensure safe and sound operations.’’). 

105See D. Easley & M. O’Hara, Information and 

the Cost of Capital, 59 J. Fin. 1553 (2004) (arguing 

that the information composition between public 

and non-public information affects the cost of 

capital because investors demand a higher return 

from their investments when they face asymmetric 

information); R. Lambert et al., Accounting 

Information, Disclosure, and the Cost of Capital, 45 

J. ACCT. RES. 385 (2007) (deriving conditions 

under which an increase in information quality 

leads to an unambiguous decline in the cost of 

capital). 

106We estimate that all registrants who filed 

annual reports in 2009 would be required to 

provide the proposed disclosures. 

The proposed amendments are likely 

to increase transparency. Therefore, 

information asymmetry and information 

risk would be lower and investors 

should demand a lower risk premium 

and rate of return.105 Thus, the 

proposed disclosures would help reduce 

cost of capital and improve capital 

allocation and formation in the overall 

economy. 

C. Costs 

The proposals to require short-term 

borrowings disclosure on an annual and 

quarterly basis are new. In connection 

with the new disclosure requirements, 

registrants would be required to incur 

additional direct costs to which they 

were previously not subject, and could 

incur indirect costs as well. Because the 

proposed requirements require 

additional disclosures that are not 

currently provided in connection with 

Guide 3 compliance, bank holding 

companies would also incur additional 

direct and indirect costs to which they 

were previously not subject. 

Furthermore, as noted in our PRA 

analysis, we estimate that registrants 

would incur higher costs in the initial 

reporting periods than would be 

incurred in ongoing reporting periods. 

We estimate that the proposals would 

impose new disclosure requirements on 

approximately 10,380 public 

companies.106 We estimate that the 

collection of information and the 

preparation of the disclosure would 

involve multiple parties, including inhouse preparers, senior management, inhouse accounting staff, in-house 

counsel, information technology 

personnel, outside counsel, outside 

auditors and audit committee members. 

For purposes of our PRA analysis, we 

estimated that company personnel 

would spend approximately 872,204 

hours per year (84 hours per company) 

to prepare, review and file the proposed 

disclosure. We also estimated that 

companies would spend approximately 

$143,756,500 ($13,849 per company) on 

outside professionals to comply with 

the proposed requirements. 

We believe that the proposed 

amendments could increase the costs for 

some companies to collect the 

information necessary to prepare the 

disclosure. We also believe that the 

proposed amendments will impose 

different costs for companies, 

depending on whether they are bankholding companies that currently 

provide Guide 3 information, financial 

companies as defined in the proposed 

rule, non-financial companies, or 

smaller reporting companies, as 

described below. Although management 

must already consider short-term 

borrowing information as it prepares its 

financial statements and MD&A under 

existing requirements, the proposed 

amendments could impose significant 

incremental costs for the collection and 

calculation of data, particularly in 

connection with the registrant’s initial 

compliance. 

In particular, this disclosure requires 

the production of new data for 

companies that are not already reporting 

this type of data voluntarily or to their 

primary regulators. In some industries, 

companies may readily have access to 

this information in their systems while 

others may not be producing it on a 

daily basis as would be required for 

financial companies under the 

proposals. For example, insurance 

companies may find it difficult to 

produce daily balances for each day that 

is necessary for the average and 

maximum short-term borrowing 

disclosures applicable to them. In 

addition, companies that are not 

financial companies under the proposed 

definition, particularly those with 

multi-national operations, may not 

currently be producing the data 

necessary for the monthly average and 

maximum short-term borrowings 

disclosures, and they may be faced with 

complex calculation issues when 

gathering the data from multiple 

jurisdictions. For many companies, the 

costs of data production may be high. 

For bank holding companies currently 

subject to Guide 3, costs will likely arise 

primarily from the preparation of 

incremental disclosure in MD&A (i.e., 

the proposed requirements for 

maximum daily amounts instead of 

maximum monthly amounts and the 

proposed narrative discussion of shortterm borrowings arrangements) as well 

as quarterly reporting of this 

information (rather than on an annual 

basis alone). These bank holding 

companies already report to the 

Commission average short-term 

borrowings data computed based on 

daily averages on an annual basis, 

pursuant to Item VII of Guide 3. Of the 

approximately 10,380 public 

companies, we estimate that 

approximately 800 are bank holding 

companies. 

For registrants that meet the proposed 

definition of ‘‘financial company’’ but 

that are not bank holding companies, 

such as insurance companies, brokerdealers, business development 

companies, and financing companies, 

the costs imposed could be substantial 

because, as requirements that are newly 

applicable to these entities, costs would 

likely include implementing or 

adjusting data gathering systems to 

capture daily balance information, 

implementing new disclosure controls 

and procedures, time spent by internal 

accounting staff to compile the data, as 

well as the preparation of narrative 

disclosure. As a portion of these costs 

would arise from data collection, the 

costs of compliance in the initial 

reporting period would likely be higher 

because systems may need to be 

implemented or adjusted. We estimate 

that, in addition to the approximately 

800 bank holding companies, 

approximately 700 registrants would 

meet the proposed definition of 

‘‘financial company.’’ 

Registrants that do not meet the 

definition of ‘‘financial companies’’ 

could have lower costs than those 

registrants that are financial companies, 

because they would not be required to 

compile data based on daily balances. 

Again, the requirements would be 

newly applicable, and could require 

these registrants to incur costs to 

implement or adjust data gathering 

systems to capture month-end balance 

information, the implementation of new 

disclosure controls and procedures, 

time spent by internal accounting staff 

to compile the data, as well as 

preparation of narrative disclosure. For 

companies that do not currently close 

their books on a monthly basis, the costs 

of gathering the data would likely be 

higher than those that do, because 

monthly balances would not be readily 

available from existing books and 

records systems. The implementation or 

adjustment of data gathering systems 

would likely cause costs to be higher for 

these companies in the initial 

compliance period. We estimate that the 

number of registrants that are not 

financial companies and that are not 

smaller reporting companies, is 

approximately 7,640. 

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107 15 U.S.C. 78w(a)(2). 

108 15 U.S.C. 77b(b). 

109 15 U.S.C. 78c(f). 

110See D. Easley & M. O’Hara, supra note 98, and 

R. Lambert et al., supra note 98. 

For smaller reporting companies, the 

proposed requirements would also be 

newly applicable, and costs incurred 

would be similar to those applicable to 

large reporting companies, except that, 

as proposed, smaller reporting 

companies would only be required to 

provide two years of annual short-term 

borrowings information, rather than 

three years, and would not be required 

to provide quarterly disclosure on the 

same level of detail as annual 

disclosure. Accordingly, in addition to 

the costs to prepare and review the 

disclosure, smaller reporting companies 

that do not currently track the data 

needed to compile the short-term 

borrowings disclosure or that do not 

currently close their books on a monthly 

basis, would incur costs to implement 

or adjust data collection systems and 

disclosure controls and procedures. On 

the other hand, small entities without 

such systems would be more likely to 

engage in financing activities that are 

less complex, where the compilation 

and calculation of such data would not 

raise significant burdens. In addition, 

the cost estimates set forth in our PRA 

analysis may be lower for a small entity 

to the extent its costs for personnel and 

outside professionals are lower than our 

assumed amounts. As discussed 

elsewhere in this release, we estimate 

that there are approximately 1,240 

smaller reporting companies. 

In addition, registrants that are not 

smaller reporting companies could 

incur increased costs in connection with 

the preparation of their quarterly 

reports, as the amendments call for 

disclosure in quarterly reports at the 

same level of detail as in annual reports. 

To provide this increased level of detail, 

registrants may need to alter their 

existing disclosure controls and 

procedures for quarterly reporting. For 

purposes of our PRA analysis, we 

estimated that company personnel 

would spend approximately 18 

additional hours per year to prepare, 

review and file the proposed disclosure 

in Form 10–Q. We estimate that 

approximately 8,200 registrants (based 

on our estimated number of annual 

report filers, less smaller reporting 

companies and foreign private issuers) 

would be subject to the requirement to 

provide quarterly disclosure at the same 

level of detail as in annual reports. 

Companies may also be faced with 

indirect costs arising from the 

amendments. For example, companies 

may need to consider the impact of the 

amendments on their financing plans, to 

the extent the gathering of data and 

preparation of disclosure imposes 

significant time burdens. Specifically, 

companies could decide to delay 

registered offerings or conduct 

unregistered offerings if they are unable 

to gather data and prepare the new 

disclosures without significant time and 

expense. This indirect cost should 

decrease over time, as companies 

implement disclosure controls and 

procedures to comply with the new 

disclosures. In other cases, companies 

may alter their short-term borrowings 

activities in response to the proposed 

disclosure, in order to avoid incurring 

the cost of compliance, and in doing so 

could incur transaction costs or 

opportunity costs that they would not 

face without a mandatory disclosure 

requirement. 

In certain cases, mandatory required 

disclosure requirements can have 

adverse effects for companies and their 

shareholders if the disclosures reveal 

confidential information and trade 

secrets of a company. In the case of the 

proposed short-term borrowings, 

however, such indirect costs should be 

minimal due to the non-proprietary 

nature of short-term borrowings. There 

is some possibility that a company’s 

competitors could be able to infer 

proprietary or sensitive information 

about a company’s business operations 

or strategy from disclosure about shortterm borrowings arrangements. If this 

were the case, it could 

disproportionately impact companies 

that meet the proposed definition of 

‘‘financial company,’’ to the extent that 

amounts calculated based on daily 

balance information provide a more 

accurate basis for such inferences. We 

preliminarily believe that the likelihood 

of this impact is low. 

D. Request for Comment 

We request data to quantify the costs 

and the value of the benefits described 

above. We seek estimates of these costs 

and benefits, as well as any costs and 

benefits not already defined, that may 

result from the adoption of these 

proposed amendments. We also request 

qualitative feedback on the nature of the 

benefits and costs described above and 

any benefits and costs we may have 

overlooked. 

VI. Consideration of Impact on the 

Economy, Burden on Competition, and 

Promotion of Efficiency, Competition, 

and Capital Formation 

Section 23(a)(2) of the Exchange Act 

requires us,107 when adopting rules 

under the Exchange Act, to consider the 

impact that any new rule would have on 

competition. In addition, Section 

23(a)(2) prohibits us from adopting any 

rule that would impose a burden on 

competition not necessary or 

appropriate in furtherance of the 

purposes of the Exchange Act. 

Section 2(b) of the Securities Act 108

and Section 3(f) of the Exchange Act109

require us, when engaging in 

rulemaking where we are required to 

consider or determine whether an action 

is necessary or appropriate in the public 

interest, to consider, in addition to the 

protection of investors, whether the 

action will promote efficiency, 

competition, and capital formation. 

The proposed amendments are 

intended to enhance disclosure in 

MD&A relating to registrants’ liquidity 

profile in each reporting period by 

highlighting and expanding disclosure 

requirements for short-term borrowings. 

The proposed amendments to Form 

8–K, which would conform the 

disclosure requirements in the Form to 

the proposed amendments to Regulation 

S–K, are intended to continue to 

provide real-time disclosure in 

connection with these topics. 

The proposed amendments may 

increase the usefulness of MD&A. The 

ability of users of financial information 

to understand registrants’ financial 

statements and to determine the 

existence of trends in borrowing and 

funding activity is expected to improve 

as a result of the disclosure of average 

and maximum short-term borrowings 

during each reporting period. 

The proposed amendments also 

should increase the efficiency of U.S. 

capital markets by providing investors 

with additional and more timely 

information about registrants’ borrowing 

and funding activities, including 

borrowing activities that are not 

apparent on the face of period-end 

financial statements and exposures to 

market and funding liquidity risks. This 

information could be used by investors 

in allocating capital across companies, 

and toward companies where the risk 

incentives appear better aligned with an 

investor’s appetite for risk. Furthermore, 

these reductions in the asymmetry of 

information between registrants and 

investors could reduce registrants’ cost 

of capital as investors may demand a 

lower risk premium when they have 

access to more information.110

In certain cases, mandatory required 

disclosure requirements can have 

adverse effects for companies and their 

shareholders if the disclosures reveal 

confidential information and trade 

secrets of a company. In the case of the 

proposed short-term borrowings, 

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111Public Law 104–121, tit. II, 110 Stat. 857 

(1996). 

112 5 U.S.C. 603. 

113 5 U.S.C. 601(6). 

114 17 CFR 230.157. 

115 17 CFR 240.0–10(a). 

116This includes approximately 30 business 

development companies that are small entities. For 

purposes of the Regulatory Flexibility Act, an 

investment company (including a business 

development company) is a small entity if it, 

together with other investment companies in the 

same group of related investment companies, has 

net assets of $50 million or less as of the end of 

its most recent fiscal year. 17 CFR 270.0–10(a). 

however, such indirect costs should be 

minimal due to the non-proprietary 

nature of short-term borrowings. There 

is some possibility that a company’s 

competitors could be able to infer 

proprietary or sensitive information 

about a company’s business operations 

or strategy from disclosure about shortterm borrowings arrangements. If this 

were the case, it could 

disproportionately impact companies 

that meet the proposed definition of 

‘‘financial company,’’ to the extent that 

amounts calculated based on daily 

balance information provide a more 

accurate basis for such inferences. We 

preliminarily believe that the likelihood 

of this impact is low. 

We request comment on whether the 

proposed amendments would promote 

efficiency, competition, and capital 

formation or have an impact or burden 

on competition. Commentators are 

requested to provide empirical data and 

other factual support for their view to 

the extent possible. 

VII. Small Business Regulatory 

Enforcement Fairness Act 

For purposes of the Small Business 

Regulatory Enforcement Fairness Act of 

1996 (SBREFA)111 we solicit data to 

determine whether the proposed rule 

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. 

Commentators should provide 

empirical data on (a) the potential 

annual effect on the economy; (b) any 

increase in costs or prices for consumers 

or individual industries; and (c) any 

potential effect on competition, 

investment or innovation. 

VIII. Initial Regulatory Flexibility Act 

Analysis 

This Initial Regulatory Flexibility 

Analysis (IRFA) has been prepared in 

accordance with the Regulatory 

Flexibility Act.112 It relates to proposed 

revisions to the rules and forms under 

the Securities Act and Exchange Act to 

enhance disclosure that registrants 

provide in MD&A regarding short-term 

borrowings. 

A. Reasons for, and Objectives of, the 

Proposed Action 

The proposed amendments are 

intended to enhance disclosure in 

MD&A relating to registrants’ liquidity 

profile by highlighting and expanding 

disclosure requirements for short-term 

borrowings. The proposed amendments 

to Form 8–K, which would conform the 

disclosure requirements in the Form to 

the proposed amendments to Regulation 

S–K, are intended to continue to 

provide real-time disclosure in 

connection with these topics. These 

amendments are being proposed to 

increase transparency in the 

presentation of registrants’ borrowing 

and funding activities and exposure to 

liquidity risks in connection with that 

activity. This increased transparency in 

areas of increasing importance to 

investors is intended to maintain 

investor confidence in the full and fair 

disclosure required of all registrants. 

B. Legal Basis 

We are proposing the amendments 

pursuant to Sections 6, 7, 10, 19(a) and 

28 of the Securities Act and Sections 12, 

13, 14, 15(d), 23(a) and 36 of the 

Exchange Act. 

C. Small Entities Subject to the 

Proposed Action 

The proposed amendments would 

affect some companies that are small 

entities. The Regulatory Flexibility Act 

defines ‘‘small entity’’ to mean ‘‘small 

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

‘‘small governmental jurisdiction.’’ 113

The Commission’s rules define ‘‘small 

business’’ and ‘‘small organization’’ for 

purposes of the Regulatory Flexibility 

Act for each of the types of entities 

regulated by the Commission. Securities 

Act Rule 157 114 and Exchange Act Rule 

0–10(a) 115 define a company, other than 

an investment company, to be 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. 

We estimate that there are 

approximately 1,240 companies that 

may be considered small entities.116 The 

proposed amendments would affect 

small entities that (i) have a class of 

securities that are registered under 

Section 12 of the Exchange Act, or are 

required to file reports under Section 

15(d) of the Exchange Act and (ii) are 

required to provide MD&A disclosure 

under applicable rules and forms or 

disclosure under Items 2.03 and 2.04 of 

Form 8–K. In addition, the proposals 

also would affect small entities that file, 

or have filed, a registration statement 

(that is required to include MD&A 

disclosure under the applicable rules 

and forms) that has not yet become 

effective under the Securities Act and 

that has not been withdrawn. 

The data underlying the proposed 

short-term borrowing disclosures should 

be available from a company’s books 

and records, although it may not 

currently be collected on month-end 

basis or daily basis, as proposed in the 

rule. As discussed in our PRA analysis, 

we believe that the collection and 

calculation of short-term borrowing data 

in the form proposed may have a cost 

impact on registrants, including small 

entities, that do not currently maintain 

information technology systems for the 

collection of the required data. On the 

other hand, small entities without such 

systems would be more likely to engage 

in financing activities that are less 

complex, where the compilation and 

calculation of such data would not raise 

significant burdens. In addition, the cost 

estimates set forth in our PRA analysis 

may be lower for a small entity to the 

extent its costs for personnel and 

outside professionals are lower than our 

assumed amounts. 

We are proposing an accommodation 

for smaller reporting companies, such 

that expanded disclosures of short-term 

borrowings would not be required for 

interim periods and annual period data 

would only be required for two years 

rather than three years. 

D. Reporting, Recordkeeping, and Other 

Compliance Requirements 

The proposed amendments are 

intended to enhance disclosure about 

short-term borrowings. These proposals 

would require a small entity to: 

• Provide, in a separately captioned 

subsection of MD&A, a comprehensive 

explanation of its short-term 

borrowings, including both quantitative 

and qualitative information; and 

• Use a revised definition of ‘‘direct 

financial obligation’’ for purposes of 

disclosure requirements in Items 2.03 

and 2.04 of Form 8–K. 

These proposed amendments largely 

would apply to both large and small 

entities equally, except that smaller 

reporting companies would benefit from 

the proposed exclusion from expanded 

interim reporting of short-term 

borrowings and would provide two 

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117 Item 303(d) of Regulation S–K provides an 

exclusion for smaller reporting companies from the 

requirements of Item 303(a)(5), and permits smaller 

reporting companies to provide, if they meet 

specified conditions, only two fiscal years of 

information on the impact of inflation and changing 

prices pursuant to Item 303(a)(3)(iv). 

years of annual data rather than three. 

As noted above, the proposed short-term 

borrowings disclosure should be 

available from a company’s books and 

records and tracked with existing 

internal controls without a significant 

incremental burden imposed on small 

entities, except to the extent that it 

doesn’t track the data on a monthly 

basis. 

E. Duplicative, Overlapping, or 

Conflicting Federal Rules 

We believe the proposed amendments 

would not duplicate, overlap, or conflict 

with other Federal rules. The proposed 

new requirements for short-term 

borrowings disclosures provide specific, 

additional information that would be 

complementary to existing MD&A 

requirements. 

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 disclosure 

amendments, we considered the 

following alternatives: 

• Establishing different compliance or 

reporting requirements or timetables 

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. 

Currently, small entities are subject to 

the same MD&A requirements as larger 

registrants under Item 303 of Regulation 

S–K, except that smaller reporting 

companies are permitted to exclude 

information as to their contractual 

obligations.117 The proposed 

amendments would not alter the 

exclusions applicable to smaller 

reporting companies, except, as 

discussed above, an additional 

exclusion would be provided for smaller 

reporting companies so that they would 

not need to provide the proposed 

expanded interim period disclosures of 

short-term borrowings and would be 

permitted to provide two years of 

annual data instead of three years. The 

remaining proposed disclosure 

requirements would apply to small 

entities to the same extent as larger 

registrants, and would require clear, 

straightforward disclosure about shortterm borrowings. 

Except for the exclusions noted above, 

we are not proposing to change existing 

alternative reporting requirements 

under Item 303 of Regulation S–K, or 

establish additional different 

compliance requirements or an 

exemption from coverage of the 

proposed amendments for small 

entities. The proposed amendments 

would provide investors with greater 

transparency into the liquidity profile of 

registrants, by highlighting short-term 

borrowings. With potentially fewer 

financing options available to small 

entities, information about critical 

funding risks and future commitments 

is important to investors in the context 

of small entities as it is in the context 

of larger entities. Therefore, we do not 

believe it is appropriate to develop 

separate requirements for small entities 

that would involve clarification, 

consolidation, or simplification of the 

proposed disclosure requirements, other 

than the proposed exclusions discussed 

above. We do not believe that these 

proposed disclosures would create a 

significant new burden for small 

entities, and, we believe that uniform, 

comparable disclosures across all 

companies would be beneficial for 

investors and the markets. 

We have used design standards and 

performance standards in connection 

with the proposed amendments. We rely 

on design standards for two reasons. 

First, based on our past experience, we 

believe that the proposed requirements 

would result in disclosure that is more 

useful to investors than if there were 

specific, enumerated informational 

requirements. The proposed 

requirements are intended to elicit more 

comprehensive and clear disclosure, 

while still affording registrants the 

ability to tailor the disclosure to reflect 

their specific activities and to provide 

the information that is most important 

in the context of their specific business. 

Second, the proposed amendments 

would promote consistent disclosure 

among all companies, providing 

information that is increasingly 

important to investors. Our existing 

MD&A requirements are largely 

performance standards, designed to 

elicit disclosure unique to the particular 

company. 

Finally, we believe that requiring 

additional short-term borrowings 

information in MD&A is the most 

effective way to elicit the disclosure 

both for small entities. MD&A’s existing 

emphasis on liquidity and capital 

resources, as well as identification of 

significant uncertainties and events, 

makes the placement of the disclosure 

as part of MD&A an appropriate choice. 

Because the proposed disclosure of 

short-term borrowings is intended to 

supplement the discussions of liquidity 

and capital resources already required 

to be provided by smaller reporting 

companies under existing rules, we 

believe the inclusion of the proposed 

requirements in MD&A would reduce 

redundant disclosure requirements and 

promote investors’ understanding of this 

important and, at times highly complex, 

information. 

We seek comment on whether we 

should exempt small entities from any 

of the proposed amendments or scale 

the proposed disclosure requirements to 

reflect the characteristics of small 

entities and the needs of their investors. 

G. Solicitation of Comments 

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 amendments can 

achieve their objective while lowering 

the burden on small entities; 

• The number of small entities that 

may be affected by the proposed 

amendments; 

• The existence or nature of the 

potential impact of the proposed 

amendments on small entities discussed 

in the analysis; and 

• How to quantify the impact of the 

proposed amendments. 

Respondents are asked to describe the 

nature of any impact and provide 

empirical data supporting the extent of 

the impact. Such comments will be 

considered in the preparation of the 

Final Regulatory Flexibility Analysis, if 

the proposed rule amendments are 

adopted, and will be placed in the same 

public file as comments on the proposed 

amendments themselves. 

IX. Statutory Authority and Text of the 

Proposed Amendments 

The amendments contained in this 

release are being proposed under the 

authority set forth in Sections 6, 7, 10, 

19(a) and 28 of the Securities Act and 

Sections 12, 13, 14, 15(d), 23(a) and 36 

of the Exchange Act. 

List of Subjects in 17 CFR Parts 229 and 

249 

Reporting and recordkeeping 

requirements, Securities. 

Text of the Proposed Amendments 

For the reasons set out in the 

preamble, the Commission proposes to 

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59888 Federal Register / Vol. 75, No. 187 / Tuesday, September 28, 2010 / Proposed Rules 

amend Title 17, Chapter II, of the Code 

of Federal Regulations as follows: 

PART 229—STANDARD 

INSTRUCTIONS FOR FILING FORMS 

UNDER SECURITIES ACT OF 1933, 

SECURITIES EXCHANGE ACT OF 1934 

AND ENERGY POLICY AND 

CONSERVATION ACT OF 1975— 

REGULATION S–K 

1. The authority citation for Part 229 

continues to read in part 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, 78l, 78m, 78n, 

78o, 78u–5, 78w, 78ll, 78mm, 80a–8, 80a–9, 

80a–20, 80a–29, 80a–30, 80a–31(c), 80a–37, 

80a–38(a), 80a–39, 80b–11, and 7201 et seq.; 

and 18 U.S.C. 1350, unless otherwise noted. 

* * * * * 

2. Amend Section 229.303 by: 

a. Removing the phrase ‘‘paragraphs 

(a)(1) through (5) of this Item’’ and 

adding in its place ‘‘paragraphs (a)(1) 

through (a)(6) of this Item’’ in the second 

sentence of the introductory text of 

paragraph (a); 

b. Revising paragraphs (a)(4)(ii)(A), 

(a)(4)(ii)(C) and (a)(4)(ii)(D), and 

(a)(5)(ii)(A), (a)(5)(ii)(B) and (a)(5)(ii)(C); 

c. Redesignating the ‘‘Instructions to 

paragraph 303(a) (4)’’ to directly follow 

paragraph (a)(4)(ii)(D); 

d. Adding a new paragraph (a)(6) 

directly above the ‘‘Instructions to 

paragraph 303(a)’’; 

e. Revising the fourth sentence of 

Instruction 8 to paragraph 303(a); 

f. Revising Instruction 9 to paragraph 

303(a); 

g. Adding the phrase ‘‘, except as 

provided in Instruction 8 to paragraph 

303(b)’’ at the end of the first sentence 

of Instruction 3 of the Instructions to 

paragraph (b) of Item 303; 

h. Adding Instruction 8 to the 

Instructions to paragraph (b) of Item 

303; and 

i. Revising paragraph (d). 

The revisions and additions read as 

follows: 

§ 229.303 (Item 303) Management’s 

Discussion and Analysis of Financial 

Condition and Results of Operations. 

* * * * * 

(a) * * * 

(4) * * * 

(ii) * * * 

(A) Any obligation under a guarantee 

contract that has any of the 

characteristics identified in FASB ASC 

Topic 460, Guarantees, paragraph 460– 

10–15–4, as may be modified or 

supplemented, and that is not excluded 

from the initial recognition and 

measurement provisions of FASB ASC 

paragraphs 460–10–15–7, 460–10–25–1, 

and 460–10–30–1; 

(B) * * * 

(C) Any obligation, including a 

contingent obligation, under a contract 

that would be accounted for as a 

derivative instrument, except that it is 

both indexed to the registrant’s own 

stock and classified in stockholders’ 

equity in the registrant’s statement of 

financial position, and therefore 

excluded from the scope of FASB ASC 

Topic 815, Derivatives and Hedging, 

pursuant to FASB ASC subparagraph 

815–15–74(a), as may be modified or 

supplemented; 

(D) Any obligation, including a 

contingent obligation, arising out of a 

variable interest (as defined in the FASB 

ASC Master Glossary, as may be 

modified or supplemented) in an 

unconsolidated entity that is held by, 

and material to, the registrant, where 

such entity provides financing, 

liquidity, market risk or credit risk 

support to, or engages in leasing, 

hedging or research and development 

services with, the registrant. 

(5) * * * 

(ii) * * * 

(A) Long-Term Debt Obligation means 

a payment obligation under long-term 

borrowings referenced in FASB ASC 

Topic 470, Debt, paragraph 470–10–50– 

1, as may be modified or supplemented. 

(B) Capital Lease Obligation means a 

payment obligation under a lease 

classified as a capital lease pursuant to 

FASB ASC Topic 840, Leases, as may be 

modified or supplemented. 

(C) Operating Lease Obligation means 

a payment obligation under a lease 

classified as an operating lease and 

disclosed pursuant to FASB ASC Topic 

840, as may be modified or 

supplemented. 

* * * * * 

(6) Short-term Borrowings. (i) In 

tabular format, provide for each category 

of short-term borrowings specified in 

paragraph (a)(6)(iii) of this Item and for 

the periods specified in paragraph 

(a)(6)(v) of this Item: 

(A) The average amount outstanding 

during each reported period and the 

weighted average interest rate thereon; 

(B) The amount outstanding at the 

end of each reported period and the 

weighted average interest rate thereon; 

(C) (1) For registrants that are 

financial companies, the maximum 

daily amount outstanding during each 

reported period or 

(2) For registrants that are not 

financial companies, the maximum 

month-end amount outstanding during 

each reported period; and 

(D) For any of the amounts referred to 

in paragraphs (a)(6)(i)(A), (B) or (C) of 

this Item, disaggregate the amounts in 

the table by currency, interest rate or 

other meaningful category, to the extent 

presentation of separate amounts is 

necessary to promote understanding or 

to prevent aggregate amounts from being 

misleading, and include a footnote to 

the table indicating the method of 

disaggregation and any other pertinent 

data relating to the calculation of the 

amounts presented, including, without 

limitation, the timing and exchange 

rates used for currency translations. 

(ii) Discuss the registrant’s short-term 

borrowings, including the items 

specified in paragraphs (a)(6)(ii)(A) 

through (D) of this Item to the extent 

necessary to an understanding of such 

borrowings and the current or future 

effect on the registrant’s financial 

condition, changes in financial 

condition, revenues or expenses, results 

of operations, liquidity, capital 

expenditures or capital resources: 

(A) A general description of the shortterm borrowings arrangements included 

in each category (including any key 

metrics or other factors that could 

reduce or impair the company’s ability 

to borrow under any of such 

arrangements and whether there are any 

collateral posting arrangements) and the 

business purpose to the registrant of 

such short-term borrowings; 

(B) The importance to the registrant of 

such short-term borrowings in respect of 

its liquidity, capital resources, marketrisk support, credit-risk support or other 

benefits; 

(C) The reasons for any material 

differences between average short-term 

borrowings and period-end borrowings; 

and 

(D) The reasons for the maximum 

outstanding amounts in each reported 

period, including any non-recurring 

transactions or events, use of proceeds 

or other information that provides 

context for the maximum amount. 

(iii) As used in this paragraph (a)(6), 

the term ‘‘short-term borrowings’’ 

includes amounts payable for short-term 

obligations that are: 

(A) Federal funds purchased and 

securities sold under agreements to 

repurchase; 

(B) Commercial paper; 

(C) Borrowings from banks; 

(D) Borrowings from factors or other 

financial institutions; and 

(E) Any other short-term borrowings 

reflected on the registrant’s balance 

sheet. 

(iv) As used in this paragraph (a)(6), 

the term ‘‘financial company’’ means a 

registrant that, during the reported 

period, is engaged to a significant extent 

in the business of lending, deposittaking, insurance underwriting or 

providing investment advice, or is a 

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broker or dealer as defined in Section 3 

of the Exchange Act (15 U.S.C. 78c), and 

includes, without limitation, an entity 

that is, or is the holding company of, a 

bank, a savings association, an 

insurance company, a broker, a dealer, 

a business development company as 

defined in Section 2(a)(48) of the 

Investment Company Act of 1940 (15 

U.S.C. 80a–2(a)(48)), an investment 

adviser, a futures commission merchant, 

a commodity trading advisor, a 

commodity pool operator, or a mortgage 

real estate investment trust. 

(v) Information required by this 

paragraph (a)(6) shall be presented for 

each of the three most recent fiscal 

years, and, in the case of annual reports 

filed on Form 10–K (referenced in 

§ 249.310), information for the 

registrant’s fourth fiscal quarter 

presented in accordance with the 

requirements for interim periods set 

forth in Instruction 8 to paragraph (b) of 

this Item 303; provided that a registrant 

that is a smaller reporting company may 

provide the information required for 

each of the two most recent fiscal years 

in accordance with paragraph (d) of this 

Item 303 and, in the case of annual 

reports filed on Form 10–K (referenced 

in § 249.310), is not required to include 

information for the fourth fiscal quarter. 

Instruction 1 to Paragraph 303(a)(6): 

Where a registrant meets the definition 

of financial company, but also has 

operations that do not involve lending, 

deposit-taking, insurance underwriting, 

providing investment advice, or broker 

or dealer activities, it may present the 

information specified in Item 

303(a)(6)(i) separately for such 

operations. In doing so, the registrant 

may disclose averages and maximum 

amounts for such operations using the 

rules and instructions applicable to 

registrants that are not financial 

companies, provided that it must 

disclose averages computed on a daily 

average basis and maximum daily 

amounts for its operations that fall 

within the definition of financial 

company. For purposes of making this 

segregation, the registrant should make 

the distinction assuming the business in 

question were itself a registrant. 

Additional information should be 

presented by footnote to enable readers 

to understand how the registrant’s 

operations have been grouped for 

purposes of the disclosure. 

Instruction 2 to Paragraph 303(a)(6): 

For registrants that are financial 

companies, averages called for by 

paragraph (a)(6) of this Item are averages 

computed on a daily average basis 

(which means the amount outstanding 

at the end of each day, averaged over the 

reporting period). For all other 

registrants, the basis used for calculating 

the averages must be identified, and the 

averaging period used must not exceed 

a month. 

Instruction 3 to Paragraph 303(a)(6): 

As used in this Item 303(a)(6), the 

maximum daily amount outstanding 

during a reported period means the 

largest amount outstanding at the end of 

any day in the reported period, and the 

maximum month-end amount 

outstanding during a reported period 

means the largest amount outstanding at 

the end of the last day of any month in 

the reported period. 

Instructions to Paragraph 303(a): 

* * * * * 

8. * * * However, registrants may 

elect to voluntarily disclose 

supplemental information on the effects 

of changing prices as provided for in 

FASB ASC Topic 255, Changing Prices, 

or through other supplemental 

disclosures. * * * 

9. Registrants that elect to disclose 

supplementary information on the 

effects of changing prices as specified by 

FASB ASC Topic 255 may combine 

such explanations with the discussion 

and analysis required pursuant to this 

Item or may supply such information 

separately with appropriate crossreference. 

* * * * * 

(b) * * * 

Instructions to Paragraph 303(b): 

* * * * * 

8. Notwithstanding anything to the 

contrary in this Item 303, a registrant 

that is not a smaller reporting company 

must include the disclosure required 

pursuant to (a)(6) of this Item for each 

interim period for which financial 

statements are included or required to 

be included by Article 3 of Regulation 

S–X (17 CFR 210.3–01 to 3.18), and for 

the registrant’s fourth fiscal quarter in 

the case of an annual report filed on 

Form 10–K (referenced in § 249.310), 

and must provide an updated 

discussion and analysis of the 

information presented. The discussion 

and analysis should also highlight any 

material changes from prior periods. For 

purposes of interim period disclosures 

of short-term borrowings required by 

paragraph (a)(6) of this Item, the term 

‘‘reported period’’ used in paragraph 

(a)(6) of this Item means the most recent 

interim period presented or, in the case 

of an annual report filed on Form 10– 

K (referenced in § 249.310), the 

registrant’s fourth fiscal quarter. 

* * * * * 

(d) Smaller reporting companies. A 

smaller reporting company, as defined 

in § 229.10(f)(1) of this Chapter, may 

provide the information required in 

paragraphs (a)(3)(iv) and (a)(6) of this 

Item for the last two most recent fiscal 

years of the registrant if it provides 

financial information on net sales and 

revenues and on income from 

continuing operations for only two 

years. For interim periods, a smaller 

reporting company is not required to 

follow Instruction 8 to paragraph 303(b) 

and, instead, must discuss material 

changes to the information specified in 

paragraphs (a)(4) and (a)(6) of this Item 

from the end of the preceding fiscal year 

(and, if included, from the 

corresponding interim balance sheet 

date of the preceding fiscal year) to the 

date of the most recent interim balance 

sheet provided. In the case of an annual 

report filed on Form 10–K (referenced in 

§ 249.310), a smaller reporting company 

is not required to provide information 

for the fourth quarter of the most recent 

fiscal year. 

* * * * * 

PART 249—FORMS, SECURITIES 

EXCHANGE ACT OF 1934 

3. 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.; and 18 U.S.C. 1350, unless otherwise 

noted. 

* * * * * 

4. Form 8–K (referenced in § 249.308) 

is amended by: 

a. Revising paragraph (c)(4) of Item 

2.03; and 

b. Removing paragraph (e) of Item 

2.03. 

The revisions read as follows: 

Note: The text of Form 8–K does not, and 

this amendment will not, appear in the Code 

of Federal Regulations. 

Form 8–K 

* * * * * 

Item 2.03 Creation of a Direct 

Financial Obligation or an Obligation 

Under an Off-Balance Sheet 

Arrangement of a Registrant 

* * * * * 

(c)* * * 

(4) A short-term borrowing, as defined 

in Item 303(a)(6)(iii) of Regulation S–K 

(17 CFR 229.303(a)(6)(iii)), that arises 

other than in the ordinary course of 

business. 

* * * * * 

5. Form 20–F (referenced in 

§ 249.220f) Item 5 is amended by: 

a. Revising paragraphs (a) and (d) of 

Item 5.E.2; 

b. Adding Item 5.H; and 

c. Adding Instructions to Item 5.H 

after the ‘‘Instructions to Item 5.F’’. 

The revisions and additions read as 

follows: 

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Note: The text of Form 20–F does not, and 

this amendment will not, appear in the Code 

of Federal Regulations. 

Form 20–F 

* * * * * 

Item 5. Operating and Financial Review 

and Prospects 

* * * * * 

E. Off-balance sheet arrangements. 

* * * * * 

2. * * * 

(a) Any obligation under a guarantee 

contract that has any of the 

characteristics identified in FASB ASC 

Topic 460, Guarantees, paragraph 460– 

10–15–4, as may be modified or 

supplemented, excluding the types of 

guarantee contracts described in FASB 

ASC paragraphs 460–10–15–7, 460–10– 

25–1, and 460–10–30–1; 

(b) * * * 

(c) * * * 

(d) Any obligation, including a 

contingent obligation, arising out of a 

variable interest (as defined in the FASB 

ASC Master Glossary, as may be 

modified or supplemented) in an 

unconsolidated entity that is held by, 

and material to, the company, where 

such entity provides financing, 

liquidity, market risk or credit risk 

support to, or engages in leasing, 

hedging or research and development 

services with, the company. 

* * * * * 

H. Short-Term Borrowings 

1. In tabular format, provide for each 

category of short-term borrowings 

specified in Item 5.H.3 of this Form and 

for the periods specified in Item 5.H.5 

of this Form: 

(a) The average amount outstanding 

during each reported period and the 

weighted average interest rate thereon; 

(b) The amount outstanding at the end 

of each reported period and the 

weighted average interest rate thereon; 

(c)(i) For companies that are financial 

companies, the maximum daily amount 

outstanding during each reported period 

or 

(ii) For companies that are not 

financial companies, the maximum 

month-end amount outstanding during 

each reported period; and 

(d) For any of the amounts referred to 

in (a), (b) or (c) of this Item 5.H.1, 

disaggregate the amounts in the table by 

currency, interest rate or other 

meaningful category, to the extent 

presentation of separate amounts is 

necessary to promote understanding or 

to prevent aggregate amounts from being 

misleading, and include a footnote to 

the table indicating the method of 

disaggregation and any other pertinent 

data relating to the calculation of the 

amounts presented, including, without 

limitation, the timing and exchange 

rates used for currency translations. 

2. Provide a discussion of the 

company’s short-term borrowings, 

including the items specified in 

paragraphs (a) through (d) of this Item 

5.H.2 to the extent necessary to an 

understanding of such borrowings and 

the current or future effect on the 

company’s financial condition, changes 

in financial condition, revenues or 

expenses, results of operations, 

liquidity, capital expenditures or capital 

resources: 

(a) A general description of the shortterm borrowings included in each 

category (including any key metrics or 

other factors that could reduce or impair 

the company’s ability to borrow under 

any of such arrangements and whether 

there are any collateral posting 

arrangements) and the business purpose 

to the company of such short-term 

borrowings; 

(b) The importance to the company of 

such short-term borrowings in respect of 

its liquidity, capital resources, marketrisk support, credit-risk support or other 

benefits; 

(c) The reasons for any material 

differences between average short-term 

borrowings and period-end borrowings; 

and 

(d) The reasons for the maximum 

outstanding amounts in each reported 

period, including any non-recurring 

transactions or events, use of proceeds 

or other information that provides 

context for the maximum amount. 

3. As used in this Item 5.H, the term 

‘‘short-term borrowings’’ means amounts 

payable for short-term obligations that 

are: 

(a) Federal funds purchased and 

securities sold under agreements to 

repurchase; 

(b) Commercial paper; 

(c) Borrowings from banks; 

(d) Borrowings from factors or other 

financial institutions; and 

(e) Any other short-term borrowings 

reflected in the company’s balance 

sheet. 

4. As used in this Item 5.H, the term 

‘‘financial company’’ means a company 

that, during the reported period, is 

engaged to a significant extent in the 

business of lending, deposit-taking, 

insurance underwriting or providing 

investment advice, or is a broker or 

dealer as defined in Section 3 of the 

Exchange Act (15 U.S.C. 78c), and 

includes, without limitation, an entity 

that is or is the holding company of, a 

bank, a savings association, an 

insurance company, a broker, a dealer, 

a business development company as 

defined in Section 2(a)(48) of the 

Investment Company Act of 1940 (15 

U.S.C. 80a–2(a)(48)), an investment 

adviser, a futures commission merchant, 

a commodity trading advisor, a 

commodity pool operator, or a mortgage 

real estate investment trust. 

5. Information required by this Item 

5.H shall be presented for each of the 

three most recent fiscal years. 

* * * * * 

Instructions to Item 5.H: 

1. Notwithstanding Item 5.H.3, the 

categories of short-term borrowings 

disclosed pursuant to Item 5.H of this 

Form may be based on the 

classifications for such types of shortterm borrowings used under the 

comprehensive set of accounting 

principles that the company uses to 

prepare its primary financial statements, 

so long as the disclosure is provided at 

a level of detail that satisfies the 

objective of this Item 5.H disclosure 

requirement. 

2. Where a company meets the 

definition of financial company, but 

also has operations that do not involve 

lending, deposit-taking, insurance 

underwriting, providing investment 

advice, or broker or dealer activities, it 

may present the information specified 

in Item 5.H.1 of this Form separately for 

such operations. In doing so, the 

company may disclose averages and 

maximum amounts for such operations 

using the rules and instructions 

applicable to companies that are not 

financial companies, provided that it 

must disclose averages computed on a 

daily average basis and maximum daily 

amounts for its operations that fall 

within the definition of financial 

company. For purposes of making this 

segregation, the company should make 

the distinction assuming the business in 

question were itself a registrant. 

Additional information should be 

presented by footnote to enable readers 

to understand how the company’s 

operations have been grouped for 

purposes of the disclosure. 

3. For companies that are financial 

companies, averages called for by this 

Item 5.H are averages computed on a 

daily average basis (which means the 

amount outstanding at the end of each 

day, averaged over the reporting period). 

For all other companies, the basis used 

for calculating the averages must be 

identified, and the averaging period 

used must not exceed a month. 

4. As used in this Item 5.H, the 

maximum daily amount outstanding 

during a reported period means the 

largest amount outstanding at the end of 

any day in the reported period, and the 

maximum month-end amount 

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Federal Register / Vol. 75, No. 187 / Tuesday, September 28, 2010 / Proposed Rules 59891 

outstanding during a reported period 

means the largest amount outstanding at 

the end of the last day of any month in 

the reported period. 

* * * * * 

Dated: September 17, 2010. 

By the Commission. 

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. 2010–23743 Filed 9–27–10; 8:45 am] 

BILLING CODE P 

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